Organizational Needs Essay

The success of any business or any organization basically depends on proper planning and proper utilization of its resources. It is true that success dose not comes overnight, a need for assessing; exploring is required to be done. After planning, there comes the step of communication. The quality of communication determines the extent of the success of a business. In order to make communication effective career development programs are introduced to the employee by the organization. The basic aim of this kind of career development program is to make an individual employee give in his best to the company thus, maximizing profits. Although these programs were not really liked by some of the organizations. And were regarded as cost oriented, but with times as the result was good, people recognized its importance. â€Å"A needs assessment is a systematic exploration of the way things are and the way they should be†. As Gutteridge says that career development is not only the development of an individual but also the development of the management as a whole. It is equally essential, to know what learning will be accomplished, what changes in an individual’s performance are expected, what are the expected economic costs what will be the result, and after how much time will the target be achieved. Main Aim of Organizations As we know that the main aim of any origination or any business done is to get maximum profits. It is the same way in order to achieve the target. A lot of hard work has to be done, like conduction of career development programs. Knowdell (1982 – 1984) traced the origin of career developmental programs. This would of course enhance their abilities of the employees as we know that â€Å"a career development system with in a business is an organized formalized, planned effort to achieve a balance between the individuals. † With the help of these career program employees and managers know about their potentials and weaknesses, they come to know how to manage their own careers and this way feel more confident and responsible about themselves. A career developmental program should be based on: Check Actual Performance The very first step should be to check and analyze the present abilities of the employees and of course the current satiation of the organization in which it is running. After the analyses of the current situation have been made we could them go on to focus on our desired goal. By the help of the information gained on the abilities and on the capabilities of the employees we could by the help of counselors could guide an individual employee, on what particular part. He basically has got to focus. This practice may take time but with time slowly and gradually every individual employee would to his organization. It is very crucial that one must distinguish the actual needs from the perceived needs. It is true that with proper training, guidance and of course not to forget full cooperation of the employee, the target of maximums profits would be achieved. An individual should work harder on his weak points and should strive to develop his stronger ones. Set Priorities After analyzing an individual or the employee’s strengths and weaknesses we could know what kind of training is needed by an individual. What time, money should be allocated on him. One thing which should be kept in mind is the organizational needs goals and realities. The employee who is under training should set priorities that is, on which area he should work first, as per the need of his organization. If all these matter would be taken into consideration then without any doubt he would develop himself his abilities, his sense of responsibility, knowledge, skill and would accomplish his goals. Identify Problem Areas In this step we would identify those areas in which working have got to be done. After the problem is identified specific solution has to be applied. This will of course require detailed investigation and analysis. Identify Appropriate Solutions In this last step after solution have been applied to the specific problems, still as it is there is more room for improvement. It is important to move people into new direct to explore more and to improve. There are specific research centers like â€Å"the society’s career development program provides awards intended to meet the specific needs of investigators at different states in their research careers†. Thus, a lot of encouragement is given to all those people under training, so as to encourage them get good results. Essential Components The oxford English dictionary says One’s careers are one’s course or progress through life. This basically means that as an individual keeps on progressing and making himself better, through gaining more knowledge and information he keeps on improving with time and practice to improve there are self development tools. Self Assessment Know body know you as well as you know yourself. So as it is that the person under training should assess himself that what kind of training he should take or what kind of training would help to make his career develop and prosper. He should take care of his weak points and should develop his strengths. It is very curtail that counseling should be done by an expert advisor to the trainee. This way the trainee would be sure as to which way he has to go. There are also internal labor marketing and many more components. Pro and Cons There are advantages as well as certain disadvantages of getting into career programming. The good points are that after a certain period of time with a lot of hard work and labor the organization would gain good profits. There are certain disadvantages as well like it is very. Time consuming; it involves a lot of time, labor and money which would otherwise be spent elsewhere in the company. Conclusion There is a well enough connection between the organizational development and career development. As we know that a lot of individuals make is going to go under training gains knowledge develop his skill and abilities. Eventually he would perform well in that organization and because of him the company would make a lot of profits there he would certainly be rewarded. Thus his way he would also develop his career and this would certainly be a good start in his life. Reference http://www.leukemia-lymphoma.org/all_page?item_id=11618

Comment on the Three Conditions on Market Efficiency

An efficient capital market is one in which stock prices fully reflect available information. Professor Andrei Shleifer has suggested three conditions lead to market efficiency. (1)rationality, (2)independent deviations from rationality, and (3)arbitrage. This essay will examine investors’ behavioral biases and then discuss the behavioral and empirical challenges to market efficiency. In the attached article, James Montier suggested three behavioral biases that investors had. (1) illusion of control, (2)self-attribution, and (3)over-confident. Illusion of control means people fell they are in control of a situation far more than they are.Self-attribution means good outcomes are contributed to their skill while bad outcomes are contributed to external, such as back luck. These two biases lead people to be over-optimistic and exaggerate their own abilities. People are always over-confident as well. They always think they are smarter and have better information than they actually do. These three behavioral biases form a potential combination and lead investors to overestimate their ability and knowledge and understate the risks. In reality, there are some other behavioral biases. Investors usually prefer to put their money into a company that they know or familiar with.This is known as familiarity bias. They will invest heavily in the company they work for. They will also allocate a larger fraction of their investments to domestic stock even though it is easier to diversify investments across geographies. In addition, people tend to perceive probabilities and resonate with their own pre-existing ideas even though the conclusions drawn are statistically invalid. And this is called representativeness. The next bias exists in reality is conservatism, it means that people are too slow in adjusting their beliefs to new information.They clings to prior views or forecasts at the expense of acknowledging new information. The last bias I want to mention is herd beha vior. This is a tendency for individuals to mimic the actions(rational or irrational) of a larger group. It may comes from social pressure of conformity and/or believing the larger group knows something that they don’t. Most of the above-mentioned behavioral biases contradict Professor Andrei Shleifer’s three conditions for market efficiency. One of the conditions he suggested was rational.People will adjust their estimates of stock prices in a rational way after new information is released in the marketplace. Are people really rational? Not always. People will exert familiarity bias. They will be too favor the investments in companies they are familiar with. Tendency by investors to invest in domestic stock or the companies they work for. They do not achieve the degree of diversification that they can easily achieve. Others are over-confident and over-optimistic to believe they can pick winners and losers when, in fact, they cannot; this leads them to trade too much, generating both commissions and taxes.The behavioral view is that not all investors are irrational. Rather, it is some, perhaps many, investors are. Independent deviation from rationality was the second condition for market efficiency suggested by Andrei Shleifer. However, psychologists have long argued that people deviate from rationality in accordance with a number of basic principles. Some of them can apply to finance and market efficiency. One of the most examples in recent memory would be the bursting of the internet bubble. The behavior bias, representativeness can be used to explain this phenomenal.People perceive their pre-existing idea and draw conclusions from insufficient data. They saw a short history of high revenue growth and extrapolate that it will continue forever. Another behavior bias to explain internet bubble is herd behavior. Investors face pressure of conformity and trust large group irrationally. Result into a tendency for individuals to mimic the actions of a larger group that contributed to Internet bubble as well. Another behavior bias contradict independent deviations from rationality is conservatism. People are too slow in adjusting their beliefs to new information.In 2005, Kolasinski and Li have done a research by ranking companies by the extent of their earnings surprise. They found that prices adjust slowly to the earning announcements with the portfolio with the positive surprises outperforming the portfolio with the negative surprises. Behavioral finance suggests that investors exhibit conservatism. Professor Andrei Shleifer suggests that domination of rational professional will carry the stock meet its efficient prices by simultaneous purchasing and selling of misprice stock. However, in a world of many irrational amateurs and a few professionals, prices would not adjust to correct level.The risk of further mispricing may reduce the size of arbitrage strategies. In 1907, Royal Dutch Petroleum and Shell Transport merge interes t and split the cash flow in a 60/40 basis. However, empirical finding shows that two parties have rarely traded at parity (60/40) over the 1962 to 2004 period. Deviation from parity could increase in the short run, implying losses for the arbitrageur. There are also a numbers of empirical challenges to market efficiency. The common features among those empirical studies were all in an international basis.A number of studies of relationship between the return and its market capitalizations have been replicated over different periods and in different countries. They found that return on small stocks was quite a bit higher than the average return on large stocks. It may be not all but merely a compensation for the extra risk. In 1998, Fama and French found the average return on value stocks was above the average return on growth stocks in 12 to 13 major international stock markets. The return difference is so large and these ratios can be obtained so easily.The results constitute stro ng evidence against market efficiency. Security prices sometimes move wildly above their true values and eventually fall back to original level. The crashes and bubbles of Internet stock in late 1990 consistent with this bubble theory and constitute evidence against market efficiency. Size, value versus growth, crashes and bubbles were all found in international stock market. And those behavioral biases studies were carried around the world. Therefore, we may expect those behavioral and empirical challenges discussed above may hold in all counties or market setting.

