CHAPTER 1: DERIVATIVES: INTRODUCTION AND OVERVIEW
Question 4: What is the meant by financial engineering? What is the role of derivative instruments in financial engineering? Financial engineering can be defined as a multidisciplinary field which involve theories of financial, engineering methods and mathematical tools to solve the risk problems (Student resources, 2013). Financial engineering applied mathematics, computer science, statistics and economic theory as tools to make pricing, hedging, trading and portfolio management decisions. Mostly, financial engineers will be employ by companies such as investment banks and commercial banks, insurance companies, corporate treasuries, hedge funds and regulatory agencies
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The exchange requires him to post RM300,000 as initial margin. If the maintenance margin is RM250,000, what price change (per ton) would lead to a margin call? What price change lead to RM30,000 being credited to his margin account?
(i) Margin call
500 tons (RM6,000 per ton- RM x) = -RM50,000
(RM6,000 per ton- RM x) = -RM50,000 / 500 tons
RM x = RM6,000 + RM 100
RMx = RM6,100
When the margin balance falls below RM6,100 per ton, the party will receive a margin call from his broker.
(ii) 500 tons (RM6,000 per ton - RM x) = RM30,000
(RM6,000 per ton - RM x) = RM30,000/500
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Question 12: Suppose you bought one gold futures contract for August delivery at its 2 April settlement price of $279/oz. Assume that both the last trading date and the delivery date are 27 August. Assume that your borrowing and lending rates are 8%per year, and that you borrow to met any mark-to- market cash outflows and lend any mark to market inflows. (a) If the gold futures price remains unchanged until 26 August then falls to $250/oz, on 27 August, what is your profit or loss per ounce?
$250/oz - $279/oz = -$29/oz
(b) If, instead, the gold futures price falls to $250/oz, on 3 April and stays there until the delivery date, what is you profit or
If it can be determined that the depressed prices for lean hogs are only temporary, inventories could and should be kept at cost basis. In this case, adjusting prices to match current market prices would not be necessary. Future prices indicate a recovery before the end of the fiscal year. Futures prices will surpass cost in February and remain above cost for the remainder of the fiscal year. The future prices support claims that the price fluctuations are only temporary in nature, and do not reflect a permanent downward shift in hog prices. Since inventories once impaired cannot be marked up to reflect changes in market conditions, this strategy could be beneficial to the company later on. In this case inventory would not be shown on the books at an unfairly low value.
In order to estimate the possible impacts of introducing Oxyglobin as a major product, it was assumed that Biopure would be able to produce and sell its full capacity of 300,000 units per year. As can be seen in Exhibit 1, the results of such an aggressive marketing strategy would yield a positive gross margin of between 49% and 66%, assuming the product was sold at a price of $100 to $150 per unit.
There are two solutions that provide the optimal profit given the current constraints under which JP Molasses operates. Under these conditions, the optimal profit is $63,571. This profit margin is achieved in both cases with revenue of $942,354 and cost of $412,333 for material purchased and $466,450 for fixed and variable costs in processing, for total cost of $878,783.
So this is where option 1 comes in. If there is an opportunity for Andrews to reduce costs, increase production to meet increased demand, then that should be quickly taken advantage of. It’s that simple.
Since the rates are going to fluctuate, it is easy to imagine that the party, to whom the contract means a worse result than what the spot rate on the day of settlement will offer, will have a strong incentive to renege. Futures contracts solves this by use of two mechanisms, the first being that parties are required to post collateral, also called a margin, which serves as a guarantee that the parties can meet their obligations. The second mechanism is the daily settlement. Instead of waiting until the date of delivery, gains and losses are settled and exchanged every day through a process called ‘marking to market’ (Berk and DeMarzo, 2013). This means that cash changes hands every day, provided that the price of the contract
Although only required to discuss two associations this writer thought it was important to discuss the SEC as they are directly connected to FINRA in that they take litigation cases, and fraud cases from FINRA and follows up on whether any security laws or criminal laws were broken. Once they investigate the wrong doing they proceed with the corrective action that best suits the offense not excluding criminal prosecution and jail time. According to the Securities and Exchange Commission (2014) website the mission of the SEC is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”. The SEC was created to ensure that all investors big or small have a fair and unbiased account of a companies transactions and current state of affairs.
If the company follow this recommendations, it will obtain a profit of $ 531,000 that represents $180,000 more than with seasonal production
Pennings, Joost M.E. Research in Agricultural Futures Markets: Past Present and Future. Presentation Paper: Wageningen Agricultural University: Netherlands. 8 June 2001.
The sales director proposed that if the firm were to reduce the price of Item 345 to FF15.00/m, they would be able to increase sales to 175,000 units (or 25% of industry volume). But if they were to keep the price at the current value of FF20.00/m, they would be able to sell not less than 75,000 units (or 11% of industry volume).
(Potential $loss if reduce price = 94962.yr but losing market would be a bigger problem.)
gross margins were about 70%, so the Gold Plus’ cost should probably equal to $1.047 per unit, 30% of $3.49. After reducing the 15% of Gold Plus’ price, Kodak still has the profit of $1.9195 per unit which more than Fujicolor Super G’s profit of $1.6005, 55% of $2.91. It is clear that justifying a 15% price reduction of Gold Plus, which brings the price down to $2.9665, is realistic. However, reducing the price might cause the quality image of the film product, Gold Plus. Therefore, Kodak has to be very careful if it implement this price
below, if firm X decides to lower its price from B to D, sales should
Since the listing of KOSPI 200 futures in May 1996, the derivatives market has grown into one of the key derivatives markets in the world. In the meantime, the market has achieved a higher level of excellence in market operation and secured a trading system and fair market management, and consequently figures as a decent reference among derivatives markets. The brief history of Korean derivatives market related to the products is as follows:
Finance is a field that had always fascinated me right from my undergraduate college days. What make me interested in this particular field of study are the art of finance and the complexity of investment market which would allow me to employ my personal skills, such as analytical and communication skills, along with my personal characteristics such as dedication and compassion for what I do. As one of the most important sector in the world, I believe it would provide me with a broad range of career options.
Let us assume that the spot price at the end of 6 months i.e. 30 June 2016 is 67.00 and the forward price to sell USD INR is at ` 66.7350. The payoff would be calculated as below: