The Use of Money Market Funds as Collateral

Provide detailed descriptions and show all calculations used to arrive at solutions for the following questions:

The current 50% hedging policy executed at the fund level has served well for OTPP for the past ten years, contributing to the fund’s positive returns. The FX Hedge Program not only has minimized the downside risk, but has also limited the upside potential. If OTPP decided not to implement a hedging program in 1996, they would have lost about $983 million CAD over the ten year period (1995-2005) which is valued at 2% of the portfolio. With the hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short-term risk minimizing strategy for long term investors, sustaining a continual payout of pensions during volatile times in OTPP’s invested currency markets. Currently, approximately 21% of OTPP’s net assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk management program of hedging, as slight currency fluctuations can significantly affect the value of the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk management strategy.

Mr. Brown readily admitted that he was not at ease discussing the most recent approaches to risk reduction or hedging. He had received his MBA from Harvard in the 1960s and had spent most of his career working for a company that had little international exposure. Moreover, he was not familiar with derivatives such as currency options, which until recently were not widely traded. However, Mr. Brown had recently hired an assistant, Mr. Dan Pross, who had some knowledge of hedging and derivatives. As a student at UCLA, Mr. Pross had traded various types of derivatives for his own portfolio and was familiar with how they were traded. Although Mr. Pross did not have a finance background, he was, in Mr. Brown’s opinion, extremely intelligent and highly capable. Mr. Brown suggested that Mr. Pross make a presentation to the senior management on the use of derivatives to reduce risk.

In the United States, a society plagued by capitalism, investing has become a way of life. To most Americans it begins with opening a savings account and slowly allowing that money to grow through the compounded interest rate over the years. While it may not seem like a big step in generating more income, nonetheless, this is a positive movement in the market of investments. With the many types of investments available knowing which are reliable, or safe, or yield good returns, are just some of the questions on the investors mind. Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity.

The Federal Reserve Bank has established standards for the different denominations of currency in how they are bundled. Each denomination of cash and coin is indicated by a specific color band or wrapper. It is important that tellers are familiar with these standards to quickly identify bundles of cash or rolls of coins and maintain these standards.

LTCM’s board of directors included many geniuses in from the financial world, who collectively created complex models allowed them to calculate risk of securities much more accurately than others. LTCM’s trading strategy was featured by the divergence in price between long-term U.S. Treasury bonds. It shorted the more expensive “on-the-run” bond and purchased the “off-the-run” security at the same time to exploit the price divergence. In order

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

Elephant Bar Restaurant is a California based company founded by Chris Nancarrow in 1979. The restaurant started as a test concept of Carrow’s Restaurants, a chain of more than 150 full-service restaurants. Elephant bar was sold to W. R. Grace in 1985, and repurchased in 1993. The company aims to differentiate itself through innovative culinary concepts. On a product level, the company provides an “elephant-sized” culinary experience to the customer. In order to support innovation, the menu featured complex dishes that included “one unusual ingredient.” On a store level, the restaurants

The handwriting is on the proverbial wall and so are the signs of the time: history repeats itself. Once again gold, silver and platinum will come to the financial rescue of those who prepared.

One must pretend to know the broad and yet differentiated world of banking and equity portfolios without bothering to actually learn about them. Use words such as ‘instability’, ‘hedging’, and ‘derivatives’ to inspire awe and trust among those who discuss these activities with you. Of utmost importance to Step Two, one must invest in only certain types of products to assure that one’s portfolio remains inflexible and susceptible to crashing.

Mezzanine financing is an unsecured debt instrument that sits between senior secured debt and common equity in a company's capital structure. Mezzanine financing is generally not used to fund day to day operations; rather, it is primarily used by companies experiencing a significant transition event, whether through rapid organic growth (introducing new product/service lines, expanding geographically), making a strategic acquisition, or effecting a change in shareholder composition (management buyout, leveraged buyout, recapitalization). These situations may require extra financing above and beyond what senior secured debt alone can provide, especially in cases where collateral is limited; mezzanine financing allows shareholders to execute

The real readers for Muhtaseb’s article align very well with his intended readers because of the location of the publication in the Journal of Derivatives and Hedge Funds which caters to financially savvy and hedge fund interested readers. In the second sentence of the abstract, Muhtaseb already begins to reference technical financial terms that his intended reader should understand. When elaborating on how his purpose is achieved, he says, “It is accomplished through identification and analysis of numerous activities normally associated with hedge funds that have become an integral part of capital market activities” (1). Even in the abstract when Muhtaseb attempts to summarize his argument in approachable and concise terms, he uses the phrase ‘capital market activities.’ The intended audience reading in the Journal of Derivatives and Hedge Funds would recognize capital markets as markets for buying and selling debt and equity instruments, but because I am not part of the intended audience for article, I rely on google searches to fill the gaps in my understanding. Because Muhtaseb published his article in a technical journal, though, his real readers are likely

The forward and money-market hedges are discussed in detail below. At this point, it is sufficient to acknowledge that these financial contracts do mitigate the risk. Other suggested contracts are beyond the scope of this case, but should be acknowledged.

JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 6 • Number 1 • Summer 2007

During the last 30 years, derivatives have become increasingly important and widely used in the field of finance all around the world. Their increasing values made them impossible to be ignored because they have become much bigger than the stock market when measured in terms of underlying assets in so much that Global corporations and financial intermediaries trade billions of dollars of derivative contracts on a daily basis across a range of products and markets (Batten and Wagner, 2012).