How can we use the futures market to hedge against rising interest rates? What is the difference between using derivatives to hedge against risks and using them to speculate? Relate this topic to Christianity and how or if we can use these elements to prosper spiritually. You must post 1 thread of at least 250 words.

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Jean KeelingLv2

28 Sep 2019

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Thread: Discuss the following question: Commercials suggesting that âbuying goldâ would be a wise decision are commonly aired. Explain the difference between âhedgingâ and âspeculatingâ by explaining why someone who wishes to âhedgeâ against inflation might choose to purchase gold. Explain why someone who wishes to âspeculateâ might also choose to purchase gold. Relate the motivations of âhedgingâ and âspeculatingâ to the topic of Christianity. You must submit 1 thread of at least 250 words and cite at least 1 source in addition to any Scripture verses cited.

Reply: Respond to at least 2 classmates' threads and discuss whether or not these topics/questions can be related to furthering the Gospel message. Are there biblical elements that can be incorporated or pulled from these topics? Each reply must be at least 100 words.

Your thread is due by 11:59 p.m. (ET) on Friday of Module/Week 6. Replies are due by 11:59 p.m. (ET) on Monday of the same module/week

Mega Fund
Mega Fund invests in stocks of US companies. With uncertainty in the world economy and in the US economy in particular, the US stock market has been quite volatile. The
current portfolio value of Mega Fund is $120 million. Brian, the portfolio manager is concerned about the volatility of stock prices and is thinking of obtaining portfolio
insurance. He also would like to diversify his holdings. With the downgrading of bonds issued in Europe, he believes that investing in bonds issued in Europe would be a good
investment and also diversify the fund holdings. Accordingly, he wants to borrow $125 million and invest in bonds of European firms for 5 years. The average yield from these bonds is 10%. However, these bonds are denominated in euro and all cash flows will occur in euros. Thus, Brian is concerned about the exchange rate risk he will be
undertaking if he invests in European bonds. He also would like to hedge the exchange rate risk through a currency swap. He has collected the following information:
On 1 April, S & P 500 Index is at 2,350. On the same day S & P futures are trading at 2,400 and S & P call options with exercise price of 2,400 is trading at 30. S & P put
options with exercise price of 2400 are trading at 60. Futures and options have a contract multiplier of 100. The options are American options.
The exchange rate on 1 April is Euro 1 = USD1.25 and the foreign exchange rate used for the beginning and end of a currency swap is the same. The swap rates are 5% USD
and 5% Euro.

Question 1
Brian would like to insure portfolio value at $120,000,000 on 1 April.
(a) Show how he can accomplish this by using S&P futures and how many futures contracts are needed.

(b) Show how he can accomplish this using S&P options and how options contracts are needed.

(c) Which of these methods is preferable? Explain why.

Question 2
If Brian enters into a currency swap contract,
(a) Explain how this helps Mega Funds from facing currency risk.
(b) Show clearly the initial cash flow, periodic cash flows, and terminal cash flow resulting from the currency swap.

Question 3
Consider the firm you work for, or another firm whose operations you are familiar with. Briefly describe its operations. What type of financial risks does that firm face?
How can you hedge against those risks? What are the constraints in hedging against those risks? Do the costs and benefits of the hedging strategy you recommend justify
hedging? Substantiate your response

scarleteel467

FINANCIAL MANAGEMENT- 14th Edition Chapter #23 - Mini Case

Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The firmâs CEO, Bill Stooksbury, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended was on the pressing need for companies to institute enterprise risk management programs. Because no one at Tennessee Sunshine is familiar with the basics of enterprise risk management, Stooksbury has asked you to prepare a brief report that the firmâs executives could use to gain at least a cursory understanding of the topics.

To begin, you gathered some outside materials on derivatives and risk management and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach to the paper is to use a question-and-answer format. Now that the questions have been drafted, you have to develop the answers.

a. Why might stockholders be indifferent to whether or not a firm reduces the volatility of its cash flows?

b. What are six reasons risk management might increase the value of a corporation?

c. What is COSO? How does COSO define enterprise risk management?

d. Describe the eight components of the COSO ERM framework.

e. Describe some of the risks events within the following major categories of risk:

o (1) strategy and reputation,

o (2) control and compliance,

o (3) hazards,

o (4) human resources,

o (5) operations,

o (6) technology, and

o (7) financial management.

f. What are some actions that companies can take to minimize or reduce risk exposures?

g. What are forward contracts? How can they be used to manage foreign exchange risk?

h. Describe how commodity futures markets can be used to reduce input price risk.

i. It is January, and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise capital for an expansion. Currently, the firm can issue 20-year bonds with a 7% coupon (with interest paid semiannually), but interest rates are on the rise and Stooksbury is concerned that long-term interest rates might rise by as much as 1% before June. You looked online and found that June T-bond futures are trading at 111â25 . What are the risks of not hedging, and how might TS hedge this exposure? In your analysis, consider what would happen if interest rates all increased by 1% .

j. What is a swap? Suppose two firms have different credit ratings. Firm Hi can borrow fixed at 11% and floating at LIBOR + 1% . Firm Lo can borrow fixed at 11.4% and floating at LIBOR + 1.5% . Describe a floating versus fixed interest rate swap between firms Hi and Lo in which Lo also makes a âside paymentâ of 45 basis points to Firm L.

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