I need a 100 word reply to each of the following 8 forum post (800 words total). These post are from a finance course
Forum Reply#1
Determining Stock Prices
The prices of stocks are calculated similarly to other assets, like bonds. “The price of a financial asset is equal to the present value of the payments to be received from owning it” (Hubbard, 2013, p. 164). The value of the stock is the equivalent of the present value of its price at the end of the year and the dividends received throughout the year. The present value is calculated using a discount rate that reflects the rate of return that is expected on similar investments, also called the required return on equities, or cost of capital to a company. This required return is the risk-free interest rate and the risk premium combined. The risk premium includes a general systematic risk for risk that all stocks face due to price fluctuations and an unsystematic risk that is a byproduct of the fluctuations in the specific stock, or situations specific to that company. In other words, the price of the stock would be calculated by finding “the sum of the present values of the dividend expected to be paid at the end of the year and the expected price of the stock at the end of the year discounted by the market’s required return on equities” (Hubbard, 2013, p. 166). For instance, suppose that a hypothetic company, ABC, Inc., has a required rate of return of 8%, has an expected price of $20 at the end of the year and an expected dividend of $0.25 per share. The calculation to determine its present value looks like this: ($0.25/1 + 0.08) + ($20/1 + 0.08) ≈ .23 + 18.52 = $18.75. Therefore, if the price of the stock is selling for less than $18.75, it is worth buying, if it is selling for more than it is not. In order to calculate the expected rate of return the equation, expected annual dividend/initial price + expected change in price/initial price, is used.
Hedging or Speculating with Derivatives
Derivatives are assets that are used to hedge risk or speculate, essentially gamble on fluctuations in prices of assets. “Derivatives are financial securities that derive their economic value from an underlying asset, such as a stock or a bond” (Hubbard, 2013, p. 191). By selling a derivative, one can transfer risk to a speculator. Derivatives include forward contracts, futures contracts, options, and swaps.
Derivatives can be used to hedge or speculate on stock prices. A futures contract is “[a] standardized contract to buy or sell a specified amount of a commodity or financial asset on a specified future date” (Hubbard, 2013, p. 194). If you own stock, you can sell futures contracts to hedge against the risk of falling prices if the interest rates rise. If the price of the stocks fall and interest rates do rise, the price of the futures will also decline. Then you can buy futures contracts, at the lower price, to counter balance the futures you sold earlier, at the higher price. This enables a profit to make up for the loss that resulted in the falling price of the stock. In addition, you can buy when the interest rates are higher and prices are lower. If interest rates decline and prices rise, the futures contracts can be sold to counter balance the purchase that was made earlier.
Another derivative can also be used to hedge risk or speculate in the stock market, options. A call option can be used to purchase a stock at the strike price, a set price, until the date it expires or a put option can be used to sell the stock for a set price during a period of time. “With options contracts, the buyer has rights and the seller, called the option writer, has obligations” (Hubbard, 2013, p. 203). In other words, if you buy a call option and want to buy the stock, the seller must sell the stock to you. If you are the buyer of the call option, you can let it expire if you choose. For instance, if the stock was selling for lower than the strike price, you would not want to use the call option. However, if the stock was selling for higher than the strike price, and you were the buyer of the call option, you may want to exercise your right to buy it at the lower price in order to profit. If you purchased a put option, and chose to sell the stock, the person you purchased it from must buy the stock at the strike price.
As a buyer, there is less risk when buying options than with futures contracts because the most you can lose is the premium you paid for the option because you do not have to exercise the option. This is not the case for the seller of an option because they would have to sell at the strike price regardless of what the current market levels are.
Reference
Hubbard, R. (2013). Money, Banking, and the Financial System (2nd ed.). New York, N.Y.: Pearson. ISBN: 9780132994910
Forum Reply#2
Stock prices are viewed through the same principle as financial markets, “the price of a financial asset is equal to the present value of the payments to be received owning it”, (Hubbard & O’Brien, 2014). The equity cost of capital can also assist firms in determining the amount that firms should pay investors to ensure the return on their investment is worth it. This directly relates to the price of a stock to ensure dividends can be paid since the price and quantity of stocks sold can have a major effect on the amount paid out. Equity premiums have the ability to affect price through systematic risk, or the natural occurring risk in the market, and idiosyncratic risk, the risk occurs due to an unsuccessful product or department failure.
