Harvard Business School
9-293-024
Rev. December 16, 1994
BEA Associates: Enhanced Equity Index Funds
On the afternoon of July 13, 1992, Messrs. Jeffrey Geller and David DeRosa, derivatives portfolio managers at BEA Associates, were considering alternative ways of investing the assets of a new $100 million enhanced index account. They wanted to find the most attractive combination of derivative and cash market positions to achieve the client's objective which was to outperform the S&P 500 stock index by 50 basis points in a low risk manner. The alternatives included the use of over-the-counter equity swaps, a relatively new financial instrument that had proliferated in recent years.
BEA Associates
BEA Associates was an
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The firm also aimed to offer clients a high degree of product customization. In pursuit of these aims, BEA made extensive use of derivative instruments such as options, futures, and swaps.
This case was written by Professor André F. Perold as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1992 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
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293-024
BEA Associates: Enhanced Equity Index Funds
In its more traditional equity and fixed-income portfolios, where outperformance was sought principally by investing in attractively valued stocks, bonds, and other physical securities, derivatives were used mainly as a low-cost way of controlling market risk and currency risk. In its derivativesbased portfolios, derivative instruments were used much more extensively both to manage desired portfolio risk exposures and, through
This paper will assess my ability to maximize my personal return on investment with an allocation of $1,000,000. The overall goal of this exercise is to obtain the highest return possible within the next 12 months. I am limited to the following asset classes for allocation of all investments:
Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial
David C. Shaw prepared this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The
The current 50% hedging policy executed at the fund level has served well for OTPP for the past ten years, contributing to the fund’s positive returns. The FX Hedge Program not only has minimized the downside risk, but has also limited the upside potential. If OTPP decided not to implement a hedging program in 1996, they would have lost about $983 million CAD over the ten year period (1995-2005) which is valued at 2% of the portfolio. With the hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short-term risk minimizing strategy for long term investors, sustaining a continual payout of pensions during volatile times in OTPP’s invested currency markets. Currently, approximately 21% of OTPP’s net assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk management program of hedging, as slight currency fluctuations can significantly affect the value of the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk management strategy.
There are lots of methods to solve the changes in foreign currency and interest rates issue, however, derivative financial instruments are the major tunes Nike enterprise has used to tackle this issue. Despite the fact that this approach does not wipe out comprehensively the risk of foreign exchange, Nike enterprise still utilize it to minimize or delay the negative consequences. Specifically, the derivative financial instruments comprise embedded derivatives, interest rate swap, and foreign exchange forwards and options contracts (Nike annual report, 2014).
This case was prepared by Associate Professor Marc L. Lipson. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2010 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
ASIAN JOURNAL OF MANAGEMENT CASES, 7(2), 2010: 135–155 SAGE PUBLICATIONS LOS ANGELES/LONDON/NEW DELHI/SINGAPORE/WASHINGTON DC DOI: 10.1177/097282011000700204
This case was prepared as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1983 by the President and Fellows of Harvard College. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical,
Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.
than to illustrate effective or ineffective handling of an administrative situation. Copyright 2010 by the University
Nestlé S.A. is a Swiss company and owns a prestigious position being the world’s leading nutrition, health and wellness group (Nestlé, 2016). According to its annual report (2015), this company is exposed to many risks caused by movements in foreign currency exchange rates, interest rate and market prices. The foreign exchange risk comes from transactions and translations of foreign operations in Swiss Francs (CHF). The interest rate risk faces the borrowings at fixed and variable rates. The market price risk comes from commodity price and equity price. The former risk arises from world commodity market for the supplies of coffee, cocoa beans, sugar and others. The later risk arises from the fluctuations of the prices of investments held. (Nestle annual reports, 2015). Thus, financial derivatives instruments are used by this multinational corporation in order to hedge these risks.
The primary organizational behavior problem within the organization is a lack of candor and corrective action on the part of the new president. The new president must exhibit certain leadership qualities in order for the overall business operations to continue unabated. However, as the case indicates, the president has done little to address the fundamental problems embedded within the organization. Many of the organizations grievances, he has simply attempted to appease rather than correct. As such, C.D. Jackson must become a more effective leader in regards to the overall business operations of the firm. For instance, when giving explicit directions to Arthurs regarding the excessive amenities of
These have been to the benefit of passive index investors who want to create simple portfolios that track both equity and fixed income indices. Yet with the boom in popularity in ETFs in the past 10
This case was prepared by Professor Mark E. Haskins, Darden Graduate School of Business Administration, and has benefited from collaborations with various colleagues over the years on earlier versions. It was written as a basis for discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2012 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊
Among the most fundamental risks, associated with exchange-traded derivatives, is variable degree of risk. According to Ernst, Koziol, & Schweizer (2011), the transactions in