Show How Transactions in Derivatives Can Be Used to Either Hedge Risk or to Open Speculative Positions.

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

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.

To make informed decisions about whether to obtain securities or manage speculation goods. The contracts should hold financial benefits of transactions.

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

The Dow Jones Industrial Average (INDEX:DJIA) stock price has been fluctuating and has moved up from 16,384on September 18 to 17,910 on November 6. The Dow Jones Industrial Average (INDEX:DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896. The DJIA typically has not only solid profits, but also create immense amounts of cash flow, much of which they turn around and return to investors. Through a combination of dividends and share buybacks, Dow companies demonstrate their commitment to

The definition of "derivatives" is also very wide, and includes options and warrants, whoever they are issued by, as well as rights and interests in respect of listed securities (or other derivatives).

Thus, this block-trading strategy combined with adverse selection avoidance allowed the DFA to beat the market and thus the benchmark by about 200 basis points over the 20 year period. And as a result became the benchmark for these types of portfolios.

Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.

Question 2: Assume that Jim is subject to a $5,000,000 position limit. What position should he take to exploit the mispricing for the March '86 MMI futures?

AIFS is an American based company that offers travel abroad and exchange study services to both college and high school students. While AIFS’s revenues are denominated in American Dollars (USD), most of their costs are in foreign currencies as Euros (EUR) and British Pounds (GBP). Consequently, foreign exchange hedging has a crucial importance for the company because it provides protection against different types of risk that derive from its activity.

The London Metal Exchange (LME) is the world’s premier industrial metals market – more than two thirds of global non-ferrous futures and options trading is conducted on the LME. The price derived from trading is used as a reference price in the majority of the world’s physical metal markets. Located in the City of London, the LME’s membership is global, with more than 95% of the business conducted on its markets coming from outside the United Kingdom.

* If index future price is under pressure in Chicago, index futures arbitrage will lead to a massive selling in the cash market.

For individual speculators and the managers of financial firms, they have incentives to increase profit where they prefer more risk investment when counterparties and others obey the rules to keep a sustainable marker. Therefore, the transparency policy had been implemented to expose more information around prices and volumes combined with the standardising policy of derivatives contracts, which also increase market efficiency and liquidity. The main regulations introduced are as follows:

The best opportunity is that the total of 8270 tonnes of aluminum could be hedged in future contracts, which will cover the expected case volume of 23.55 million in aluminum cans. This investment should not harm the covenants in 1994 and the following years.

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