“Derivatives are financial securities that derive their economic value from an underlying asset, such as a stock or a bond”, (Hubbard & O’Brien, 2014). Derivatives are meant to provide investors and firms a way to use underlying asset’s price movement to make a profit. Hedging is a way to reduce the risk by buying a contract that will that will offset the costs in an investor’s portfolio by increasing while another asset decreases. Business attempt to avoid commodity price risk through the act of hedging, or limiting the estimated amount produced in the future through a contract in order to meet obligations (Huang & Zhang, 2015). Speculation of derivatives can also be used to “place financial bets on movements in asset prices”, (Hubbard & O’Brien, 2014). Speculators are seen as having little purpose, however, they serve two notable purposes. Those who participate in hedging are able to transfer their risk to speculators through securities. The second way is through liquidity, meaning without speculators there wouldn’t be a sufficient amount of buyer and seller to all the market to operate effectively.
Forward contracts provide opportunities to hedge risks through a contractual agreement to sell or purchase an asset at a specific time in the future. Future contracts maintained the risk sharing of forward contracts, however, they also increased liquidity, lower risk and information costs. Future contracts are traded on exchanges, they specify quantity but not price, and standardized settlement dates. Options are another type of derivative contract where the buyer is allowed to purchase or sell underlying assets at a given price during a specific amount of time. Call options allow buyers to purchase underlying assets at a strike price until an option’s expiration date. A put option allows the buyer to sell underlying assets at a strike price during a specific amount of time. Stock index futures are contracts where a buyer agrees to purchase a range of shares of stock at a pre-established price with delivery and fund transfers at a later time.
References:
Huang, L. & Zhang, D. (2015). Hedging or Speculation: What Can We Learn from the Volume-Return Relationship? Emerging Markets Finance & Trade, p1117-1128. 51(6).
Hubbard, R. & O’Brien, A. (2014). Money, Banking, and the Financial System, 2nd Ed. Upper Saddle River, NJ: Pearson Education, Inc.
Forum Reply#3
According to the currency converter, as of now the Euro is worth 0.877039 per each U.S. dollar (Reuters, n.d.). Over the last year, it appears that the exchange rate has fluctuated quite a bit, with a low of around 0.86 in August 2015 and a high of around 0.95 in November of 2015.
When the exchange rates fluctuate, the prices that are paid on imports from a particular country are affected. This will in turn affect economic activity in the local environment. When the value of a currency appreciates, it increases in value against another country’s currency. When this happens, it is difficult for that country to sell their goods in the country that their currency has appreciated against because the consumers in that country will end up paying more for the product. The opposite is true with the depreciation of value of currency in regards to decreasing in value against other currencies. It will be easier to sell in other countries because prices will decline in comparison.
Currency exchange rates fluctuate with inflation of the particular region. Because different regions experience different levels of inflation, exchange rates will vary. “The lower the exchange rate, the cheaper it is to convert to a foreign currency into dollars and the larger the quantity of dollars demanded” (Hubbard, 2013, p. 239). When demand for dollars increases, the exchange rate equilibrium rises and when the supply of dollars increases the exchange rate equilibrium falls. Domestic economic activity is directly related to the exchange rate because the more the dollar has appreciated relative to other currencies the more that can be purchased with it. The increase in demand for the dollar will increase its value.
Reference
Hubbard, R. (2013). Money, Banking, and the Financial System (2nd ed.). New York, N.Y.: Pearson. ISBN: 9780132994910
Reuters. (n.d.) Currencies. Retrieved fromhttp://www.reuters.com/finance/currencies/
Forum Reply#4
I recently spent a few months in the Philippines for work and pleasure, and realized how…quaky (?)… the Filipino currency is. Currently, 1 Philippine Peso (PHP) is equal to 0.021 USD, or 1 USD equals P47.30. However, just back in 2013, 1 USD was worth 40 PHP. This is a pretty dramatic fluctuation, even for a 3rd world country that has its own stock market.