Proposal Argument Essay Example | Topics and Well Written Essays - 1500 words

Proposal Argument - Essay Example The family therapist acknowledges that there is a diversity of family forms, such as nuclear, extended, cohabitation and same-sex, to name a few. It is also acknowledged that the different forms a family each have inherent strengths and weaknesses. Hence, the family therapist emphasises interventions that facilitate individuals to form social couples and households, or family groups. It is the aim of the family therapist to assist with relational development within the couple or household, and to support the learning of new ways to problem-solve. As a human service worker professional, the family therapist does not discriminate on grounds of gender, ethnicity, disability, sexual orientation, and religion or health status. To enable effective and efficient intervention, the family therapist needs to adhere to a theory that reflects their personal therapeutic philosophy. The social construction framework is useful to human service workers in the fields of family therapy and psychotherapy in that it allows practitioners to investigate and empower client’s creation of meaningful understandings of themselves and the wider world (Swann, 1999). The framework focuses on the key influences of sociocultural forces and the environmental context of human understanding, learning and accumulation of knowledge. Within family therapy this theory provides the therapist with a powerful ability to draw family members away from blaming each other for their behaviors, and placing these behaviors within a larger sociocultural context. For example, the Western values of independence, competition and profit contributing to the family to place pressure on their son to find gainful employment and to do better in life than what they have. In turn, the son has felt misunderstood, isolated and unable to achieve due to constant â€Å"failures† and has chosen to d rop out of society. Now living

Federal Express Canada Case Analysis Study Example | Topics and Well Written Essays - 1250 words

Federal Express Canada Analysis - Case Study Example Hence, the company must immediately respond to these issues in order to ensure long terms sustainability. Logistics computerization is one of the most recommendable policies for the FedEx to improve its logistics and customer service operations. The company has to raise additional finance. It also has to recruit more skilled employees to implement the planned changes. Finally, the FedEx should develop potentials systems to monitor the performance efficacy of the implemented changes. Background Federal Express or FedEx is a North American shipping company notable for its ‘fast response to customer requests and constant tracking of every shipment’ (McDougall & Dorken, 1998). The company (as cited in McDougall & Dorken, 1998), employs nearly 137,000 people worldwide (including 3,500 in Canada) and offers shipping services to 212 countries; and every night, FedEx planes carry approximately 2.9 million packages weighing a total of nearly 2 million pounds. The FedEx maintains 60 shipping facilities in Canada to meet Canadian shipping needs from coast to coast. The organization gives primary focus on Quality Management and Assurance and attained ISO 9000 for its operations worldwide. FedEx is the first service based company that has won the Malcolm Baldrige National Quality Award in the US. The company has a good reputation in the shipping sector and maintains a huge potential customer base. Statement of Issues While analyzing the case scenario, it is clear that the FedEx has some potential issues with its logistics management and customer service practices. McDougall & Dorken (1998) clearly indicate that the company failed to meet shipping requirements of Desktop Innovators and the situation caused the DI to suffer from huge business loss. The DI placed a shipping order on FedEx to send two boxes from Kitchener, Ontario to Simpsonville, South Carolina. The DI wanted to get those two boxes at the destination by 12th October so that the firm’s deale r would get plenty of time to transfer them on to Charlotte, where the trade show had been arranged. However, only one of those boxes was delivered at Simpsonville on time and therefore the DI could not display its software packages at the trade show stalls. Similarly, the FedEx did not timely and properly respond to queries raised by the DI’s Office Manager Anita Kilgour. Hence, Kilgour could not get actual status of the DI’s goods in transit and this situation caused great confusion to both Kilgour and the dealer. While scrutinizing the FedEx’s service delivery policies, it is obvious that the company violated its delivery terms and conditions, which the client had been had been promised at the time of order placement. Situation Analysis The identified issues relating to the two management areas (logistics management and customer service management) raise many potential threats to the FedEx’s long term sustainability. Effective logistics management is c rucial to customer satisfaction since customers are the end users of a firm’s all logistics activities. It is obvious that every shipment is intended for a particular purpose and therefore it will be of no use if the shipped goods are delivered late. In other words, the FedEx’s weakness in logistics management would lead to huge troubles in future since the company handles millions of packages every day. If once a customer

Reflections on reading Essay Example | Topics and Well Written Essays - 250 words

Reflections on reading - Essay Example Main hero, Zach is a complicated, not an ordinary person, who is put by author in not a casual kind of circumstances. Maybe this novel is even metaphorical: for example, Zach’s roommate in rehab has a name Raphael, what calls up a parallel with name Raphael like the angel’s name. (Koenig, L.) â€Å"Hairstyles of the Damned† by Joe Meno I loved most. It’s entertaining and helpful for young people, and a little bit philosophical – all at ones. This novel gives reader an opportunity to feel like you are (or were) not alone with your teenage problems, and believe, that if everyone is going through it, you also will. First love and sex, complexes about the way you are and way you look, problems with friends, parents and at school – it’s all common teenage problems. To my mind, such books should be written for a different ages, because in every age there are specifical problems and fears, and in every age it’s important to feel you’re not alone. I also loved the main hero for his mistakes and his honesty to himself. It’s often we can not explain all our emotions to other people, even to family and friends, but it’s important to confess your feelings to yourself and be not ashamed of what you desire. So after the end of my literature class, that force me to read, I think I still be reading sometimes for all three reasons: to know briefly something new, to think about high important things together with the intellectual author and to feel I’m not alone with something that bothers me right

RESEARCH STRATEGY PAPER Essay Example | Topics and Well Written Essays - 750 words

