(2) Explain why expectations of gold prices in the future do not have a role to
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Question
(2) Explain why expectations of gold prices in the future do not have a role to play in determining the futures price for gold. Hint: Explain and discuss how futures prices are determined. You will see that expectations of the price of gold in the future does not enter into the pricing equation. Why? Give two examples and explain of how options can be used if an investor is bullish on a stock. (3) (4) Describe the cash flows to a short futures contract. Give an example. Explain the role of directors in the management of a modern multinational firm. What are some of the decisions that directors can be expected to take. (5) (6) FinTech is an important development in Financial Markets. Using the Lending Club case as an example, describe the promise and problems with FinTech.Explanation / Answer
Futures, like any other future instrument, are priced by considering the value of its underlying asset, that is, Stock. If the stock prices increases, so would the futures prices and vice versa. However, there are certain other factors that help futures to derive its value.
Spot-Future Parity is the difference that arises due to other factors such as Interest rate, dividend yield and convenience yield.
The future pricing formula is as given below:
Future Price= Spot Price*(1+Rf-d)
Where, Rf= Risk free rate (for entire year); d= Dividend
As the future price is determined by the current value of its underlying asset, that is stock, and the benefits attached to it, it has nothing to do with the prices of Gold as Gold is a whole other asset.
If an investor is bullish on a stock, he can purchase a call option on that stock at the exercise price of today. A call option gives the investor a right to purchase the stock in the future at the price decided today (Exercise price). If the price of the stock goes up in the future, he can purchase the stock at the predetermined comparatively lower price and sell it at a higher market price to earn a profit. However, if the prices go down, he has an option to lapse the call(not to purchase at exercise price)
The investor has another option to sell a put option on the stock at the exercise price. The investor will be at a gain if the prices go up. The Put option puts an obligation to the investor to sell the stock at the predetermined exercise price. He gets a ‘Premium’ in return of that obligation. Therefore, if in future the prices go up, the put option lapses and the thus the investor’s obligation to sell lapse which gives him the profit of ‘Premium Amount’. On the other hand, if the prices go down, the put option exercises and he has to short sell the stock at a loss.
Creating a futures position requires the investor to maintain a minimum balance in his account as ‘Initial Margin’. As the investor is short, he is stand to gain unlimited profit as long as the prices go down. However, he is also exposed to unlimited risk if the prices go up dramatically.
Profit is achieved when market price of futures is less than the selling price of futures. On the other hand, Loss is incurred when Market price of futures is more than the selling price. The commission paid is also deducted or added back to the Profit or Loss respectively as the case maybe.
For example,
Suppose September Crude oil futures is trading at $37 and each futures covers 1000 barrels of crude oil, and a trader enters short futures position by selling 1 contract of September Crude oil.
Now, on delivery date, if the September Crude oil is trading at $30, then the trader will gain $7 per barrel. Since the contract size is 1000 barrels, the trader earns a net profit of $7000.
On the other hand, if on the delivery date the September crude oil trades at $45, the trader suffers a loss of ($8*1000)=$8000 in value.
A multinational firm consists of a number of independent firms which all have their own statutory bodies (e.g. general meeting of shareholders, board of directors, auditing body). The bodies that govern all these statutory bodies are the board of directors of the parent firm (often simultaneously the holding firm) and the multinational firm management set in place by the board of directors.
The board of directors of the parent firms assumes responsibility for the supreme strategic management of the holding firms and of the multinational firms as a whole. Depending on the multinational firms, its activities and geographical fields of activity, the board of directors of the parent firms must be made up of persons with the necessary competences, experience and capacities. On the other hand, the boards of directors of the sub-firms of the multinational firms are often made up from members of the multinational firm management. The strategic company management is focused on the long term and deals with future developments and potentials, as well as the consolidation of existing business activities. The main focus of operational management, on the other hand, is the short to midterm economic operational success and the implementation of the corporate strategy laid down. To this end, it determines the necessary programs, activities and resources for the various business areas in detail.
(Note: Please post the 5th question as a seperate question so that we can answer it too).
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