StudentShare solutions
Triangle menu

Derivatives and Alternative Investments - Assignment Example

Nobody downloaded yet

Extract of sample
Derivatives and Alternative Investments

First, if management understands about the corporation’s risks better than shareholders, the corporation, not its stakeholders, can hedge. Subsequent, corporation could be capable to hedge at a lower cost. Corporate hedging can be justified if default costs are significant, since it reduces the possibility of default (Johnson, 2010). Lastly, if the corporation encounters progressive taxes, it can decrease tax accountabilities by hedging which steady corporate earnings. To calculate the appropriate number of bonds and equity futures that should be sold the following are considered and done. Bond estimation is a technique used to establish the predictable trading price of a bond. The anticipated trading value is computed by adding the total of the current values of all coupon costs to the current value of the par value (Johnson, 2010). German federal state bonds with a minimum issuing volume of EUR 1 billion. FDAX = opening price 8,218.50 Low price 8,164.00 High 8,259.00 Daily settlement price 8,197.50 Bond face value = € 1 000 000 000 Annual coupon rate = 3.723% Maturity in years = 1 year Market interest rate = 7.2% Future Bond Price = 3.723% * 1000 000 000 * 1-(1+7.2%)-10/7.2% + 1000000000/ (1+7.2%)10 =32,230,000*6.94 +1000000000/2.004 =223676200+499001996 =€ 722,678,196 Future Equity Present value = €50,000,000 Question 2 Interest rate swap amount = €5,000,000 Term: 5 year fixed rate payer The risks of the interest rate swap To explain the risks of the interest rate swaps position taken by the European asset manage the following are considered. In addition, the possibilities of hedging the scenario are also explained. Management decisions relating to a bank’s interest rate risk challenge should consider the risk or reward swap of interest rate risk positions. This is why the trade-off, in form of interest rate swaps, is necessary in this scenario (Corb, 2012). Management must compare the possible risk such as impact of unpleasant rate actions of an interest rate risk situation or approach against the possible reward (impact of positive rate movements).To assess the potential impact of interest rate danger on a corporation’s operations, a well-managed company will reflect on the affect on both its incomes (the profits or accounting viewpoint) and fundamental economic worth (the capital or economic perspective). Both perspectives must be evaluated to establish the full scope of a corporation’s interest rate risk vulnerability, particularly if the company has significant long-term or multipart interest rate risk positions (Corb, 2012). The current situation warranty interest rate swaps consideration so as to avert too much risk exposure. An interest rate swap is an accord by two entities(the European asset corporation and the central Bank) to swap or exchange floating rate interest compensations for fixed rate interest compensations and vice versa. It is significant for the European asset manager to appreciate that swaps are between corporations and not between personal investors; however, the outcome of these swaps may influence his/her job activities or the cost he/she may pay for a bond. The most ordinary kind of swap is a vanilla exchange in which fixed rate interest compensations are swapped for floating rate interest payments according to the London Interbank Offered Rate (LIBOR) (Corb, 2012). The London Interbank Offered Rate is the interest rate that financials institutions with high credit ratings from ratings organizations charge one another for ...Show more


DERIVATIVES AND ALTERNATIVE INVESTMENTS by Code+ University name Date Question 1 The manager wants to hedge the interest rate risk on bonds to ascertain or dispute this it is necessary to consider why a firm should hedge or not…
Author : odickinson
Derivatives and Alternative Investments essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the assignment on your topic
"Derivatives and Alternative Investments"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Finance International Investments
India has emerged as a strong economic force and has experienced outstanding investment accounts in the last 10 years. The economy is projected to grow by 12.8% annually in the next three years (Guenthner). The average Indian income is anticipated to triple by the year 2025 (Guenthner).
4 pages (1000 words) Assignment
In the primary market companies issue new securities to raise funds. Hence it is also referred to the new issue market. The secondary market deals with the second hand securities, this are securities that have already been issued by companies that are listed in a stock exchange.
7 pages (1750 words) Assignment
Foreign Direct Investments in Bulgaria
However, as the deadline for entry to the EU gets closer, Bulgaria is encountering difficulties due to graft, corruption, organised crime, and bureaucratic inefficiency that threaten to delay the country's admittance but also its efforts to attract more foreign investors.
21 pages (5250 words) Assignment
Derivatives and Risk
Hull, 2008). Speculators trade in the derivatives market with the objective of making gains from taking positions in the derivatives market. They enter into long and short positions. Speculators also use a lot of leverage. The advantage
12 pages (3000 words) Assignment
Alternative Therapy
licy with regards the way in which therapies are integrated with the patient are almost always based upon the means by which the action will integrate with the disease or illness in question (Cheng & Ives, 2010). However, with regards to alternative remedies, one of the most
1 pages (250 words) Assignment
Alternative Assessment
that schools are not only meant to teach but also required to measure the child’s individual mastery of concepts and skills and also to gauge the individual acquisition of the entire study. This paper therefore is about a critique on reaction report based on alternative
4 pages (1000 words) Assignment
Futures and Hedging Investments
e hedging strategy adopted a short-maturity contracts and at N equal to 0.35 (N>0), the number of contracts would not fall to zero even if the market falls at 10% by March 21. Therefore, the hedging strategy locks in February 1 price at $ 50. Through market conventions, the
1 pages (250 words) Assignment
Over the years usages of the derivatives have increased a lot. To protect their moneys various organizations and government agencies are using these contracts. Fluctuations and volatility in the foreign exchange
3 pages (750 words) Assignment
Derivatives and financial crisis
systematic and unsystematic risk. Derivatives are used to minimise the effect of such risks. Though the negative event cannot be avoided, but the impact can be greatly reduced by hedging through derivatives. They are mainly of four types vis- a-vis futures, forwards
8 pages (2000 words) Assignment
Essential of investments
The days since last coupon and days in coupon period was calculated by using two functions on excel, COUPDAYBS and COUPDAY, by using the settlement date, maturity date and the coupon payments per year. These two were
2 pages (500 words) Assignment
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
Comments (0)
Click to create a comment
Contact Us