RESEARCH STRATEGY PAPER - Essay Example The things that one will take into consideration as possible solutions to the problem would likewise be presented. Statistics show that there are an alarming number of students who leave school for a variety of reasons. According to Alliance (2007), almost seven thousand students become dropouts every school day. It revealed that if the students who dropped out of the class of 2007 had graduated, the nation’s economy would have benefited from an additional $329 billion in income over their lifetimes. The implications of the students’ dropping out are not realized until it is just too late. It should be emphasized, however, that it is actually never too late to go back. College life poses strategic differences from high school making students totally unprepared for it. There are varieties of factors that scholars and researchers on the topic identify as the reasons why students fail in college. In this regard, this essay aims to determine the rationale behind barriers to collegiate success through an identification of the kinds and sources of information needed to address the problem, and an enumeration of suggested solutions after analyzing the rationale for failure to succeed. The discourse proffered by Taft College (2007) clearly depicted distinct differences in the areas of time, costs, responsibilities, classes, professors and tests with guiding principles stated for each classification. This information can be gathered through relevant secondary sources of scholars and researchers who conducted studies on the subject. Most of the information can be viewed from electronic sources. College education is basically voluntary and more expensive where students learn how to manage their own time. Students are expected to take accountability and responsibility for their academic performance through prioritizing compliance to

Case Scenario Assignment Example | Topics and Well Written Essays - 500 words - 1

Case Scenario - Assignment Example er or siblings but only his mother and the criminal gangs, is sufficient evidence to say that his social environment compromised his rational thinking to opt joining the criminal gangs hence making this case scenario being in tandem and well explained by the Social Disorganization Theory’. Virginia’s case can be well explained by the theories of Biology, genetics & Evolution, which articulate that the behavior of individuals can be genetical, biologically or evolutionary influenced to make individuals commit crime. Given that either Virginia’s mother or her twin sister have been accused or convicted of a crime, it implies that Virginia’s crime behavior of shoplifting is genetically inherited, hence influencing the choices she makes. Therefore, I can authoritatively say that Virginia was born criminal since this can be identified through her identification or stigmata characteristics. Further, we can say that the processes of natural selection, which result in tendencies of criminal genetics that are passed from generation to generation were inherited by Virginia from her mother, hence giving a good explanation of her twin sister and her criminal behavior. Police have no legal right to storm into your home, house or apartment and start ransacking it without probable cause or warrant unless it an emergency. The criminal defense law 407-894-0055 allows you not to allow police enter into your house without a warrant. However, there are some instances when police do not need a warrant to search your house e.g. in case of plain view or when they want to stop a crime in progress. Therefore, given that the police officers are trained narcotic and drug officers, it is probable that the plant they have recognized would indeed be marijuana. Thus, since they have sufficiently determined beyond reasonable doubt that Lucy is a trafficker, they can, therefore, storm at Lucy’s apartment and search for the incriminating evidence without a warrant. Under the Federal

Research of self-defence case Paper Example | Topics and Well Written Essays - 750 words

Of self-defence case - Research Paper Example The government view is that, after Belcher confronted Suber, he went ahead, retrieved a gun from Brown and began shooting Suber with no excuse. the state affirms that the killing has to be unlawful and thus instructs the jury that the malice be inferred for the use of the deadly weapon (California Center for Research and Education in Government 86). The states stress that courts have been bestowed powers to settle fixtures in the criminal systems of the company. 2) What is the prosecutor's point of view? From the prosecutor’s point of view, Belcher is guilty and has two counts of charges to answer. One of the charges is that Belcher committed murder while the second one is the possession of the illegal firearm. The prosecutor finds sufficient evidence to believe that Belcher committed the heinous act, it is for this reason that the prosecutor instructs the jury to convict Belcher for murder and the illegal possession of the firearm. The prosecutor refers the charges with respe ct to Belcher’s murder reiterating that his act contravenes the state law regarding human conduct. According to the prosecutor, Murder is the unlawful killing with malice, which may be inferred by the deadly weapons or from the circumstances that may be proved by the state. According to the prosecutor, the law presumes malice from the homicide and therefore Belcher is guilty of the offense. However, the prosecutor does not take the step of prosecuting Belcher. In his response to the judgment of the jury that warrants the jury to charge Belcher for murder and voluntary manslaughter, the prosecutor finds the inference of malice regarding the use of the deadly weapon as no longer being a good law in South Carolina. He therefore makes a ruling that Belcher’s convictions be reversed and remand for a new trial to begin. The prosecutor arrives at this verdict owing to the conflicting testimonies presented at the pretrial chamber. 3) What is the element of the crime? The eleme nts of the crime are the use of the deadly weapon and malice. However, the evidence of self-defense and malice are presented with respect to this case. The evidence of malice in this case is evidenced by Belcher’s use of handgun. It is however, perceived that the notion of charging malice by the use of the deadly weapon is harmless. This makes the case complicated. 4) What is the issue inference, Mens Rea, Actus Res, or Presumptuous? The issue inference here is the Suber’s murder subject to malice. Belcher portrays the Actus reas in his submission of evidence when he states that, his decision to shoot Suber was an attempt to defend him (West Publishing Company 270). The evidence provided is presumptuous and thus fail to catch the prosecutor’s admissibility. It is therefore, upon the jury’s decision to make valid ruling regarding the pursuance of justice. It is important to note that presumption is not applicable when the circumstances and facts related to the homicide are disclosed in evidence in a manner that it draws a conclusion of malice. Presumptions are used as substitutes when theirs is a lack of direct proof. In Belcher’s case, presumption is employed owing to lack of sufficient evidence. 5) What was the previous Law? It emerges that the prosecution embraced the Bishop criminal law previously. Subject to this law, the inference of malice was drawn from the use of deadly weapons especially in the act of

Leadership - leadership versus followership Essay

Leadership - leadership versus followership - Essay Example Bad Leader believes that employees working under him are basically lazy and the work, assigned to them, is distasteful to them. They assume that people are motivated by money. Leaders with bad leadership traits normally or wrongly assume that there must be very detailed work routines and enforced milestones to ensure that every work gets done. According to Allio, a bad leader apart from failing both professionally as well as personally, would destruct the organizations and regrettably the employees and the shareholders A good leader must be tough enough to win a fight, but not tough enough to kick a man when he is down. They find strategies to increase the owners fund, encourage change in the wrong direction rather than resisting it. Further they influence their subordinate in a negative rather than coerce them into a positive path. The Bad leaders are corrupt, misguided and have disregard for the stakeholders. They bring disrepute to the organization and are painful to the employees. Dean B McFarlin & Paul D Sweeney in their book â€Å"Where EGOS Dare-The Untold Truth about Narcissistic Leaders & how to Survive them† defines Narcissistic Leaders as the ones who are fundamentally, insecure individuals who will crave adoration and will act in a negative way to get adoration, eventually only getting negative adoratio n. They compensate by projecting an inflated sense of self worth & competence to those around them. The next important point raised by Allio in the article is that, most leaders start as visionaries having great ideals to lead the organization into high growth. They exhibit high integrity and they take the right path to retain the idealism for what they had dreamt of in the beginning. However, the environmental and resource constraints influences idealism and they become practical and think of alternative ideas. They start of in a big way but when their plans fail to deliver, they take wrong decisions

