23 Feb Explain the differences between Options and Futures Contracts? Using one example, how Options and Futures Contracts can be used to hedge against risk? (You have to mention one academic refer

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Explain the differences between Options and Futures Contracts? Using one example, how Options and Futures Contracts can be used to hedge against risk? (You have to mention one academic reference) Could you make your answer (100-200 words)?
Note:
Could you make this discussion more realistic by commenting on the post of at least 2 of your classmates?
Week 5: Interactive activity
5.1-Learning Outcomes
Upon successful completion of this module, the student will be able to:
Describe the contents and uses of a financial plan.
Construct a simple financial planning model.
Estimate the effect of growth on the need for external financing.
5.2-Reading
Read the following to prepare for this week:
Chapter 18
5.3 -Test your Knowledge (Question):
* What are the contents and uses of a financial plan?( Words-100 )
5.4 Instructions
Answer the question in the test your knowledge section.
Post your answer in the discussion board using the discussion link available at BB (Week-5:Interactive learning Discussion)
Week 12: Interactive activity
12.1- Learning Outcomes
Upon successful completion of this module, the student will be able to:
Identify and explain the six most important ideas in finance.
Identify and explain the nine unsolved problems in finance.
12.2- Reading
Read the following to prepare for this week:
Chapter 25
12.3 – Test your Knowledge (Question):
@ What determines project risk and PV?
12.4 – Instructions
Answer the question in the test your knowledge section.
Post your answer in the discussion board using the discussion link available at BB (Week-12:Interactive learning Discussion)
Week 11:Interactive Learning Activity
11.1- Learning Outcomes
@Upon successful completion of this module, the student will be able to:
Understand why companies hedge to reduce risk.
Use options, futures, and forward contracts to devise simple hedging strategies.
11.2- Reading
Read the following to prepare for this week:
Chapter 24,
11.3 -Test your Knowledge (Question):
@ What is the basic difference between hedgers and speculators?
11.4-Instructions
Answer the question in the test your knowledge section.
Post your answer in the discussion board using the discussion link available at BB (Week-11:Interactive learning Discussion)
Requirements: Discussion
McGraw-Hill/IrwinCopyright ? 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
24-2Risk ManagementThe Financial Manager Faces Multiple Sources of Risk يلاملا ريدملا هجاويرطاخملل ةددعتم رداصمExchange Rate Riskفرصلا رعس رطاخمEnvironmental Riskةيئيبلا رطاخملاMarket Risk رطاخمقوسلاInterest Rate Riskةدئافلا لدعم رطاخمCompetitionةقباسمIndustry Changesةعانصلا تارييغتPolitical Risk رطاخملاةيسايسلا
24-3Why Hedge: To Add Value?Reason 1: Hedging is a zero-sum game. ببسلا1 :رفص اهتلصحم ةبعل طوحتلا.Reason 2: Investors do-it-yourself alternative.يناثلا ببسلا :كسفنب نورمثتسملا هلعفي يذلا ليدبلا.How should a financial manager approach hedging?؟طوحتلا عم يلاملا ريدملا لماعتي نأ بجي فيك
24-4A Sensible Approach to HedgingNote: Any sensible risk strategy must answer the same five questions.ةظحلام :ةسمخلا ةلئسلأا سفن ىلع ةلوقعم ةرطاخم ةيجيتارتسا يأ بيجت نأ بجي.1) What are the major risks that the company faces and what are the possible consequences?1 ) يه ام؟ةلمتحملا بقاوعلا يه امو ةكرشلا اههجاوت يتلا ةيسيئرلا رطاخملا2) Is the company being paid for taking these risks?2 )؟رطاخملا هذه لباقم ةكرشلل عفدلا متي له3) Can the company take any measures to reduce the probability of a bad outcome or to limit its impact?3 )؟اهريثأت نم دحلل وأ ةئيس ةجيتن ثودح ةيلامتحا ليلقتل تاءارجإ يأ ذاختا ةكرشلل نكمي له4) Can fairly priced insurance to offset any losses?4 ) يأ ضيوعتل لوقعم لكشب ًارعسم نيمأتلا نوكي نأ نكمي له؟رئاسخ5) Can derivatives, such as options or futures, hedge the risk?5 ) دوقعلا وأ تارايخلا لثم ? تاقتشملل نكمي له؟رطاخملا نم طوحتلا ? ةلجل?ا
24-5Why Hedge?What is a cereal company in the business of doing?؟ةيراجتلا لامعلأا يف بوبحلا ةكرش يه امA. Producing a product efficiently and selling it fora profit.حبرلل هعيبو ةءافكب جتنم جاتنإ.B. Speculating on the price of sugar, wheat, and otherinputs for its product. حمقلاو ركسلا رعس ىلع ةبراضملاهجتنمل ىرخأ تلاخدمو.Answer: Both. The company does A by choice and B because it has no choice.امهلاك . ةكرشلا موقت”أ ” رايتخلااب”ب “رخ? رايخ اهيدل سيل هنلأ.
