PART 1: (40 marks)
“Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Berkshire Hathaway Inc. Chairman of the Board Warren Buffet, “Letter to the Shareholders of
Berkshire Hathaway Inc.,” February 21, 2003
Since the early 1990’s, there have been a number of high-profile businesses that have realised huge losses associated with the use of derivatives for hedging that went wrong. Better known cases in the 1990’s involved Barings Bank (195), Long Term Capital Management (1998), Procter and Gamble (1994), Metallgesellschaft AG (1993), and Orange County California (1993) whilst more recent cases include JP Morgan (2012), AIG (2008) and China Aviation Oil (2004).
You are required to choose ONE of the above companies. In relation to your chosen company, research into their derivatives failure, and answer the following questions:
(i) Describe the facts, including background (nature of company business, trading history, size, etc.) and nature and amount of losses realised;
(ii) Explain the risk that the company was subject to and detail Risk Management (RM) techniques that were used. Please note any specific derivatives hedging strategy.
(iii) Explain what went wrong in detail;
(iv) Evaluate the RM performance; and detail any lessons learned from the experience.
PART 2: (60 marks)
Choose ONE of the following two cases and answer the questions relating to your case of choice. Case readings are available from Moodle. You are encouraged to conduct your own extra research to answer the questions.
CASE 1: HEDGING AT PORSCHE
Porsche, a German manufacturer of performance cars, was known for a cautious approach to risk management and conservative financial policies. In 2007, however, it stunned analysts and investors by reporting billions of dollars of profits from transactions on financial derivatives. Some of these profits came from foreign exchange hedging, but much of them were due from a huge position in options on Volkswagen stocks. Volkswagen, one of the world’s largest car manufacturers and a company many times the size of Porsche, was partnering with Porsche on a number of development and manufacturing projects.
Porsche used the option to build an ownership stake in Volkswagen. Porsche argued that the ownership stake was necessary to prevent a hostile takeover and breakup of its key partner by a third party. Porsche’s executives further maintained that the options strategy to build the stake was prudent because it protected Porsche against the risk of a substantial rise in Volkswagen’s stock price once Porsche’s intentions became clear to market participants. However, critics argued that Porsche’s derivatives transactions represented reckless speculation that could put the entire company at risk.
Answer the following questions relating to the case.
(i) Should Porsche hedge its foreign exchange exposure? How do Porsche competitors, such as BMW, deal with this risk? Can Porsche do something similar?
(ii) Research Porsche’s option hedging strategy and describe it in detail. What would be an alternative hedging strategy? Which strategy is better for Porsche? (iii)How did Porsche build its Volkswagen stake? Why not buy Volkswagen stocks
(iv)Was Porsche’s attempt to build a stake in Volkswagen a sensible one? Or do you agree with critics who argued that Porsche was speculating with shareholders’ money and it had become a hedge fund that neglected its core business? Justify your answer.
CASE 2: FOREIGN EXCHANGE HEDGING AT GENERAL MOTORS
The Treasury team at General Motors (GM) is responsible for managing the corporation’s varied financial transactions and their associated risks. With operations and subsidiaries all over the world, GM has exposure to numerous currencies. The company’s hedging policy defines what exposures should be hedged and how the prescribed hedges should be implemented. GM’s passive hedging strategy is intended to minimize management time and discretion spent on hedging decisions and does not usually accommodate hedging translational exposures. Exceptions to the hedging policy must be approved by the Head of Treasury. The Head of Treasury is currently reviewing two proposals for the Canadian dollar and the Argentinean peso. He and his team have to evaluate GM’s exposure to each currency, determine the risks, consider other approaches to managing these currency risks, and decide if GM should depart from its formal hedging policy. If they decide to go ahead, they would also need to consider what instruments to use to implement the hedges.
Answer the following questions relating to the case.
(i) Should multinational firms hedge foreign exchange rate risk? If not, what are the consequences? If so, how should they decide which exposures to hedge?
(ii) What do you think of GM’s foreign exchange hedging policies? Would you advise any changes?
(iii) Should GM deviate from its policy in hedging its CAD exposure? Why or why not?
(iv) If GM does deviate from its formal policy for its CAD exposure, how should GM think about whether to use forwards or options for hedging?
(v) Why is GM worried about the ARS exposure? What operational decisions could it have made or now make to manage this exposure?
Compelling correspondence is essential to the achievement all things considered but since of the changing idea of the present working environments, successful correspondence turns out to be more troublesome, and because of the numerous impediments that will permit beneficiaries to acknowledge the plan of the sender It is restricted. Misguided judgments.In spite of the fact that correspondence inside the association is rarely completely open, numerous straightforward arrangements can be executed to advance the effect of these hindrances.
Concerning specific contextual analysis, two significant correspondence standards, correspondence channel determination and commotion are self-evident. This course presents the standards of correspondence, the act of general correspondence, and different speculations to all the more likely comprehend the correspondence exchanges experienced in regular daily existence. The standards and practices that you learn in this course give the premise to additionally learning and correspondence.
This course starts with an outline of the correspondence cycle, the method of reasoning and hypothesis. In resulting modules of the course, we will look at explicit use of relational connections in close to home and expert life. These incorporate relational correspondence, bunch correspondence and dynamic, authoritative correspondence in the work environment or relational correspondence. Rule of Business Communication In request to make correspondence viable, it is important to follow a few rules and standards. Seven of them are fundamental and applicable, and these are clear, finished, brief, obliging, right, thought to be, concrete. These standards are frequently called 7C for business correspondence. The subtleties of these correspondence standards are examined underneath: Politeness Principle: When conveying, we should build up a cordial relationship with every individual who sends data to us.
To be inviting and polite is indistinguishable, and politeness requires an insightful and amicable activity against others. Axioms are notable that gracious “pay of graciousness is the main thing to win everything”. Correspondence staff ought to consistently remember this. The accompanying standards may assist with improving courtesy:Preliminary considering correspondence with family All glad families have the mystery of progress. This achievement originates from a strong establishment of closeness and closeness. Indeed, through private correspondence these cozy family connections become all the more intently. Correspondence is the foundation of different affiliations, building solid partners of obedient devotion, improving family way of life, and assisting with accomplishing satisfaction (Gosche, p. 1). In any case, so as to keep up an amicable relationship, a few families experienced tumultuous encounters. Correspondence in the family is an intricate and alluring marvel. Correspondence between families isn’t restricted to single messages between families or verbal correspondence.
It is a unique cycle that oversees force, closeness and limits, cohesiveness and flexibility of route frameworks, and makes pictures, topics, stories, ceremonies, rules, jobs, making implications, making a feeling of family life An intelligent cycle that makes a model. This model has passed ages. Notwithstanding the view as a family and family automatic framework, one of the greatest exploration establishments in between family correspondence centers around a family correspondence model. Family correspondence model (FCP) hypothesis clarifies why families impart in their own specific manner dependent on one another ‘s psychological direction. Early FCP research established in media research is keen on how families handle broad communications data. Family correspondence was perceived as an exceptional scholastic exploration field by the National Communications Association in 1989. Family correspondence researchers were at first impacted by family research, social brain science, and relational hypothesis, before long built up the hypothesis and began research in a family framework zeroed in on a significant job. Until 2001, the primary issue of the Family Communication Research Journal, Family Communication Magazine, was given. Family correspondence is more than the field of correspondence analysts in the family. Examination on family correspondence is normally done by individuals in brain science, humanism, and family research, to give some examples models. However, as the popular family correspondence researcher Leslie Baxter stated, it is the focal point of this intelligent semantic creation measure making the grant of family correspondence special. In the field of in-home correspondence, correspondence is normally not founded on autonomous messages from one sender to one beneficiary, yet dependent on the dynamic interdependency of data shared among families It is conceptualized. The focal point of this methodology is on the shared trait of semantic development inside family frameworks. As such, producing doesn’t happen in vacuum, however it happens in a wide scope of ages and social exchange.
Standards are rules end up being followed when performing work to agree to a given objective. Hierarchical achievement relies significantly upon compelling correspondence. So as to successfully impart, it is important to follow a few standards and rules. Coming up next are rules to guarantee powerful correspondence: clearness: lucidity of data is a significant guideline of correspondence. For beneficiaries to know the message plainly, the messages ought to be sorted out in a basic language. To guarantee that beneficiaries can without much of a stretch comprehend the importance of the message, the sender needs to impart unmistakably and unhesitatingly so the beneficiary can plainly and unquestionably comprehend the data.>