Case report for Harvard Business School Case and solutions to problems Essay

Case report for Harvard Business School Case and solutions to problems in the case - Essay Example At times, there are different other factors apart from these budgeting methods, which should also be kept in mind while making decision. Because when we talk about investment there are two major components; return and risk. The budgeting method used in the cases will help the decision maker in critically analyzing all the available alternatives and choosing the best among them, so that they can achieve profitable cash flows in future. Investment is defined as present commitment of dollar for a specific tenure in order to generate future stream of cash flows which will be greater than current dollar amount1. The investor can be an individual, an organization, a government or a pension fund. In addition to this, investor expects a rate of return on the investment as compensation for the time for which they have made investment2. However, there might be some deviation from expected rate of return from certain investments and such deviation is known as investment risk. Therefore, where there is investment there is return and risk. Investment can be of two types; financial investment and economic investment. A financial investment refers to commitments in terms of monetary terms in order to generate better future cash flows which can be in a form of interest, premium, dividend etc. However, economic investment refers to making fund commitment which will result in increase of capital stock which includes goods and services. Furthermore, investors are looking for investment opportunities that will increase the current pool of funds in future. Hence, investment analysis refers to finding and opting for investment opportunity that will be giving highest rate of return and is having minimum risk. Thus, investors needs to evaluate all the available investment options and should come up with the best possible scenario3. Organizations encounter many investment opportunities but the main issue is opting and evaluating the options. Therefore,

Bridgeton Industry, Automotive Component & Fabrication Essay Example for Free

Bridgeton Industry, Automotive Component Fabrication Essay 1.Industry and its relevant characteristics. As the original plant of Bridgeton Industry, Automotive Component Fabrication (ACF) supplies the most components to the U.S automotive industry. The plant has a long history that was established in 1840s and the site developed by several industrial uses. ACF could be the leader of the whole industry because the Big- Three automobile manufacturers are the ACF main customer, which bought the whole production of ACF. 2.Competitive environment  Although there are some competition mainly from local suppliers and other Bridgeton plants in domestic, ACF was still considered to be advantaged as the automotive market and US automotive industry dominated. But it was not that optimistic when the competition from global and domestic loss of market share happened. 3.Products and production processes.  During the 1987 model year, products were analysed and classified to different classes based on their quality, customer service, technical capacity and competitive cost position by a strategic consulting firm and it concluded that: Class I-fuel tanks; Class II-Manifolds, front and rear doors; Class III- Muffler-exhaust systems and oil pants. For producing fuel tanks, firstly six stamping lines from coated sheet metal are used to place those, and they automatically seam welded followed by placing together. Manifolds: a highly automated production process is used to produce stainless steel exhaust manifolds. And the parts are robotically welded after being loaded. The highly advanced system is disadvantaged in cost. Front and rear doors: those are the doors for vans. Four press lines with six presser per line in maximum are used to produce. Muffler-exhaust systems: sheet metal that is bet to shape is used to form those and robotically welded afterwards. Oil pans: it means small steel stampings are produced on two lines with one press each contained. 4. Description of the old cost system.  The overhead was allocated using a predetermined rate of percentage of direct labour cost and it used a single overhead pool. 5. Possible problems with the old cost system. Overhead was allocated using a predetermined rate of percentage of direct labour cost would be subject to some fluctuation. Sometimes it could not reflect the true cost as not every model year has the same percentage overhead of direct labour cost, so end of period adjustment is needed. As ACF’s production is various, using a single overhead pool could not reflect all the cost driven by different cost drivers.

Hepatitis B epidemiology and prevention strategies Essay Example for Free

Hepatitis B epidemiology and prevention strategies Essay Hepatitis B is a serious viral infection which is characterized by hepatic cell inflammation and disturbed liver functioning and is associated with high morbidity and mortality rates. It is a disease known to mankind since antiquity, given that cases of epidemic jaundice are reported in ancient Chinese documents as well as in Hippocrates’ writings in the 5th century B. C. Similar epidemics have been described during the Medieval and the Renaissance years, however, the first recorded cases of hepatitis B are probably dated in 1883 in German shipyard workers following the administration of small pox vaccine. In 1965, Blumberg identified a specific antigen in the serum of an Australian Aborigine, named â€Å"Australia antigen†, which was later linked to hepatitis B. Its detection allowed the accurate diagnosis of HBV infection, expanded scientific knowledge on the field and led to effective prevention and treatment strategies (Mahmoud Al-Hussami, 2004). According to World Health Organization, hepatitis B affects almost 2 billion people worldwide, which represents one third of global population. 75% of the world population live in areas of high endemicity, thus being exposed to high infection risk. (Previsani et al, 2002). In its chronic form, the infection affects almost 350 million individuals and may lead to several major complications including liver cirrhosis and failure and hepatocellular carcinoma, thus having an adverse effect on patients’ survival and quality of life (Lok, 2002; Rantala, 2008). Recent epidemiological and clinical data reveal that up to 80% of primary liver tumors worldwide can be attributed to chronic HBV infection (Lavanchy et al, 2004). It is estimated that hepatitis B is responsible for one million deaths annually, half of which are associated with hepatocellular carcinoma. In addition, economotechnical studies worldwide reveal that chronic hepatic B patients require long and frequent hospitalizations thus posing a significant financial burden on national health care systems (Pantazis et al, 2008). There is great variation in hepatitis B prevalence rates worldwide. The disease is more prevalent in developing countries, including tropical Africa, Southeast Asia and China, where 10-15% of the general population are HBsAg carriers (Previsani et al, 2002). In contrast, developed countries with higher standards of living and better organized public health systems, are considered areas of low endemicity for the disease. In Western and Central Europe, North America and Australia, seroprevalence rates range from 0.  2 to 1. 5% of the general population. In these areas, young adults are mostly affected, with males having 1. 8 greater risk to be infected compared to females. It is estimated that 200,000-300,000 individuals in the United States become infected with HBV annually, and almost one million people are chronically infected. Despite, HBV infection’s low prevalence, there are certain sub-populations in the Western world that run extremely high risk compared to the general population. These high-risk groups include infants born to infected mothers, healthcare workers, intravenous drug users, individuals living with HBV patients, sexually active heterosexuals with multiple partners, homosexual males, haemodialysis patients and patients frequently receiving blood transfusions (Previsani et al, 2002). The existence of a sub-population of vulnerable individuals, underlines the fact that hepatitis B remains a small yet appreciable public health risk and emphasizes the need for proper interventions. WHO suggests specific measures aiming at HBV infection surveillance and disease control. Although in most countries reporting HBV infection is mandatory, a significant percentage of cases go under-reported and surveillance systems need to be upgraded. In addition, effective disease control should encompass broadening of immunization, effective screening of blood and blood products to avoid transmission through transfusion and educating healthcare workers and high-risk individuals (Previsani et al, 2002). After the introduction of HBV vaccine in 1981, the systematic implementation of national vaccination programs in developed countries has led to a significant decrease in seroprevalence. By the end of the year 2007, 171 countries had instituted the systematic vaccination of infants [5]. HBV vaccine represents a safe and highly effective method of immunization which protects against hepatitis B and its long-term complications in 95% of cases (Previsani et al, 2008). Initially, HBV vaccine was a plasma derived product, however due to concerns regarding the possibility of viral transmission, it was substituted by the recombinant form. The current trend in hepatitis B vaccination supported by the Center for Disease Control (CDC) is to target not solely high risk individuals but also all newborns, children and adolescents up to 18 years of age, given that in a significant proportion (30%) of acute HBV infections no risk factor can be traced. However, despite the vaccine’s established efficacy, vaccination programs’ success is currently limited by the existence of a sizeable percentage of individuals who refuse to be vaccinated. Several studies worldwide have revealed that vaccination rates among healthcare workers hardly reach 50% (CDC, 1991). Likewise, in earlier and recent studies, parents reported significant doubts about global infant immunization (Woodruff et al, 1996; Hontelez et al, 2010). A recent German study reported vaccination rates of 29% for the general population and 58% for high risk groups, revealing a significant gap in vaccination coverage (Schenkel et al, 2008). Parameters which have consistently been shown to relate to vaccination acceptance include higher educational level, younger age and better information about the disease (Mahmoud Al-Hussami, 2004; Panhotra et al, 2005). Additional reasons for low vaccination compliance may be associated with vaccine availability and cost. Despite their growth and prosperity and the development of welfare state, western societies still have to cope with the fact that a sizeable proportion of the population lacks access to basic healthcare, due to financial and social reasons. These findings underscore the importance of informing and educating the public opinion about hepatitis B and widening the availability of HBV vaccine. In order to implement an effective vaccination campaign, people should be responsibly informed regarding risk factors, ways of transmission and prevention measures. In this way, not only vaccination acceptance will rise, but, in addition, individuals will be encouraged to adopt a healthier lifestyle, including embracing basic hygiene habits, condom use and other safe sex practices in everyday life. Previous research has shown that using the internet and the mass media to provide disease-related information may have a positive impact on disease prevention (Kang et al, 2010). In addition, school-based programs have proven adequately efficacious in modifying negative parental attitudes towards immunization thus increasing vaccination rates. (Ogilvie et al, 2010). Insurance providers are strongly encouraged to undertake similar educational initiatives targeting the whole population to minimize disease’s medical, psychosocial and financial impact. Lowering vaccine cost and rendering it accessible to the whole population requires additional funding and strong policy makers, determined to defend public safety and well-being against economic gain and pharmaceutical companies’ agendas. In the USA, the price of vaccination per dose ranges from 15 to 41 U. S. dollars, depending on the context where it takes place, and emerges as a major barrier to immunization. However, even in countries of low endemicity, such as the USA, universal immunization programs appear cost-effective, given the significant burden imposed by the disease and its long-term complications in terms of financial and human resources (Previsani et al, 2002). When coping with public health issues, preventive approaches represent more efficacious and cost-effective strategies compared to treatment plans, and in this respect, insurance providers may economize in the long run by covering vaccination’s cost. Another important measure for disease control is the implementation of systematic screening of blood and blood products. Modern screening practices based on recent advances in immunochemistry and molecular biology have significantly decreased HBV transmission through blood transfusion, however, there remains a small percentage of cases where HBV can not be detected. These cases represent a significant risk for multi-transfused patients, a risk which can be eliminated through educating and encouraging blood donors to keep a responsible and sensitive stance. Avoiding donating blood when engaging in high risk behaviors is probably the more simple and effective way of reducing the risk of HBV infection through blood transfusion. In conclusion, hepatitis B represents a major public health condition worldwide, associated with severe complications, poor quality of life and increased mortality rates. National and international organizations have addressed the issue, raising public and individual awareness and encouraging wide-scale immunization programs. However, significant obstacles have been detected in the implementation of disease prevention strategies, including difficulties in repudiating high-risk behaviors and adopting a healthier way of living, and limited availability and acceptance of the vaccine. In this respect, policy makers can maximize the efficacy of HBV prevention, by providing accurate and valid information to the public and increasing people’s access to vaccination.

