Search
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

The Theory and Practice of Investment Management - Essay Example

Summary
Question1 2 Part 1 2 Part 2 2 Part 3 3 Question 2 4 Question 3 6 Question 4 9 Part B chosen 9 Reference List 12 Question1 Part 1 I. The company must choose the contract March 2013 in order to hedge its exposure. Usually, it is recommended that the hedge instrument to have a maturity greater with at least one month than the hedged asset…

Extract of sampleThe Theory and Practice of Investment Management

The computations are shown in the following table. Table no.1 Number of contracts necessary to be hedged Contract Amount \$ 7,500,000.00 Hedge Ratio 0.5 Price 97 No of contracts 38660 Part 2 I. In order to close the position, the company should buy futures contracts for March 2013, at the price 97.6. II. The transaction on the futures market brought a loss equal to: no of contracts *(selling price-buying price). The computations are shown in the following table. Table no.2 Final position from the futures transaction Price (short position) 97 Price (long position) 97.6 No of contracts 38660 Loss \$ - 23,195.88 Part 3 I. The relationship between the price of the future contract and the interest rates on the market is an inverse relationship. So, for this example, the price of the future contract has raised implying a decline in the interest rate. II. The company has fixed its borrowing cost only for 50% of the exposure. The effective borrowing cost is computed as: r= 100- 97= 3% So, the company will borrow money at 3%. III. The company did not hedge all the risks involved by the transaction above. Firstly, it only hedged 50% of its interest rate exposure. Secondly, risks related to changes in the principal borrowed, or the currency in which this one is expressed are not hedged. Question 2 There are various theories related to dividend policies. One of the most important theories in this matter is the irrelevance thesis of Modigliani and Miller (Fabozzi and Drake, 2009). Under certain assumptions, Modigliani-Miller argues that dividend policy is irrelevant (no taxes, no transaction costs, no issuance costs, no insider information, a fixed investment policy). In other words, the management’s decision to change dividend value does not determine a shift in firm value too because the shareholder wealth is determined by the income generated through the investment policy of the firm, and not the way the firm distributes the income (Miller and Modigliani, 1961). Another theory is based on the “bird - in – the- hand” hypothesis. This assumes that the financial markets are characterized by uncertainty and imperfect information, and because of this, dividends should be considered differently than retained earnings. Moreover, all investors would want to receive dividends i.e. cash (“bird-in-the-hand”) rather than future capital gains from the evolution of the stock (“two in the bush”). So, a firm which offers a high dividend ratio would deliver good signals to the market, boosts the stock market, and finally increases the firm’s value (Walter, 1963). A theory which contradicts the “bird-in-the-hand” theory is based on the tax-effect hypothesis. This theory states that a lower dividend policy would lower the cost of capital of the firm and in this way increase the stock value and the shareholders wealth (Bajaj and Anand, 1990). The starting point for this conclusion is considering the higher taxation of dividends compared to capital gains. Furthermore, the dividends are taxed right after are paid, whereas capital gains are taxed until the moment of sell. This consideration of tax advantages of capital gains compared with receiving dividend determine investors to be attracted of companies with higher retained earnings than a higher dividend policy (Pettit, 1977). Considering the company Swan Dane Ltd., which is keeping constant a high dividend policy, can be supported by the “ ... Read More
Cite this document
• APA
• MLA
• CHICAGO
(“The Theory and Practice of Investment Management Essay”, n.d.)
(The Theory and Practice of Investment Management Essay)
https://studentshare.net/finance-accounting/12499-major-report.
“The Theory and Practice of Investment Management Essay”, n.d. https://studentshare.net/finance-accounting/12499-major-report.
Click to create a comment
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC
Human resources management: Theory and practice
Therefore, it is vital that the schools of this area continue to enjoy recreation and sport facilities which are normally provided by the town administration. However, the current state of some of the sports and recreation facilities that schools and towns have are inadequate.
10 Pages(2500 words)Essay
Economic Theories and the Music Industry
Music has been used ever since age old times to assist in the expression of emotions that a person may bear. Another role that music has played is in the relaying of information that affects the society in a particular manner. There is also the vast use of music for entertainment and pure relaxation.
8 Pages(2000 words)Essay
Finance Principles
The main purpose of diversification of portfolio is to reduce the overall risk associated with the portfolio without compromising much on the return. It is the motive of every investor to maximize return and minimize risk. The volatility or risk associated with a portfolio is minimized due to diversification because of the fact that not all the assets included in the portfolio move along the same direction.
8 Pages(2000 words)Essay
Quantitative Risk Analysis in Investment
Therefore, risk occurs when there is variability between the expected outcome and the actual outcome. The incurrence of risk in investment is quite common and risk analysis in investment is a necessity. Since investment is putting one's hard earned money in some assets for a certain period of time, the investor looks at the risk which he/she is going to incur from the investment.
8 Pages(2000 words)Essay
Investment theory and property diversification
In simple words diversification of funds help to reduce market risks that has four strong building blocks of an investment portfolio known as Cash, Fixed Interests, Property and Shares. Financial professionals generally agree there are four broad classes of assets such as stocks, fixed income or bonds, cash equivalents and other tangible assets such as real estate.
5 Pages(1250 words)Essay
Management Theory into Practice
Montana and Charnov define management as working with and through other people to achieve the goals of both the organization and its members. Emergency management deals with risks and how they can be avoided. Crisis management deals with risks and threats to the organization. However, it is more concerned with the management of an unpredictable event.
16 Pages(4000 words)Essay
Financial Management
The CAPM looks at both the systematic and unsystematic risks and directs the investors to the right direction. The assumption is that the higher the risk the investor takes, the higher the resulting returns
4 Pages(1000 words)Essay
WEALTH MANAGEMENT
Investment involves allocation of funds among investment projects in expectation of future cash inflows from the investment projects (PANDEY, 1979). Investment managers are therefore expected to make long term decisions and to make prudent
12 Pages(3000 words)Essay
Practice of investment management
Eventually, a desirable recommendation to the establishment of effective portfolio management is expected. Interest rates have major impact on a nation’s equity indices. This impact on equity indices is also prominent in the US. In this regard,
6 Pages(1500 words)Essay
Financial market is considered a market for the exchange of credit and capital, which consists the capital markets and the money markets (McLindon 1996). Whereas capital market is considered a market where long-term securities or debt are traded, the money market is considered a market for debt securities are short-term.
8 Pages(2000 words)Assignment
Let us find you another Essay on topic The Theory and Practice of Investment Management for FREE!
+16312120006