Vodafone Group Management of Market Risks

Vodafone sepa tempo Management of foodstuff guesssWhat is the role played by excerptions, hereafters and precedent contracts in managing food market hazard of exposures? The look for slenderly analyzes this through the theatrical role study of Vodafone group Plc. It first identifies the various factors that watch over these risks since market risk includes different types of risks wish strong commodity cost risks, kindle assess fluctuations risks and currency risks. Through the fictional character study, it further aims to evaluate the effectiveness of using in high spirits up differential gears, in managing market risks. By considering the portfolio of company designed to hedge a particular centre of risk the look for overly aims to critically evaluate the individual contributions of to each one of the above in risk heed and also of the portfolio as whole. first appearanceOxford dictionary defines risk as a situation involving exposure to endangerment o r expose (someone or something determine) to danger, harm, or loss (Oxford Dictionary). For a melodic phrase entity adventures atomic number 18 connected to possible uncertain(p)ties that can result in interdict effect on the entity. With the emergence of World Markets and various types of risks, risk management has become an integrated part of squ atomic number 18s today. Different types of risks command different methods to handle, keep on or somemagazines to absorb and benefit from risks. The downfall of risks has evermore been highlighted so far they do have some arbitrage that results in potential gains.The Basel charge that was formed in 1974 laid the regulatory framework for Financial adventure Management. (McNeil, Frey and Embrechts, 2005). Basel II (2001) defines Financial fortune Management to be formed of 4 steps identification of risks into market, belief, operational and other risks assessment of risks using entropy and risk model monitoring and reportin g of risk assessments on a timely basis and controlling these identified risks by senior management.(Alexander, 2005). It thence determines the probability of a negative event taking place and its personal effectuate on the entity. Once identified risk can be do by in following mannersEliminated altogether by simple pedigree practices. These atomic number 18 the risks that are detrimental to the business entity.Transferred to other participants.Actively managed at firm level. (Alexander, 1996).The risks basically depend on the time apprise of pluss. what is more with the add-ond level of multinational shareing of business entities and the highly erratic nature of markets, risk management has now become a critical part of running the business. It thusly becomes essential to understand as well as analyze the various factors that determine risks and the preventive measures implemented against them. to a fault the hedging techniques being considered do not always ensure profi ts. The research would thereby include a detail study of the effectiveness of the methods implemented. angiotensin-converting enzyme more important factor is the cost incurred. Risk management incurs certain cost and the process would therefore prove to be futile if the costs incurred dont offer proportionally benefits.Literature ReviewMarket Risk constitutes of commodity risk, interest risk and currency risks. Commodity toll risk includes the potential miscellanea in the price of a commodity. The move or falling commodity prices affect the producers, traders and the end- accustomrs of the various commodities. Moreover if they are traded in foreign currency, there arises the risk of currency exchange rate. These are normally weasel-worded by offering forward or future contracts at fixed rates. This is especially important for commodities like oil, natural gas, gold, electrical energy etc.whose prices are highly vaporific in nature. (Berk and Demarzo, 2010)Interest Risk relates to the change in interest rates of bonds, sources or loans. A rising rate of interest would effectively reduce the price of a bond. Increased interest rates result in increasing the borrowing costs of the firm and thereby reduce its profitability. It is hedged by swaps or by invest in short term securities.Currency risks arise from the exceedingly volatile exchange rates between the currencies of different countries. For e.g. Airbus, an aircraft manufacturing company establish in France requires oil for its production. Oil being traded in US dollars and the company doing trade in Euros, has a foreign exchange risk. It would be therefore proficient for Airbus to enter a forward contract with its oil suppliers. plectrums are another(prenominal) way of hedging against currency risks. (Berk and Demarzo, 2010).Forward contracts, Futures and Options are called the Financial Derivatives and are used largely to reduce market risks.Walsh David (1995) explains that if two securities hav e akin payoffs in future, they must have same price today. Thus the order of a derivative moves in the same way as that of implicit in(p) plus. This is called arbitrage.Hedging of risks is nothing but the carrier of an summation has two determines in opposite directions. One is of the derivative