Demand of Derivatives Investment in Malaysia

Demand of Derivatives Investment in Malaysia ABSTRACT This research investigates the demand of derivatives investment by Malaysia. On the whole the main purpose of this dissertation is to study, analyse and discuss about the usage of derivatives by Malaysian company or individual resident. The research paper is divided into five chapters. Chapter 1 introduces derivatives and identification of the research problems. Research objectives and questions are given briefly. Chapter 2 provides an overview of the literature reviewed throughout the research. A detailed description by past researchers is presented. The further detail of each derivative contract are summarised. Chapter 3 deals with the work flow of this study. The research methodologies includes research design and procedure, data collection method, and statistical data analyses method. Data collection from secondary data is analysed to form a theoretical framework. Chapter 4 present the analysis and result of research topic. Tables, diagrams, charts are use to illustrates the findings. Finally, Chapter 5 concludes the dissertation with summary all of the chapters. CHAPTER 1 INTRODUCTION Introduction A derivative is a financial instrument that is derived from assets, indexes, events, value or condition (known as the underlying asset). Rather than trading or exchanging the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset. (David, 2003) From definition taken from International Accounting Standards 39 (IAS39) Financial Instruments Recognition and Measurement, a derivative is a financial instrument whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rate, a credit rating or credit index or similar variable. (IAS, 2009) Forward contracts, futures contracts, options and swaps are the most common types of derivatives. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative. (Khanna, 2010) Research Problem The research problem of this study is to uncover the derivative investment as a financial instrument for business and gaining capital. The usage of derivatives is getting larger nowadays. However, there is some criticism regarding the derivative in negative aspect as well. Research Objectives The following are the specific objective to achieve under this research To study the factor influence Malaysian to invest in the derivatives investment. To identify the method of reduction in risk under the usage of derivatives. Research Questions Questions that are bound to be answered throughout the research are: Why do investors select derivative investment? How can derivatives instrument be use? What is the types of derivative that are highly demanded in Malaysia? How does reduction in risk achieve by using derivatives instrument? How do traders speculate in order to make profit via derivatives? Scope of Study The scope of study for this research focuses on the derivative instruments. Significance of Study The significance of this study is to give the investors an idea as how the derivative instruments work in the business world. It also a study that helps businessman to reduce their risk and speculator to gain short-term money through derivatives. CHAPTER 2 LITERATURE REVIEW Introduction of Derivatives The first derivatives contract was listed in the year 1865 by the Chicago Board of Trade (CBOT) in USA. Those exchange traded derivatives contracts were called futures contracts. In April 1973, the Chicago Board of Options Exchange (CBOE) was set up for the purpose of options trading. The Standard Poors 500 Index in USA currently is the most popular stock index futures contract in the world. (HSBC Invest Direct, 2010) There are two distinct groups of derivative contracts, which tell apart the way they traded in the market. Over-the-counter (OTC) derivative is a type of financial derivative that negotiated directly between two parties rather than through an exchange centre. The OTC derivative market is the largest market for derivatives, and is unregulated with respect to disclosure of information between the parties. (Essaddam, et al., 2008) Exchange-traded derivative (ETD) is a type of financial derivative that has its transaction traded via specialised derivatives exchanges or other exchanges, such as Bursa, CBOE, Eurex etc. Derivatives exchange act as an intermediary to all related transactions, ETD is usually traded in standardised derivative contracts. (ISDA, 2009) There are few major derivative contracts which consist of forward, future, option and swap contract. Forward Contract A forward contract is a contract negotiated at present that gives the contract holder both the right and full legal obligation to conduct a certain asset transaction at a specific future time, amount, price and other terms. (Schweser, 2002) The party to the forward contract that agrees to buy the financial or physical asset has a long forward position and is called the long. The party to the forward contract that agrees to sell or deliver the asset has a short forward position and is called the short. (David, 2003) For instance, Lam Soon Company signed a contract under which they agree to buy a tonne of crude palm oil (CPO) from their supplier 30 days from now at a price of RM2,500. Lam Soon Company is the long and the supplier is the short. Both parties have removed uncertainty about the price they will pay or receive for the CPO in the future date. If 30 days from now CPO are trading at RM2,580 per tonne, the short (supplier) must deliver the CPO to the long (Lam Soon) in exchange for a RM2,500 payment. If CPO are trading at RM2,420 on the future date, the long must purchase the CPO from the short for RM2,500, the contract price. Forward contract is usually negotiated directly between the two parties, therefore it is an OTC market forward contract. The forward contracts have the advantage of being flexible (the parties design the contract to meet their specific needs). However, Stalla (2000) had concluded that forward contracts have three major disadvantages: They are illiquid. Because the terms of a forward contract are usually designed to meet the specific needs of the contracting parties, it is difficult for either one of them to close out its side of the contract, either by selling it to a third party or by getting the counterparty to cancel the agreement without demanding an excessive buyout price. They have credit risk. Forward contracts usually require neither party to the agreement to post collateral, make any mark-to-market transfers of funds over the life of the contract, or make any margin deposits to give assurance that it will be able fulfil its obligations under the terms of the agreement (although such clauses could be inserted into a forward contract by mutual consent of the parties). Consequently, a typical forward agreement is based on trust, each party to the agreement must trust that its counterparty will perform in the agreed-upon manner. This exposes both contracting parties to the risk that the counterparty might default on its obligation. They are unregulated. No formal body has the responsibility of setting down rules and procedures designed to protect market participants. Generally, the only protection given to parties involved in the OTC forward market is that of contract law. Future Contract A futures contract is a forward contract that has been highly standardised and closely specified. As with a forward contract, a futures contract calls for the exchange of some goods at a future date for cash, with the payment for the goods to occur at the future delivery date. The purchaser of the contract is to receive delivery of the good and pay for it, while the seller of the contract promises to deliver the goods and receive payment. The payment price is determined at the initial time of the contract. (Adhar, 2006) Futures contracts are usually traded on futures exchanges (ETD), rather than in an OTC environment. Hence, futures contracts are unique forms of forward contracts that designed to reduce the disadvantages of forward contracts. The future contracts terms have been standardised so that can be traded in a public marketplace. Due to standardisation, futures contracts are lesser flexible than forward agreements, hut it also makes them more liquid. (Copeland, et al., 2004) According to Schweser (2006) points, in order to safeguard the clearinghouse, which act as the buyer to every seller and the seller to every buyer, the exchange requires traders to post margin and settle their accounts on a daily basis. Before trading, the trader must deposit funds, called margin with their broker (who, in return, will post margin with the clearinghouse). The