Custom Finance Essays

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Finance Custom Essays: Optimal Hedge Ratios

Naive or one-to-one hedge assumes that futures and cash prices move closely together. In this traditional view of hedging, the holding of both the initial spot asset and the futures contract used to offset the risk of the spot asset are of equal magnitude but in opposite direction. In this case the hedge ratio (h) is one-to-one (or unit) (-1) over the period of the hedge.

This approach fails to recognize that the correlation between spot and futures prices is less than perfect and also fails to consider the stochastic nature of futures and spot prices and resulting time variation in hedge ratios (Miffre, City University). The beta hedge recognizes that the cash portfolio to be hedged may not match the portfolio underlying the futures contract.

With the beta hedge strategy, his calculated as the negative of the beta of the cash portfolio. Thus, for example, if the cash portfolio beta is 1.5, the hedge ratio will be -1.5, since the cash portfolio is expected to move by 1.5 times the movement in the futures contract, where the cash portfolio is that which underlies the futures contract. The traditional strategy and the beta strategy yield the same value for h (Butterworth and Holmes 2001).

Finance Custom Essays: High Dividend Company

The theory of dividend is least complete and confusion surrounds the dividend decision. It can be because it is the kingpin to investments and financing decision. Does dividend really matters? Does high dividend shows the growth of company in future? What really dividend conveys? How much should be the dividend or no dividend? Does the value of firm is effect by dividends or change in dividend policy? There can be a long list of questions and no simple answer will gratify these questions.

In MM (1961) theory it argues that dividend is an important facet of firm valuation in the perfect market with some assumptions where as Myron Gordon (1959) contradict on the latter issue and argues that dividends are irrelevant to the firms valuations it supported is with the model so free cash flow where the dividend is not considered for the calculation.

According to Brennan, Michael these two different arguments of MM theory and Myron Gordon leave mind set on doubts and unresolved questions left in a quandary: both authors develop plausible theories from reasonable assumptions, but mystifyingly reach opposing conclusions.1 Many researchers have devised theories and provided empirical evidence regarding the determinants of a firm's dividend policy.

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