24-6Risk Management StrategiesThere are three principal ways to manage risk.رطاخملا ةرادلإ ةيسيئر قرط ثلاث كانه.Increasing FlexibilityInsurance PoliciesInvestments in Derivativesةنورملا ةدايزنيمأتلا تاسايستاقتشملا يف تارامثتسا
24-7Reducing Risk With Options: ExampleAbramovic, Inc. sells crude oil. Since its costs are relatively fixed, fluctuations in the sale price of crude oil can cause unexpected profits or losses. ةكرش عيبتAbramovicماخلا طفنلا . ًيبسن ةتباث اهفيلاكت نلأ اًرظن ? اأ اًحابرأ ببست نأ نكمي ماخلا طفنلا عيب رعس يف تابلقتلا نإف وةعقوتم ريغ رئاسخ.How might Abramovic, Inc. hedge this risk? نكمي فيك ةكرشلAbramovic?Inc. ؟رطاخملا هذه نم طوحتلا
24-8Reducing Risk With OptionsPrice per barrelAbramovic, Inc. loses money when prices drop. رسختAbramovic?Inc. امدنع لاملاراعسلأا ضفخنت.RevenuesAbramovic, Inc. sells crude oil. How does the price of oil influence revenues?
24-9Reducing Risk With Options: Example (continued)How might it hedge this risk?Price per barrelA put option makes money when prices drop. رسختAbramovic?Inc. امدنع لاملاراعسلأا ضفخنت.Revenues
24-10Price per barrelAbramovic, Inc.s natural risk, plus a put option, provides a HEDGE against price declines.ةكرشل ةيعيبطلا رطاخملا رفوتAbramovic?Inc. ? ? عيبلا رايخ ىلإ ةفاضلإابراعسلأا ضافخنا دض اًطوحت.RevenuesReducing Risk With Options: Example (continued)What are the results of this strategy?Revenues
24-11Profit to seller= initial futures price -ultimate market priceIn order to account for price fluctuations, investors sometimes manage risk by investing in futures contracts. دوقعلا يف رامثتسلاا قيرط نع رطاخملا ةرادإب اًنايحأ نورمثتسملا موقي ? راعسلأا تابلقت باسح لجأ نمةلجل?ا.Futures ContractsProfit to buyer= ultimate market price -initial futures price
24-12Future Contracts: ExampleFarmer Tom owns a wheat farm and wishes to hedge against a drop in the future price of wheat. ضافخنا نم طوحتلا يف بغريو حمق ةعرزم موت عرازملا كلتميلبقتسملا يف حمقلا راعسأ.What are the positions involved in this hedge?؟طوحتلا اذه اهيلع يوطني يتلا فقاوملا يه ام
24-13Future Contracts: Price of WheatThe farmer loses money when the price drops لاملا عرازملا رسخيرعسلا ضفخني امدنعPrice per bushelValue of wheatFarmer Tom owns a wheat farm. How does the price of wheat influence revenues?
24-14Future Contracts: Example (Continued)How might Farmer Tom hedge against this risk?The futures contract profits when prices drop. ةلجل?ا دوقعلا حابرأ ضفخنت امدنعراعسلأا.Price per bushelValue of wheat
24-15Future Contracts: Example (continued)With a futures contract, the farmer locks in a price. موقي ? لجل?ا دقعلا عم قلاغإب عرازملارعسلا.Price per bushelValue of wheatWhat are the results of this strategy?Value of Wheat
24-16Financial FuturesFinancial futures can be used to hedge against interest rate risk, exchange rate risk, and price fluctuations. ةدئافلا راعسأ رطاخم دض طوحتلل ةلجل?ا ةيلاملا دوقعلا مادختسا نكميراعسلأا تابلقتو فرصلا راعسأ رطاخمو.Commodity FuturesFinancial Futuresعلسلل ةلجل?ا دوقعلاةيلاملا ةلجل?ا دوقعلا
24-17Forward ContractsIf the terms of a generic futures contract do not fit the investors needs, he can instead buy or sell a forward contract. ? رمثتسملا تاجايتحا بسانت لا ماعلا لجل?ا دقعلا طورش تناك اذإلج? دقع عيب وأ ءارش كلذ نم ًلادب هنكميف.Forward contracts are ?custom-designed?? futures contracts. They have specific amounts and expiration dates to meet the buyers needs. ةلج? دوقع يه ةلجل?ا دوقعلا”اًصيصخ ةممصم .” ةددحم غلابم مهيدلنيرتشملا تاجايتحا ةيبلتل ةيحلاصلا ءاهتنا خيراوتو.
24-18Forward Contracts: ExampleYou enter into a forward contract to take delivery of one million Euros three months from now. What happens to the price you will pay at expiration if Euros depreciate during the contract?نل?ا نم رهشأ ةثلاث دعب وروي نويلم ملاتسلا لج? دقع يف لخدت تنأ . يذلا رعسلل ثدحي اذام؟دقعلا للاخ ورويلا ةميق تضفخنا اذإ ةيحلاصلا ءاهتنا دنع هعفدتسThe price for the Euros will not change; it was fixed at the onset of the contract.دقعلا ةيادب يف هحلاصإ مت ؛ ورويلا رعس ريغتي نل.