and opposite position is on the under-lying asset respectively. As such if the value if the asset decreases then value of the derivative will also decrease. But the change in value is off-set by the opposite positions to each other. Thus risk is reduced. This is called hedging. Long hedge in refers when an investor anticipates growth in market price and therefore secures future contracts. Short Hedge is when an investor already has a futures contract and expects the value of asset to fall and therefore carrys it beforehand. (Dubofsky and Miller, 2003)Long Hedge Short HedgeChange in value of positionChange in priceChange in value of positionChange in priceFig.1 Hedging (Dubofsky, D and Miller, T. junior 2003)Forward Contracts- These involve buying or selling specific asset at a specific price at a contract time. It is basically a contract between two parties to trade a particular commodity or asset at a particular rate on a specified time. The buyer is said to be in long position while the seller hols the short position. These are Over the Counter (OTC) Derivatives. These are used for locking-in the price and require no cash transfers in the beginning, thereby involve credit risks. Their of import feature is the flexibility as forward contracts can be betrothed as per the requirements of the traders. They are typically used to hedge the exchange rate risks. (Claessens, 1993)Futures- These are more standardized than the Forward contracts. They are traded at opposed Exchanges. The standardized contract specifying the asset, price and delivery time is either bought or sold through broker. The delivery price depends on market and determined by the exchange. The default risk in futures is minimized due to clearinghouse. It acts as centred party and does the marking to market of traders account by doing profit-loss calculations daily. Initial valuation reserve amount is required and futures hence involve marge calls. Minimum credit risk is involved but being standardized contracts, these cannot be tailored to individual demands. (Hinkelmann andSwidler, 2004). Futures could be contracts on real assets for e.g. gold, oil, corn etc. or they could also be contracts of financial nature for e.g. currency, interest rates etc. (Tamiso and Freedman, 1995).Fig.2 Hedging through Futures. (Walsh, D. 1995)Options- The holder can buy from or sell to, the asset at a strike rate at a future maturity date. However the holder of the option has no deterrent example obligation to do so. The cost of buying the option involves a insurance premium which is to be paid up front. The option that enables the holder to buy an asset is called Call option while in impersonate option the holder is able to sell the asset. (Claessens, 1993) These can be bought Over the Counter (OTC) at a bank or can be exchange traded options. An American option could be exercised at any time before it expires. On the contrary, a European option has to be exercised on maturity.Option is normally transactd when its strike price is less than price of the stock. However, is the price of the stock is less than the strike price the holder will not execute the option. Black and Scholes (1973) gave the formula to determine the price of a European option. fit to the formula, the value of Call option is given bywhereThe value of Put option is given byP = Ke-r (T-t) S + C = N(-d2) Ke-r (T-t) N(-d1) S.Where N (.) is a cumulative normal distribution functions- standard passing of the share price,rf- risk-free interest rate per annum and t- time to expiry (in years).The above formula, also known as the Black-Scholes option pricing model is based on the assumptions t hat the stock doesnt pay any dividends, it is possible to buy or sell even a single share, there are no costs incurred in these transactions and that arbitrage opportunity doesnt exist. According to Black and Scholes (1973), the option value as a function of the stock price is independent of the expected outcome of the stock. The expected return of the option, however, will depend upon the expected return of the stock. Hence as the price of underlying asset increases, the price of option will also increase owing to their linear similitudeship.Black and Scholes (1972) further carried on various information-based tests to validity of the formula. They observed that price paid by the buyers of the option was higher than that shown by the formula. This was mainly because the transaction costs that are incurred are always paid by the buyers of the options. These costs were found to be high for options of high risks and vice-versa. The sellers of options thus got the price that was pr edicted by the formula. The case study would make use of this formula to determine the value of options held by the company.Walsh David (1995) explains that options have a non-linear sexual congress with payoff. Its payoff increases with the price of the asset if it is in-the-money and has a constant payoff which is the option premium if it is out-of-the-money. On the contrary, futures and forward contracts have a linear relation with the payoffs in both, profit as well as loss. Therefore options exponent be preferred over futures and forwards for hedging. He further highlights the loss between hedging through futures and forward contracts. While in forward contracts, the company merely sets up a rate for future trading, it doesnt involve any monetary transfer. Futures however make use of margin account and marking to market is done daily. Hence the results of futures over their time span vary greatly with those of forward contracts. Hence the individual contributions of each to risk management would be calculated during the research. The case study would also include a study the similarities and differences in futures, forward contracts and options and their individual effects on risk management.Data and MethodologyObjectivesThe research aims toIncrease the intelligence of the factors that determine market risks. perceive the haven provided by financial derivatives against these risks. look at a clear understanding of the methods or risk management techniques.Understand the process of risk management.Understand the intricacies of derivative markets.Data and MethodologyThe look for is essentially a case study of Vodafone Group Plc. Primary info would include the information of the forward contracts with service providers, options and futures of the company in the market. auxiliary data would be Qualitative in nature, comprising online journals, relative case studies and books.The research would be carried out in the following stepsDepending upon the nat ure of company, determine that factors that would affect the risk faced by the company.Evaluate the percentage of risk faced by the company. Determine the amount of this risk, which the company would want to hedge.The data would then be utilised to determine the amount of risk hedged by each of the above and then determine the total risk hedged by portfolio as whole.Calculate the cost of hedging the risk. analyse and strain the findings with the defined Effective Risk Management.Critically analyze the results. pop the question improvements if any, in the portfolio.Calculate the risk hedged with the suggested changes.Proposed TimetableDateActivitysixth May, 2011Submission of final proposal(By) 20th June, 2011Collection of data as required by case study and start working on calculations.1st July, 2011Define the parameters for effective risk management and complete calculations. realized the initial declaration pages of report.fifteenth July, 2011 boom the literature review pertainin g to case study. Finish report writing till that part. (up to 5000 words)1st August, 2011Compare and contrast the findings to theestablished parameters. Evaluate results. Some more relative literature review.15th August, 2011Finish writing the calculations, explaining results. Complete up to 10,000 words of report.1st September, 2011Complete the report and submit the first draft for feedback.15th September, 2011Redraft using the suggested changes. lowest draft for submission19th September, 2011Final submission of the report.REFERENCESAlexander, C. (1996). The Handbook of Risk Management and Analysis. West Sussex John Wiley Sons.Alexander, C. (2005). The Present and Future of Financial Risk Management. Journal of Financial Econometrics, 3 (1), pp. 3-25. JSTOR (Online). easy at http//jfec.oxfordjournals.org/ (Accessed 8th March, 2011).Berk, J and Demarzo, P. (2010). Corporate Finance. 2nd edn. Boston Pearson.Black, F. and Scholes, M. (May Jun., 1973). The Pricing of Options and Cor porate Liabilities. The Journal of semipolitical Economy.81 (3) pp. 637-654. JSTOR (Online). Available at http//www.jstor.org/ persistent/pdfplus/1831029.pdf?acceptTC=true (Accessed 5th May, 2011).Black, F. and Scholes, M. (May 1972). The Valuation of Option Contracts and a Test of Market Efficiency. The Journal of Finance.27 (2) pp 399-417. JSTOR (Online). Available at http//www.jstor.org/stable/2978484 (Accessed 5th May, 2011).Claessens, S (1993). World Bank Technical Paper no 235.Washington DC The World Bank.Dubofsky, D and Miller, T. Jr. (2003). Derivatives Valuation and Risk Management. Oxford Oxford University Press.Hinkelmann, CSwidler, S.(2004). Using futures contracts to hedge macroeconomic risk in the public sector. Derivatives Use, traffic Regulation.10(1),pp. 54-69. ABI/INFORM Global (Online) available at http//proquest.umi.com/pqdweb?index=0did=679304171SrchMode=2sid=1Fmt=6VInst=PRODVType=PQDRQT=309VName=PQDTS=1304643921clientId=18060 (Accessed twenty-first March, 20 11).McNeil, A.J., Frey, R., Embrechts, P. (2005) quantitative Risk Management. Princeton and Oxford Princeton University Press.Oxford Dictionary (Online) available at http//oxforddictionaries.com/?attempted=true (Accessed 21st March, 2011).Tamiso, R. Freedman, R. (1995). Confronting Uncertainty Intelligent Risk Management with Futures. Artificial Intelligence in the Capital Markets State-of-the-Art Applications for Institutional Investors, Bankers and Traders, Probus Publishing, Chicago. pp. 209-222. Available at http//www.inductive.com/RMR-FUT.pdf . (Accessed 4th May, 2011).Walsh, David. (1995). Risk management using derivative securities.Managerial Finance.21(1),pp. 43. ABI/INFORM Global (Online).Available at http//proquest.umi.com/pqdweb?index=6did=4708471SrchMode=2sid=3Fmt=6VInst=PRODVType=PQDRQT=309VName=PQDTS=1301258415clientId=18060 (Accessed 27th March, 2011).