purpose of margin is to ensure that traders will perform their contractual obligations. There are three types of margin. The first deposit is called the initial margin which had been explained above. Any losses for the day are removed from the traders account and any gains are added to the traders account. If the margin balance in the traders account falls below a certain level (called the maintenance margin), the trader will get a margin call and have to deposit more money (called the variation margin) into the account to bring the account back up to the initial margin level. (Stalla, 2000) For instance, Lam Soon buys a 30 days future contract of CPO at RM2,500 per tonne. The initial margin was RM2,500. The next day the price of CPO plummetsRM50. Therefore Lam Soon has just lost RM50. At the end of the day, the daily settlement process marks Lam Soons margin account to market by taking RM50 out of the account leaving a balance of RM2,450. Now, assume the maintenance margin level is at 70%. If Lam Soons margin balance falls to or below RM1,750, Lam Soon gets a margin call and has to bring their account back up to the initial RM2,500 level. There are several advantages to using forward or futures contracts as a substitute for trading in the spot markets of commodities: (Sorid, n.d) Transaction costs are much lower and liquidity is better in the futures markets than in the spot markets. There is no need to store or insure physical assets if forward or futures contracts are used. Forward and futures contracts may be sold short, as well as bought long. This may not always be possible if one were trading the actual underlying assets themselves. There is a great deal of leverage in forward and futures contracts. A trader can control on a large position with only a small initial deposit. If the futures contract with a value of RM100,000 has an initial margin of RM10,000 then one percent change in the futures price which is RM1,000, would result in a 10 percent change relative to the traders initial costs. Since there is no margin is required with a forward contract, control can be obtained with no money down. There is flexibility, especially with forward contracts, that can be used to create specialized risk/return patterns. Price risk can be accepted or eliminated by using forward or futures contracts without compromising any holdings of an underlying asset. Thus, a jeweller can sell the price risk associated with holding an inventory of gold without actually disturbing the physical inventory itself. This makes it easy to adjust ones financial exposure to commodity markets, even if ones physical exposure must be maintained for business purposes. The primary disadvantage of using futures contracts for speculative trading would involve a great deal of leverage, so that large losses can occur. In effect, holding a futures position with only the margin requirement on deposit in a brokerage account is the same thing as having purchased the underlying asset on margin. Another closely related disadvantage is that futures (but not forward) contracts subject the trader to margin calls to meet daily settlement obligations. This requires participants to have a cash reserve that can be drawn upon to meet these demands for additional cash. (Sorid, n.d) Option Contract According to the Chicago Board Options Exchange (CBOE) 2008, an option is a contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. The owner of a call option has the right, but not the obligation to purchase the underlying good at a specific price for a specified time period. While the owner of a put option has the right, but not the obligation to sell the underlying good at a specific price for a specified time period. To qualify these rights, the options owner has to pay a premium to the seller of the option for buying the option. (CBOE, 2008) The seller of the option is called an option writer. Options have four possible positions: (CBOE, 2008) Call option buyer Call option writer or seller Put option buyer Put option writer or seller In these contracts, the rights are with the owner of the option. The buyer that pays the premium receives the right to buy or sell the underlying asset on specific time and price. The writer or seller of the option receives payment and obligates to sell or purchase the underlying asset as agreed in the contract of the option owner. (Akmeemana, n.d.) For instance, BAT share is selling at RM50 while its call option is at RM10. The call option can be exercised for RM45 with a life span of 5 months. The exercise price of RM45 is called the options strike price. The RM10 price of the option is called the option s premium. If the option is purchased for RM10, the buyer can purchase the stock from the option seller over the next 5 months for RM45. The seller, or writer of the option gets to keep the RM10 premium no matter what the stock does during this time period. If the option buyer exercises the option, the seller will receive the RM45 strike price and must deliver to the buyer a share of BAT stock. If the price of BAT stock falls to RM45 or below, the buyer are not obliged to exercise the option. Note that the option holders can only exercise their right to act if it is profitable to do so. The option writer, however, has an obligation to act at the request of the option holder. A put option is the same as a call option except the buyer of the put has the right to sell the put writer a share of BAT at any time during the next five months in return for RM45. The owner of the option is the one who decides whether to exercise the option or not. If the option has value, the buyer may either exercise the Option or sell the option to another buyer in the secondary options market. (Tatum, 2010) For short-term investment horizons, options trading can produce lower transaction costs than the outright purchase and sale of the underlying assets themselves. Besides, options can he used to execute some tax strategies. (Skousen, 2006) Swap Contract A swap is an agreement between two or more parties to exchange sets of cash flows over a period in the future. The parties that agree to the swap are known as counterparties. The cash flows that the counterparties make are generally tied to the value of debt instruments or the value of foreign currencies. Therefore, the two basic kinds of swaps are interest rate swaps and currency swaps. (Schweser, 2006) Unlike the highly structured futures and options contracts, swaps are custom tailored to fit the specific needs of the counterparties. The counterparties may select the specific currency amounts that they wish to swap, whereas exchange traded instruments have set values. Similarly, the swap counterparties choose the exact maturity that they need, rather than maturity dates set by the exchange. This flexibility is very important in the swap market, because it allows the counterparties to deal with much longer horizons than can be addressed through exchange-traded instruments. Also, since swaps are not exchange traded, it gives the participants greater privacy, and they escape a great deal of regulation. (Hodgson, 2006) According to Hodgson (2996), the advantages of swap agreements over conventional traded derivatives can be summarised as below: Swaps are highly flexible and can be custom made to fit the requirements of the parties entering into them. The swap market is virtually unregulated, in contrast to the highly regulated futures market. This could change, however, since regulators usually abhor a regulation vacuum and probably will, eventually, seek to bring the market under their protection. The cost of transacting in the swap market is low. Swaps are private transactions between two parties. Often, swaps are off-balance sheet transactions that can be used, for example, to enable a firm to reposition its balance sheet quickly without alerting competitors. The disadvantages of swaps include: Because swaps are agreements, a party who wants to enter into a particular swap must find a counterparty that is willing to take the other side of the swap. Swaps can be illiquid; once entered into, a swap cannot easily be terminated without the consent of the counterparty. Because there are no margin deposits or a clearinghouse that help ensure, or will guarantee, that the agreements will be honoured, the integrity of swaps depends solely upon the financial and moral integrity of the parties that have entered into them. In other words, the swaps have more credit risk than futures contracts. The Demand of Derivatives Based on the statistics of the Bursa Malaysia Derivatives Berhad, the total exchange of derivatives during the year 2009 was up to 6,137,827 contracts. The crude palm oil futures (ETD) is the most liquid future in Malaysia, total of 4,008,882 contracts with average of 334,074 contracts traded monthly during year 2009. (Bursa Malaysia, 2010) Figure 2.1 shows the monthly price traded and the monthly volume of crude palm oil futures (FCPO) traded in Bursa Malaysia from year 1985 until March 2010. The green colour bar represents the price close on the month end was above the open price open on the beginning of the month, while red colour bar indicates the closing price is below the open price. Figure 2.1 indicates that there was less transaction traded during the eighth decade of the 20th century until 2002. The number of FCPO contract traded keep on increasing especially start from year 2002, and is quite popular in recent year, the volume of transaction exceeded 150,000 contracts each month. FCPO is extremely high volume in 2008 because the global oil price is at its peak at USD145 per barrel. FCPO traded at its pinnacle in November 2006 which recorded 360,650 contracts in a month. This showing that the FCPO is high in demand in Malaysia as compare to previous years. Figure 2.2 shows the history chart of FTSE Bursa Malaysia Kuala Lumpur Composite Index Futures (FKLI) traded in Bursa Malaysia from December 1995 until March 2010. There was a high trading volume during the 1997 Asian Financial Crisis due to the high fluctuate of the Kuala Lumpur Composite Index (KLCI). 148,318 future contracts were traded in September 1998. There were at least 40,000 future contracts traded in the following years of 1998. The volume traded increasing rapidly in 2007 as Malaysian economy recovers. KLCI went as high as 1400 points during the last 3 years. 302,321 future contracts were trade in August 2007, which is the highest volume recorded in history. Based on Figure 2.2 trading volume trend, it can be concluded that speculators were heavily involve in trading FKLI in 1997, where the Asian Financial Crisis tragedy occurred and in its peak in 2007 . KLCI fluctuation was elevated during these two event (circled in the chart). For the global market, the market for options developed rapidly in early 80s. The number of option contract sold each day exceeded the daily volume of shares traded on the New York Stock Exchange. According to the Bank for International Settlements, the total OTC derivative outstanding notional amounted to USD605 trillion as of June 2009. Factors That Influence Derivatives Trading Mike Singh (2010) said that trading derivatives will have lesser risk than other trades because investor are not buying into the company or buying the underlying product. Instead, the risk is placed on performance. Due to its low risk factor, investment and commercial banks, end users such as floor traders, corporations, and mutual and hedge funds, are major types of firms that utilize derivatives. A much lower initial investment start up in derivatives trading, derivatives give an edge to those who decline or do not want to invest as much as is required to purchase stock. Derivatives can be a good way to balance ones total portfolio by spreading the risk throughout a variety of investments, rather than putting all eggs into a basket. Besides that, trading derivatives can be a good short term investment. Compared to some stocks and bond, derivatives is an financial instrument that can pay off in a shorter time frame such as days, weeks, or a few months. Stock and bonds are long-term investments and may over the course of many years. As the shorter turnaround time, derivatives can be a good way break into the market and mix short and long-term investments. (Siems, 1997) Numerous resources are available for learning about derivatives trading and many options are available. Hence derivatives are variety and flexibility, this point of view was supported by Mike Singh, 2010. Derivatives can derive profit from changes in equity markets, currency exchange rate, interest rates around the world. It also include the commodities changes in global supply and demand such as precious and industrial metals, agricultural products, and energy products such as petroleum and natural gas. This show that derivatives trading are available on a global scale. Getting involved in the global economy opens international options that may not be available through the traditional stock market. From the points given above, he concluded that there are three reasons for derivatives trading. First, trading derivatives are lesser risk than other trades. Second, trading derivatives are a good short term investment. Third, trading derivatives are variety and flexibility. Hence, derivatives trading may be a good trading option if someone are looking outside of trading traditional stocks and bonds. The International Swaps and Derivatives Association, Inc. (ISDA) announced the results of a survey done on the derivatives usage by the worlds 500 largest companies. According to the survey, 94% of these companies use derivative instruments to hedge and manage their financial risks in business. The foreign exchange derivatives are the most widely used instruments with total 88% of the sample, followed by interest rate derivatives which is 83% and commodity derivatives. There are two benefits which are most widely recognised attributed to derivative instruments, risk management and price discovery. Risk management could be the most vital purpose of the derivatives market. Derivatives also used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect, bearing extra risk by speculations. (Kuhlman, 2009) Price discovery is the prediction of information about future cash market prices through the futures market. There is a relationship between an assets current (spot) price, its futures contract price, and the price that people expect to prevail on the delivery date. By using the information contained in futures prices today, market observers can form estimates of what the price of a given commodity will be at a certain time in the future. Futures markets serve a social purpose by helping people make better estimates of future prices, so that they can make consumption and investment decisions more wisely. (Sorid, n.d) The derivatives market are broadly classified into three uses: Hedging Speculation Arbitrage Hedging Hedging is a way to enter into transactions that expose the entity to risk and uncertainty that fully or partially offsets one or more of the entitys other risks and uncertainties. (Elliot Elliot, 2005) One reason why companies attempt to hedge these price changes is because they are risks that are peripheral to the central business in which they operate. Hedging also refers to managing risk to an extent that makes it bearable. (Kameel, 2008) Equity Hedging Traders can use derivatives to hedge or mitigate risk in the stock market. Entering into a derivative contract can cover part or all of the losses if the value of their underlying position moves in the opposite direction. For equity forward contracts, where the underlying asset is a single stock, a portfolio of stocks, or a stock index, work in much the same manner as other forward contracts. An investor who wishes to sell 100 shares of BAT stock 90 days from now and wishes to avoid the uncertainty about the stock price on that date, could do so by caking a short position in a forward contract covering 100 BAT shares. A dealer might quote a price of RM48 per share, agreeing to pay RM4,800 for the 100 shares 90 days from now. The contract may be deliverable or settled in cash as described above. The stock seller has locked in the selling price of the shares and will get no more if the price (in 90 days) is actually higher, and will get no less it the price actually lower. (Sharma, 2009) For equity future example, an individual stock trader can minimise the stock trading risk by hedging using futures market (Exchange-traded derivatives). A stock trader is extremely aware of economy downturn. If the trader expected an economy downturn is coming which will cause the share price to drop, the trader can protect against down fall of stocks equity by opening a short position of the FTSE Bursa Malaysia KLCI Futures (FKLI) to hedge against his stock portfolio. So if the economy downturn does happen, the trader will gain profit from the FKLI. However, there will be a loss if the trader close the position of the stock during the economy downturn, but the gain from the FKLI will cover some or over the losses from the stock market. Thus, this can reduce the risk by FKLI futures hedging. (Copeland, et al., 2004) For stock option contracts, one call priced at RM6 with a strike price of RM30 gives the