24-19SwapsOne common way for firms to hedge against risk is to enter into a swap.Swap: Arrangement by two counterparties to exchange one stream of cash flows for another.ةضياقملا : نافرط هب موقي بيترترخ?ب ةيدقنلا تاقفدتلا نم دحاو قفدت لادبتسلا.CompanySwap DealerFixed rate paymentLIBOR paymentLIBOR obligationExample: Funding a variable-rate obligation with a fixed-rate payment.لاثم :تباث لدعم دادسب ريغتم رعسب مازتلا ليومت.ةضياقم يف لوخدلا يه رطاخملا نم طوحتلل تاكرشلل ةعئاشلا قرطلا ىدحإ
24-20Interest Rate Swaps: Floating Rate to Synthetic Fixed RateIn the previous example, the swapped rates cancel out any changes in LIBOR and the total payment from the company is fixed. لاثملا يف يف تارييغت يأ ةلدابملا راعسلأا يغلت ? قباسلاLIBOR نم دادسلا يلامجإ نوكيواًتباث ةكرشلا.
24-21Currency SwapsCurrency swaps are a subset of interest rate swaps; the loans are priced in different currencies. ؛ ةدئافلا راعسأ تاضياقم نم ةيعرف ةعومجم يه تلامعلا تاضياقمةفلتخم تلامعب ضورقلا ريعست متي.Why would a firm engage in a currency swap?؟تلامعلا ةضياقم يف ةكرشلا لخدت اذامل
24-22Currency Swaps: ExampleSuppose you have invested in a project in Japan that is financed with US bonds. ةيكيرمأ تادنسب لومم نابايلا يف عورشم يف ترمثتسا كنأ ضرتفنل.How would a currency swap be useful?؟ةديفم تلامعلا ةضياقم نوكت نأ نكمي فيكYou might enter into a currency swap so that you can emulate holding Japanese bonds.تادنسلاب ظافتحلاا ةاكاحم كنكمي ثيحب تلامعلا ةضياقم يف لوخدلا كنكميةينابايلا.
24-23Currency Swaps: ExampleCoca-Cola wishes to borrow yen (?) to finance its Japanese operations. Coca-Cola believes the terms of the loan will be more favorable in the United States. It borrows $50,000,000 for 4 years at 3%. It arranges, through a swap dealer, to trade its future dollar liability for yen (the rate of the loan for yen is 4%). Suppose the spot exchange rate is $1 = ?80. Below are the cash flows (in 000,000s) which occur as a result of the swap. نيلا ضارتقا يف لاوك اكوك ةكرش بغرت )(ةينابايلا اهتايلمع ليومتل . ةكرش دقتعتةدحتملا تايلاولا يف ةمءلام رثكأ نوكتس ضرقلا طورش نأ لاوكاكوك . ضرتقي50?000?000 ةدمل رلاود4 ةبسنب تاونس3٪ . نيلا لباقم رلاودلاب يلبقتسملا همازتلا لوادتل ? ةضياقم رجات للاخ نم ? بتري( وه نيلا لباقم ضرقلا لدعم4٪ .) نأ ضرتفا وه يروفلا فرصلا رعس1 رلاود =80ني . ةيدقنلا تاقفدتلا يلي اميف(نييلاملاب )ةلدابملل ةجيتن ثدحت يتلا.Year 0Years 1-3Year 4$?$?$?Coca-Cola Dollar Loan+ 50-1.5-51.5Arrange Currency Swapa.Coca-Cola receives $-50+ 1.5+ 51.5b. Coca-Cola pays ?+ 400-16-416NetCash Flow (000,000s)$0+ ?400$0-?16$0-?416
24-24Hedging vs. SpeculatingHedgers reduce risk; speculators do little more than gamble. نم رثكأ نولعفي لا نوبراضملا ؛ رطاخملا نم نوللقي نوطوحتملاةرماقملا.Uninformed investors should use derivatives for hedging, not speculation. سيلو طوحتلل تاقتشملا مادختسا نيعلطملا ريغ نيرمثتسملا ىلع بجيةبراضملا.
24-25Derivative InnovationsDerivatives can be created to hedge against any risk a firm faces. The potential varieties are infinite.ةكرشلا اههجاوت رطاخم يأ دض طوحتلل تاقتشملا ءاشنإ نكمي .ةيئاهنلا ةلمتحملا فانصلأا.Example: A TV network may want to hedge the risk of a World Series game being rained out, foregoing advertising income. لاثم :لسلسلا باعلأ ىدحإ ضرعت رطاخم نم طوحتلا يف ةينويزفلت ةكبش بغرت دق ةتانلاعلإا لخد نع لزانتلل ةيملاعلا.Who might the counterparty be to such a contract?؟دقعلا اذه لثمل لباقملا فرطلا نوكي دق نم
24-26Appendix A: Worldwide Turnover in Futures Contracts
24-27Appendix B:Financial Futures / Forwards

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