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FIN 442 Upper Iowa University Enlightenment of Portfolio Theory Discussion

FIN 442 Upper Iowa University Enlightenment of Portfolio Theory Discussion

Question Description

To complete the Summary Assignment, please refer to the ‘Weekly Summary – Guidelines’ under the General Course Content

DQ1

We often refer to “Hedging” as a means to deal with risk.

  • Describe some techniques that fall under this concept that could help you to deal with a price increase.
  • See URL: Investopedia.com. (n.d.) Hedge. Retrieved December 12, 2016, from http://www.investopedia.com/terms/h/hedge.asp

Risk is a core aspect of investing but uncertain. Irrespective of how an investor is intended, it will contribute to a deeper understanding of how investors and businesses defend themselves from a simple familiarity with hedging techniques. A hedge is a portfolio to reduce the risk of detrimental market fluctuations of an asset. A hedge typically includes a compensating role in a corresponding defense (Downey & Scott, 2020). One of the techniques used to handle risks of price increases through hedging is using the future. Future exchange proposes product contracts. These prospective contracts provide both manufacturers and buyers with a framework for safeguarding their product roles. The future contracts encourage suppliers and customers to select hedges that represent their uncertainties over varying periods. Moreover, futures agreements are liquid securities.

Secondly, firms may use commodity derivatives to offset the prices of raw materials. Derivatives of goods are transactions that derive their worth from the price fluctuations of a specific product. For instance, by using product derivatives, one can safeguard the price of oil, gas, charcoal, minerals, agriculture,and energy. Commodity derivatives can transact immediately between the over-the-counter players or through coordinated markets. Many cover payments involve the actual distribution of the item, while other payments involve only cash. Thirdly, the companies can also use commode swap, which is the exchange for one cash balance. A flat product exchange enables one side to pay the present price in exchange and obtain set payments on a national basis. The present price is dependent on the value of the product measure. The hedge equivalent is normally materials buyer and profits as costs increase when it earns more than it spends (Downey & Scott, 2020). When rates decrease, material savings will compensate for the profits lost on the exchange.

Reference

Downey, L., & Scott, G. (2020, November 12). Hedge. Retrieved from https://www.investopedia.com/terms/h/hedge.asp

DQ2

  • Define a priority lender and why he is entitled to receive payment ahead of other creditors such as common shareholders.
  • Numerous business enterprises stretch their payables beyond predominant credit terms. The advantage of extending one’s payable is that it reduces the time a company needs to return to its creditors. It is also imperative to remember that companies that operate on an invoice can reduce the number of days paid or offer quick payment reductions (Valipour, Moradi & Farsi, 2012). You may continue to use apps for faster and easier transfers, for example, automated payment and mobile payments. Advanced technologies for payment management would also support this process. Companies may either settle exchanges of electronic bills or use the direct transfers to raise payable costs. However, there are various disadvantages to this strategy. First, the possibility that financial reports, and in specific cash flow statements, is significantly skewed by an arbitrary rise in payable products and the consequent increase in organizational cash flow is one of the main consequences for accountants. Following financial and accounting cases, analysts and policymakers have a far more heeded approach to cash flow reports fraud, particularly expanding payables to boost the cash flow statement.
  • Another disadvantage of this strategy is the fact that it risks the loss of key assets. There are unintended effects, including as vendors bear the lack of sales. Because they have not been paid on time, some sellers might still supply their goods but proceed to look for new and more reliable customers to prevent insufficient cash flow. Some can lose main suppliers or their properties, lessening their ability to produce the merchandise on schedule or reducing the quality of items. I may not have interacted with this strategy’s results, but I am looking forward to assessing how it may work as a source of instantaneous credit. ReferenceValipour, H., Moradi, J., & Farsi, F. D. (2012). The impact of company characteristics on working capital management. Journal of Applied Finance and Banking, 2(1), 105.


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