Interpret the following statements made by Wall Street analysts and portfolio managers. a. “The existence of...

Interpret the following statements made by Wall Street analysts and portfolio managers.

a. “The existence of financial futures contracts allows our firm to hedge against temporary market declines without liquidating our portfolios.”

b. “Given my confidence in the market, I plan to use stock index futures to increase my exposure to market movements.”

c. “We used currency futures to hedge the exchange rate exposure of our international mutual fund focused on German stocks.”

Solutions

Expert Solution

Answer(a): Futures- is the derivative contract that is arrangement between two parties (buyer and seller) to buy or sell certain asset at a specified price and time in future.

Futures are used in Hedging- Hedging is a techniques to minimize risk. Future contracts are used for hedging purpose, they hedge against the unexpected price movements in future. When a company is going to buy some items in the future and it expects that the price can go up then it can fix a price that it will pay in the future, by buying future contract. On the other hand, if company is selling something in the future, it expects that price will drop, it can take a short position in futures contract.

Furfures are based on underlying, that underlying asset can be equity, commodity or currency.

Answer(b): Stock index futures- These are available in stock market for trading, that track key market indices. It is a legal agreement between two parties to buy or sell stocks on a future date at a specified price. These are used for speculation purpose. With the help of stock index futures, investors can make money, this can be traded with low capital also. When trader things that price will go up or index will rise, he buys the stock index futures and vice versa.

Answer(c): Currency futures- Are used to hedge the exchange rate risk, exchange rate risk is the forex risk that arises due to fluctuation in currencies of two or more countries. Currency futures are used to hedge the risk of getting payment or paying in foreign currency. Currency future contract is an agreement to exchange the price in one currency to another in a future date.

In international trading and mutual funds, currency futures are widely used. Underlying asset of currency futures is Spot rate of currency pair. Currency futures are used for hedging and speculation purpose.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Interpret the following comments made by Wall Street analysts and portfolio managers. a. “Our firm took...

Interpret the following comments made by Wall Street analysts and portfolio managers. a. “Our firm took a hit because we wrote put options on stocks just before the stock market crash.” b. “Before hedging our stock portfolio with options on index futures, we search for the index that is most appropriate.” c. “We prefer to use covered call writing to hedge our stock portfolios.”

Analysts on Wall Street get paid enormous amounts of money to leave their current firm and...

Analysts on Wall Street get paid enormous amounts of money to leave their current firm and bring their clients and business with them to a new firm. The bonus structure for bringing new business to a firm was spread over 6 years. The average analyst was paid $16 million immediately to leave their old firm, $6.5 million at the end of year 1, $7 million at the end of year 2, $8.5 million at the end of year 3, $9...

Many Wall Street firms use LP models to select a desirable bond portfolio. The following is...

Many Wall Street firms use LP models to select a desirable bond portfolio. The following is a simplified version of such a model. Solodrex is considering investing in four bonds; $1 million is available for investment. The expected annual return, the worst-case annual return on each bond, and the duration of each bond are given in the file P04_56.xlsx. (The duration of a bond is a measure of the bond’s sensitivity to interest rates.) Solodrex wants to maximize the expected...

What part did Wall Street, with its stockbrokers, investment advisors, and stock analysts, play in the...

What part did Wall Street, with its stockbrokers, investment advisors, and stock analysts, play in the Enron debacle? At least 300 words

Question 6 (15 marks) Nash Manufacturing is a “darling” of Wall Street analysts. Its current market...

Question 6 Nash Manufacturing is a “darling” of Wall Street analysts. Its current market price is $20 per share, and its book value is $8 per share. Analysts forecast that the firm’s book value will grow by 12 percent per year indefinitely, and the cost of equity is 17 percent. (Hint: You could apply the shortcut forms of profit-based valuation asset valuation model) 1) Given these facts, what is the market’s expectation of the firm’s long-term average ROE? 2) What...

You have made a fortune in Wall Street. The IRS is suspicious and you must launder...

You have made a fortune in Wall Street. The IRS is suspicious and you must launder the money. You have D dollars and you are considering all the different ways you can divide this amount (in integer values) to n different criminal groups. Each group can take up to ai dollars without alerting the IRS. You also have D <=a1 + a2 + .. + an. Using bottom-up dynamic programing, write pseudo-code to determine how many different ways you can...

Interpret the comments: “’Insurance company portfolio managers may serve as shareholder activists to implicitly control a...

Interpret the comments: “’Insurance company portfolio managers may serve as shareholder activists to implicitly control a corporations actions” and relate it to real life current events. "If a life insurance company wants a portfolio manager to generate sufficient cash to meet expected payments to beneficiaries, it cannot expect the manager to achieve relatively high returns for the portfolio.”

The following is from an article in the “Overheard” section in the Wall Street Journal: “Hi,...

The following is from an article in the “Overheard” section in the Wall Street Journal: “Hi, I’m a Mac.” “And I’m a PC.” “I like to stay in those posh hotels with free coffee and 700-threadcount sheets.” “I like to stay at Motel 6.” That is the latest revelation about the great computing divide, courtesy of Orbitz Worldwide CEO Barney Harford. Touting his company’s ability to differentiate itself by slicing and dicing customer data; he let on that those booking...

The following appeared in the Wall Street Journal, September 16, 2019 "Letters to the Editor" that...

The following appeared in the Wall Street Journal, September 16, 2019 "Letters to the Editor" that refers to a September 11 article that appeared in the Journal. Read the letter reproduced below in part and answer the question following the letter. "Phil Gramm and Mike Solon start “Warren’s Assault on Retiree Wealth” (op-ed, Sept. 11) by telling the reader that the households of ages 65 to 74 have an average of $1,066,000 in net worth. This may be technically true...

13 Which of the following is a true description of variance? (i) Managers should interpret an...

13 Which of the following is a true description of variance? (i) Managers should interpret an unfavorable variance as "bad signals" (ii) A company can determine whether a variance should be investigated. (iii) The purchasing manager secured a discount for buying in bulk with fewer purchase orders which results in unfavorable material price variance. (iv) Managers' performance should be evaluated on multiple variances. Select one: a. (ii), iii), (iv) b. (ii), (iv) c. (i), (ii), (iii) d. (i), (ii), (iii),...

Subjects