Fundamentals of Financial Management

Page 3: Introduction to the Financial System Page 7: Commercial Banks Page 12: The Share Market and the Corporation Page 15: Corporations Issuing Equity into the Share Market Page 19: Investors in the Share Market Page 24: Short-term Debt Page 28: Medium- to Long-term Debt Page 32: Interest Rate Determination and Forecasting Page 37: The Foreign Exchange Market Page 40: Factors that Influence the Exchange Rate Page 42: Futures Contracts and Forward Rate Agreements Page 47: Options

The Balance of Payments in India mainly relies on services exports, remittances and the course capital flows, both foreign direct investments (FDI) and FII. It is very essential that all market participants, such as banks and other intermediaries be provided with the wherewithal so that they can undertake a risk management in a way that is scientific. One of the ways to access domestic, foreign exchange markets is to hedge on the underlying foreign exchange exposures. In addition, the facilities that are available as the booking of forward contracts were included in the domestic forex market in order to evolve and acquire volumes and depth (Sumanth, 2012). Some of the newer hedging instruments have put in place swaps and options in the

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

3. In light of the various other techniques for hedging currency exposures why the market for currency swap does exists? Who benefits and who looses in such an agreement? Can a swap really create value for a corporation? And if so where does the value come from? What risks does the swap carry for the various parties involved?

Options strategies share a similar defect with forward sales. That is the weakness of getting the maximum profits that are available when the price goes up or indeed has the potential to rise. “By adjusting the exercise prices and ratios of puts and calls, American Barrick could determine the degree to which it chose to participate in gold price sales”. However, options contracts are usually not longer than 5 years and only contracts with maturities under 2 years have high liquidity. Thus, the time spread of it is far shorter than the 20 years of expected production currently in reserve. Taking these factors into consideration, we think options contracts are good for American Barrick to hedge risk in short-term period.

There are lots of methods to solve the changes in foreign currency and interest rates issue, however, derivative financial instruments are the major tunes Nike enterprise has used to tackle this issue. Despite the fact that this approach does not wipe out comprehensively the risk of foreign exchange, Nike enterprise still utilize it to minimize or delay the negative consequences. Specifically, the derivative financial instruments comprise embedded derivatives, interest rate swap, and foreign exchange forwards and options contracts (Nike annual report, 2014).

Since the acceptance of Dozier Industries’ bid, the company CFO has been exploring the methods available to best manage the exchange risk associated with the award payment being dispersed in British Pounds (GBP). He originally considered a forward contract or a spot contract, but is now investigating how currency options could help hedge against uncertain foreign exchange exposure. The CFO needs to decide whether or not options contracts might provide some benefit to hedge the currency risk.

We first illustrate the concept of “Carry Trade”. It is the process whereby an investor borrows money from a low-interest country, uses the fund by converting (i.e. selling) it to a different currency yielding a higher interest rate. The aim of carry trade is to profit from the interest rate differential between the 2 countries involved. Huge profits as well as substantial lost are most of the time the likely benefit and downside risk respectively. First thing to look for when starting a carry trade is to look for the two currencies offering a high and low interest yield.

Then, we took into consideration only a fluctuation of the exchange rate. The scenarios that we analyzed covers different positions of the dollar against the euro: weak dollar (USD 1,48/EUR), stable dollar (USD 1,22/EUR) and strong dollar (USD 1,01/EUR). Different coverage of costs with hedging was also introduced in the analysis. The three main policies are of not hedging, 100% hedging with forward contracts and 100% hedging with options.

1) What are Aspen Technology’s main exchange rate exposures? How does Aspen Tech’s business strategy give rise to these exposures as well as to the firm’s financing need?

Moreover, because of the huge worldwide extension of the corporation, which operates in 194 countries, the use of foreign currency derivatives to minimize the earnings volatility would be the subject of later analysis. The report will focus on how Nestlé uses futures and option contracts to hedge its exposure to currency risk, centering our attention in Nestlé Home Currency, the Swiss Franc in relation to the US Dollar (USD/CHF). It will be examined an example of its hedging strategy and the information provided by a contact in the firm.

* Stock prices change only when there is new info- cannot be predicted ahead of time

In finance a carry trade is a strategy that consists of borrowing at a low interest rate currency to fund investment in higher yielding currencies. (Moffett) The country in which the investors borrow from is called the funding country and the country where the investment occurs is called the target country. (4) Carry trade is also termed currency carry trade; this strategy is speculative in that the currency risk is present and not managed or hedged. (Moffett) Although there are several complicated carry trades in finance, the most popular are carry trades in the foreign exchange market, which I will discuss in this paper and its role in the financial crisis of 2008.

Among the most fundamental risks, associated with exchange-traded derivatives, is variable degree of risk. According to Ernst, Koziol, & Schweizer (2011), the transactions in

Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company 's management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income. The company 's management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge