Our company "Saint Derivatives" offers a wide range of financial derivative instruments.
1. Our first customer is investor from China who invested large sum of money into KKB’s stocks. He decided to hedge his portfolio and contacted us. We offered him European put option on KKB’s stocks which matures in 9 months with the strike price of $13,1 per GDR. To estimate how much we are to charge for put option, we used data taken from the website of London Stock Exchange (www.londonstockexchange.com), as KKB’s GDR is quoted on this stock exchange. Latest price of the GDR is $16,29 (on 18 April,2008). To calculate volatility we used historical prices of the stock in the interval from 1 January until 18 April, and it is equal to 47,98%. Having all these figures we used Black-Scholes formula and found out the price of put option, which is $0,79. We also checked it on DerivaGem program.
1.
X 13,1 Strike Price
S 16,29 Stock Price
T 0,75 Time
r 2,64% 9-Month LIBOR
sigma 47,98% Volatility
d1 0,779909502 -0,779909502
d2 0,364390513 -0,364390513
N(d1) 0,782277927
N(d2) 0,642216791
N(-d2) 0,357783209
N(-d1) 0,217722073
p 1,048378375
The calculation of volatility is in Excel’s file.
2. Our second client is investor from Turkey, who also has KKB’s stocks. As he believes that credit crunch in our country will persist and KKB’s stocks will falter, we decided to offer him butterfly spreads with calls. The reason why we chose these strategy is from investor’s expectations of not large price variation in the next 6 months. Having analyzed historical prices of the stock, we offer him to long call options with strike prices of $15 and $18, and to short two calls with the strike of $16,5. Here investor has an initial cost of $0,15, and maximum profit is made when the stock price in 6 months is 16,5 and is equal to 16,5-15-0,13=$1,37.
Butterfly spread with calls for the maturity 6 months
Long call option with lower strike price K1=$15
Long call option with higher strike price K3=$18
Short two calls with average strike price K2=$16,5
Having calculated the option prices by DerivaGem program, we obtained:
c1=$3,42
c3=$2,17
c2=$2,73
Initial costs of investor=3,42+2,17-2*2,73=$0,13
3. Now we can offer our clients not only European options, but also American ones. To calculate the prices of options, both puts and calls on the same underlying asset (KKB’s stock) we used DerivaGem, because we have no information of company’s dividends. To have more exact results of the American puts and calls, we use DerivaGem program with maximum 500 steps by Binomial Method.
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
This case is about Star River and how the firm is in the middle of financial crisis that was induced by rapid growth. The CEO basically wants to improve the financial health of the company and ask for help to make some decisions. The CEO asks one of the analyst for help in reviewing the historical performance of the firm, forecast financing requirements for the next two years, exercise the forecasting model to identify the key drivers of the assumptions, estimate Star River’s weighted-average cost of capital and lastly to analyze the proposed investment in a packaging machine.
Ross, S.A., Westerfield, R.W., Jaffe, J.F., & Roberts, G.S (2001) Corporate Finance. 3 th ed.Toronto, McGraw-Hill Ryerson.
Theoretically, it is the foundation of simpleness and reasoning for stock valuation as any cash payoff from company is entirely in form of dividends. However, in practice, this model require further hypothesis on company’ dividend payments, future interest rate and growth pattern. Therefore, it is assumed that the DDM model merely applies to evaluate roughly minor proportion of the value of company’ share price. Specifically, the JB HI-FI value obtained from the DDM is 30.65 higher than their actual currently trading share price 24.1; a different of 6.55, and then the stock is undervalued. Consequently, DMM is not applicable for stock price valuation in case of JB HI-FI since it is not an individual approach of stock
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
"Why We're Expecting a Big Stock Decline in the Next 10 Days | TradeKing." TradeKing Trader Network | Online Stock & Options Trading Community | TradeKing. Web. 28 Nov. 2011. .
The CAPM is the best method of determining the cost of equity for General Mills, inc. (NYSE: GIS). Using CAPM calculations, GIS target for December 2013 is $50.60 (Reuters, 2013). If this security becomes untenable in one year’s time, then the option of increasing dividends to boost investor confidence can be explored. The APT is less accurate compared to the CAPM and the dividend growth models. However, CAPM seems to be the easiest to use. The isolation of the Beta assumptions into a single variable fits the current state of the company best when using the CAPM.
Current tallies of the New York Stock Exchange, the NYSE, have equated its assets to nearly fifteen-trillion dollars, which does not even cancel out our national debt. The NYSE was officially opened in 1792, since then many people have become extremely wealthy while some have even became extremely poor. Our country has benefitted from the stock exchanges too, by creating jobs and influencing the economy in positive and negative ways. The United States economy and the stock market seem to share many relations, such as the repeating economic cycle of thirty years; which demonstrates the upswings and downswings of the NYSE. Over the past three-hundred and twelve years the New York Stock Exchange has contributed greatly to our country, in both positive and negative ways.
In conclusion, hedging risk with financial derivatives can give firm range of benefits such as lower probability of having financial distress, lower value of debt ratio, and earn tax benefit. It can be concluded that firm should hedge risk using financial derivatives because lot evidence shows that firm using this strategy is more successful than those who are not. However, since different type of companies facing different risks, they should not necessarily use the same hedging strategy.
“Options give you the right (without the obligation) to transact a security at a predetermined price within a certain time period. In a call option, the buyer has the right (but is not required) to buy an agreed quantity of a commodity or financial instrument (called the underlying asset) from a seller by a certain date (the expiry) for a certain price (the strike price). A put option is the right to sell the underlying stock at a predetermined strike price by a certain date” (Call Option vs Put Option, 2014).
4. Harry Davis’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Harry Davis’s beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond yield plus risk premium approach, the firm uses a 4% point risk premium.
When it comes to profit, Pick n Pays share price on the JSE has vaulted 29% within the last year. The franchises numbers for March showed a turnaround in margins from 17.4% last year up to 17.5%. Sales increased by 7.7% to R63.1 billion. Trading profit improved by 18.5% (and 34.4% on a comparable basis after three consecutive years of decline) (BDLive, 2014).
The intensely competitive, action-oriented, profit-hungry world of investment banking can seem like a bigger-than-life place where deals are done and fortunes are made. Investment bank includes but is not limited to bringing an established company to the market, by that I mean taking company with the capabilities but not capital of expanding, and raising money through other investors or the stock market (IPO) for a commission, I chose this field because of my personal experience with my father and his company, I’ve seen him go from starting off as a cold calling broker, to running a brokerage firm, to starting a brokerage firm, all the way to having his own investment firm. I feel like I would do better with jobs where you set your own hours and work at your own pace. A lot of the work is commission based so the more your work the more you make, this would also benefit me because it would drive me to work more, money is my motivation. To be hired you will need good people and communication skills, highly analytical skills, high ability to synthesize and high creative ability. You will also need experience in modeling, valuing companies, and financial accounting.
Financial theories are the building blocks of today's corporate world. "The basic building blocks of finance theory lay the foundation for many modern tools used in areas such asset pricing and investment. Many of these theoretical concepts such as general equilibrium analysis, information economics and theory of contracts are firmly rooted in classical Microeconomics" (Oaktree, 2005)