FINANCIAL

MANAGEMENT
NAME MATRIC NO.
SUMARIA BINTI ABD MOIN 012018071565

SHEILA BANNU BINTI HISAMUDDIN 012018071341

NURUL AMIRAH BINTI AZMI 012018070948

WARRANTS
 A warrant is a security that gives the holder the right to buy or sell
the underlying shares of the issuing firm at a fixed exercise price until
the expiration date.
 American warrants can be exercised at any time or on the
expiration date. European warrants can only be exercised on the
expiration date.
 A warrant’s “premium” is how much extra we have to pay for the
shares when buying them through warrant.
 A warrant’s “gearing” is the way to ascertain how much more
exposure we have to the underlying shares using the warrant.
 When a warrant is exercised, the firm must issue a new shares of
stock. Each time a warrant is exercised, the number of shares
outstanding increases.
WARRANT PREMIUM
 Warrants have both price and premium.
 A warrant premium is the percentage difference between the
current traded price of a warrant and the price investor pays for
when buying and exercising a warrant.
 The premium will decrease as the price of the warrant rises coupled
with the decrease in expiration time.
 A warrant is “in-the-money” when exercise price < current share
price. The more in-the-money the warrant is, the lower the warrant
premium.
EXAMPLE
The formula for the warrant premium is:
 Warrant Premium = 100 x [(Warrant Price + Exercise Price – Current
Share Price) / Current Share Price]

An investor holds a warrant with a price of $10 and an exercise price of

$25. The current share price is $30. The warrant premium would be
16.7%.
DERIVATIVES
 A derivative is a financial security with a price that is dependant
upon or derived from one or more underlying assets.
 The derivative itself is a contract between two or more parties
based upon the assets.
 Most derivatives are not traded on exchanges and are used by
institutions to hedge risks or speculate on price changes in the
underlying asset.
 Derivatives are usually leveraged instruments which increases the
potential risks and rewards.
TYPES OF DERIVATIVES
 Futures
- An agreement between two parties for the purchase and delivery of an
asset at an agreed upon price at a future date where the contracts are
standardized.
- Traders use futures contract to hedge the risk or speculate the price of
un underlying asset.
 Forwards
- When forwards contract is created, the buyer and seller may have
customized the terms, size and settlement process for the derivative.
 Swaps
- Often use to exchange one kind of cash flow with one another,
example one might use an interest rate swap to switch from a variable
interest rate loan to a fixed interest rate loan or vice versa.
 Options
- An option is similar to a futures contract but the buyer is not obliged to
"exercise" his agreement to buy or sell.
FUTURE & FORWARD CONTRACTS
 Both forward and futures contracts allow investors to buy or sell an asset at a
specific time and price.
 Futures contracts are traded on exchanges, making them standardized
contracts.
 Forward contracts are private agreements between two parties to buy and sell
an asset at a specified price in the future.
 There’s always the chance one party in a forward contract may default.
 Futures contracts have clearing houses that guarantee the transactions.
 Forward contracts are settled on one date at the end of the contract.
 Futures contracts are marked-to-market daily, which means their value is
determined day-by-day until the contract ends.
 Futures contracts can settle over a range of dates. Speculators who bet on the
direction an asset’s price will move, often use futures.
 Futures are usually closed out prior to maturity, and delivery rarely occurs.
 Hedgers mainly use forwards to eliminate the volatility of an asset’s price. Asset
delivery and cash settlement usually take place.
OPTION
 Options are a contract between a buyer, who is known as the
option holder, and a seller, who is the option writer.
 It gives the holder the right, but not the obligation, to buy or sell an
underlying security at a specific price, known as the strike price, by
an expiration date.
 There are two types of options: Calls and Puts.
CALL OPTION
 Call options give the holder the right to buy shares of the underlying
security at the strike price by the expiration date.
 If the holder exercises his right and buys the shares of the underlying
security, then the writer of the call option is obligated to sell him
those shares.
 If the holder does not exercise his right before the expiration date,
then the option expires and becomes worthless.
 The holder of a call option pays a premium to the writer of the
option.
 Before buying the call option, the holder should expect the market
value of the underlying security to rise, in contrast to the option
writer who will profit if the security dips in value.
Example

Shares of General Electric Company(NYSE: GE) are trading at $13 each. A

call option could be purchased by an investor who expects the market
value of GE to rise. Suppose the strike price of that call option is $15 and
the expiration date is in one month. The purchaser of the call option pays
a premium to the option writer of $1 per share, or a total of $100, because
one option contract equals 100 shares of the underlying stock.
If the price of GE stock rises beyond $15 to $18, the call option holder can
exercise his right to buy 100 shares of GE at $15. The option writer sells the
shares to the call option holder at that price. The option holder who
chooses to receive the 100 shares at $15 then immediately sell those shares
at the market price of $18. This exchange produces $3 per share, or $300,
for the option holder.
After subtracting the $100 paid as a premium for the call option, the
option holder can keep a profit of $200. If the GE stock did not go above
the strike price of $15 within the month before the expiration date, then
the call option would expire worthless. If that occurs, the writer of the
option would retain a profit of $100.
PUT OPTION
 Put options give the holder the right to sell shares of the underlying
security at the strike price by the expiration date. If the holder
exercises his right and sells the shares of the underlying security, then
the writer of the put option is obligated to buy the shares from him.
Similar to a call option, if a put option holder does not exercise his
right before the expiration date, then the option expires worthless.
 To acquire a put option, a premium is paid by the holder to the
writer. A put option holder expects the market value of the
underlying security to fall, whereas the writer is betting the security
will increase.
Example

If Ford Motor Company (NYSE: F) shares are trading at $11 each, an

investor who expects the stock price to drop can buy a put option in
an attempt to profit. Suppose the strike price of the put option is $9 and
the expiration date is in three weeks.
The option buyer can pay a premium to the option writer of $1 per
share, or $100. If the price of Ford stock goes down to $7 within those
three weeks, the option holder can exercise his right on the put option
and buy the Ford shares at $7, then sell them at $9 each. The option
writer is obligated to buy them from option holder for $9 each. This
generates a profit of $2 per share, or $200, for the option holder.
After paying the premium, the option holder keeps a profit of $100. If
the Ford stock did not go below $9 within the three weeks, then the put
option would expire worthless. The writer of the option would then
retain a profit of $100.
HEDGE
 A hedge is an investment to reduce the risk of adverse price
movements in an asset.
 Hedge consists of taking an offsetting position in a related security.
 Hedging is similar to taking out an insurance policy. If you own a
home in a flood-prone area, you will want to protect that asset from
the risk of flooding – to hedge it, in other words – by taking out
flood insurance
 There is a risk-reward trade off inherent in hedging; while it reduces
potential risk, it also chips away at potential gains.
 Put simply, hedging isn't free. In the case of the flood insurance
policy example, the monthly payments add up, and if the flood
never comes, the policy holder receives no pay out
EXTORTION
 Extortion is the wrongful use of actual or threatened force, violence
or intimidation to gain money or property from an individual or
entity.