In fact, the locals told me that the exchange rate fluctuated several times a day. Sure, some currencies may do the same thing, but consider this: when I arrived in the Philippines, $1 was equal to only about 44.50 PHP. Just a week later, $1 was equal to 47.22 PHP. Since 2013, the PHP seems to be steadily declining with minor, trite upward fluctuations here and there. I’m not sure what caused the major drop in 2013, but I’d love to find out.
As for supply and demand, there are SO many American businesses and chains in the Pilipinas Islands (we’ve been there since the late ’40s), it almost seems like being in NYC, with a different currency that seems unreliable. The USD is widely accepted over there, but is primarily traded in for pesos. Since 2013, the PHP has equaled less and less U.S. dollars, causing local businesses to get wiped out by inflation. The supply is usually reduced over time when the PHP value drops, and that usually occurs after our dollar increases in value (which is rare). The supply drops because the Philippine government imposes stiff tariffs on all imports, especially those coming from America (their government is entirely corrupt, btw). The demand also drops because workers are making money that buys them less and less produce, gas, and other living necessities.
To make matters worse for the locals, the energy costs in the Philippines are outrageous. I paid an equivalent of $225 per month JUST for electricity (my entire furnished condo, at 133 square feet, was only $300 a month). In fact, the energy crisis is part of why the PHP is dropping in value. Foreign countries won’t invest in the Philippines’ energy because of the crisis, locals are paying out the a** for it, and the government keeps raising taxes in order to pay for the energy revamping.
Anyway, the Philippine Peso is an interesting currency that fluctuates, technically, every 5 seconds (check out xe.com). Supply and demand usually work negatively in regards to their exchange rate with the USD.
Forum Reply#5
Foreign exchange markets works through passing the value of one currency into another. This passing of the value is typically done through bank deposits, extension of credit denominated in a foreign currency, foreign trade financing, and the trading of options and futures on foreign currency. 2 of the markets that are used when dealing with foreign currency are the forward and spot market. The spot market deals with the immediate purchase or sale of a foreign exchange, say a cash transaction between two businesses. While the forward market deals primarily with contracting today for a future purchase or sale of those currencies.
Forum Reply#6
Provide a comprehensive explanation of foreign exchange markets. Be sure to include examples of how forward markets and spot markets operate.
The Foreign Exchange Markets comprises the transformation of buying controls from one from of currency into the next nations in order to facilitate trade and invest across borders. The Spot Market in regards to foreign exchange involves the immediate purchase or sale of a currency for another. To make it simple, I look at it like going to a financial center and trading in greenbacks for euros before a trip to France, because the trade will be better in the US than in France.
The Forward Market encompasses contracting now for the distant future securing of forex, a forward contract basically states a price for a future transaction. This is a derivative of the future value of a currency, it derives from something because it value lies in the future unlike the spot market which is an immediate trade (so to speak, even though it may not settle for 1-2 days).
Eun, C. S., & Resnick, B. G. (2015). International financial management (7th ed.). New York: McGraw-Hill Irwin. ISBN: 9780077861605
Forum Reply#7
Analyze the alternatives presented and make a recommendation on purchasing the Jaguar.
I would recommend: (b.) Buy a certain pound amount spot today and invest the amount in the U.K. for three months so that the maturity value becomes equal to £35,000.
Why do you prefer the stated alternative? Because number one I am being afforded 3 months to make the seller whole so why not earn interest to offset my cost.
The advantages of the alternative that I have selected are the interest rates investing in London is much higher even with the compounding US rate, and I don’t trust the forward, it is too much of a gamble for me.
Forum Reply#8
Myself personally, If I have the means to pay for it here and now I do so. But reading over the question it eludes to the fact that I am very well off and that I have the ability to make such purchases and decisions without much thought to how it’s going to affect my financial picture as a whole. Looking to make sure that I’m not overspending given that I have 3 months to pay it off, I would choose the second option as you would be spending less today to make the initial investment to invest to get the total sum needed for the purchase.