holder the right to purchase 100 shares of the stock at RM30 per share until the exercise date. The contract has a money value of RM600 (RM6 x 100 shares). For put options. the concepts are the same, except that the option gives the holder the right to sell 100 shares of the stated stock at RM30 per share through the exercise date. Commodity Hedging Commodity is a physical substance which there is demand, such as basic resources and agricultural. The most popular commodities in Malaysia include CPO, gold, tin, rubber and latex. (Amadeo, 2003) For instance, an airline company which the fuel is the biggest cost item for an airline taken care of, might want to get protection against the fuel price crisis. The airline company might enter into a future contract to hedge the fuel price. They will sign up a future contract with the fuel supplier (OTC derivative), promising that they will buy a certain amount of fuel at a certain price for the next certain months. The contract will definite the price that the airline company to pay for buying the fuel in future. In case the fuel price go higher than the contract price, then the fuel will have a cheaper price. If the fuel price gone down without the airline company expectation, which mean the contract price is higher than the market price, in that incident, the airline company might not want to exercise the contract price. In return, the airline company need to pay certain of fund to the fuel supplier as the contract fee. (Larry, 2005) Malaysian Airline System Berhad (MAS) announced a RM1.34 billion fuel hedge gain in the second quarter ended 30 June 2009. (Francis, 2009) Idris Jala (2009), the Managing Director and Chief Executive Officer of Malaysia Airlines said that he had decided not to unwind the fuel hedges so that the company can remain protected against the volatile fuel prices. MAS had hedged 47% of its fuel requirement at USD103/ bbl WTI for the year ended 2009 from 31 March 2009. Further highlighting the volatility of fuel prices, the fuel price increased 47% since April 2009, those airlines that did not hedge will be affected by the fuel price increasing, said Idris Jala, 2009. While MAS fuel bill increasing in tandem with the fuel price, MAS total fuel bill will be lower as the gains from the fuel hedges will partly offset the higher fuel cost. Foreign exchange (Forex) Hedging In international trading, dealings with forex play a significant role. There will be a significant impact on business decisions and outcomes if got any fluctuations in the forex rate. Many international trade and business dealings are shelved or become unworthy due to significant exchange rate risk embedded in them. Therefore, companies will use forex hedging with forwards, future, option. (Joseph Nathan, 1999) Forex hedging with forwards Forex forward rate is an agreement between two parties (OTC derivatives) to fix the exchange rate for a future transaction. In Malaysia, there are some banks do provide Forward Rate Agreements (FRA) service such as Bank Islam Malaysia, Maybank, EON Bank Group, CIMB Bank Group, HSBC Bank Malaysia, etc. A company simply transfer the risk to the bank when they entering into a FRA with a bank. Of course the bank internally will do some kind of arrangement to manage the risk. (Currencies Direct, 2010) For instance, a Malaysian construction company, Ban Lee Hin Engineering Construction Sdn Bhd just won a contract to build a bridge road in Philippines. The contract is signed for 10,000,000 Peso and would be paid for after the completion of the work. This amount is consistent with Ban Lee Hin minimum revenue of RM750,000 at the exchange rate of RM7.50 per 100 Peso. However, since the exchange rate could fluctuate and end with a possible depreciation of Peso, Ban Lee Hin enters into a forward agreement with Philtrust Bank in Philippines to fix the exchange rate at RM7.50 per 100 Peso. The forward contract is a legal agreement, and therefore constitutes an obligation on both parties. The Philtrust Bank may have to find a counter party for such transaction, either a party who wants to hedge against the appreciation of 10,000,000 Peso expiring at the same time, or a party that wishes to speculate on an increasing the value of Peso. If the Philtrust Bank itself plays the counter party, t hen the risk would be borne by the bank itself. By entering into a forward contract, Ban Lee Hin is guaranteed of an e Demand of Derivatives Investment in Malaysia Demand of Derivatives Investment in Malaysia ABSTRACT This research investigates the demand of derivatives investment by Malaysia. On the whole the main purpose of this dissertation is to study, analyse and discuss about the usage of derivatives by Malaysian company or individual resident. The research paper is divided into five chapters. Chapter 1 introduces derivatives and identification of the research problems. Research objectives and questions are given briefly. Chapter 2 provides an overview of the literature reviewed throughout the research. A detailed description by past researchers is presented. The further detail of each derivative contract are summarised. Chapter 3 deals with the work flow of this study. The research methodologies includes research design and procedure, data collection method, and statistical data analyses method. Data collection from secondary data is analysed to form a theoretical framework. Chapter 4 present the analysis and result of research topic. Tables, diagrams, charts are use to illustrates the findings. Finally, Chapter 5 concludes the dissertation with summary all of the chapters. CHAPTER 1 INTRODUCTION Introduction A derivative is a financial instrument that is derived from assets, indexes, events, value or condition (known as the underlying asset). Rather than trading or exchanging the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset. (David, 2003) From definition taken from International Accounting Standards 39 (IAS39) Financial Instruments Recognition and Measurement, a derivative is a financial instrument whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rate, a credit rating or credit index or similar variable. (IAS, 2009) Forward contracts, futures contracts, options and swaps are the most common types of derivatives. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative. (Khanna, 2010) Research Problem The research problem of this study is to uncover the derivative investment as a financial instrument for business and gaining capital. The usage of derivatives is getting larger nowadays. However, there is some criticism regarding the derivative in negative aspect as well. Research Objectives The following are the specific objective to achieve under this research To study the factor influence Malaysian to invest in the derivatives investment. To identify the method of reduction in risk under the usage of derivatives. Research Questions Questions that are bound to be answered throughout the research are: Why do investors select derivative investment? How can derivatives instrument be use? What is the types of derivative that are highly demanded in Malaysia? How does reduction in risk achieve by using derivatives instrument? How do traders speculate in order to make profit via derivatives? Scope of Study The scope of study for this research focuses on the derivative instruments. Significance of Study The significance of this study is to give the investors an idea as how the derivative instruments work in the business world. It also a study that helps businessman to reduce their risk and speculator to gain short-term money through derivatives. CHAPTER 2 LITERATURE REVIEW Introduction of Derivatives The first derivatives contract was listed in the year 1865 by the Chicago Board of Trade (CBOT) in USA. Those exchange traded derivatives contracts were called futures contracts. In April 1973, the Chicago Board of Options Exchange (CBOE) was set up for the purpose of options trading. The Standard Poors 500 Index in USA currently is the most popular stock index futures contract in the world. (HSBC Invest Direct, 2010) There are two distinct groups of derivative contracts, which tell apart the way they traded in the market. Over-the-counter (OTC) derivative is a type of financial derivative that negotiated directly between two parties rather than through an exchange centre. The OTC derivative market is the largest market for derivatives, and is unregulated with respect to disclosure of information between the parties. (Essaddam, et al., 2008) Exchange-traded derivative (ETD) is a type of financial derivative that has its transaction traded via specialised derivatives exchanges or other exchanges, such as Bursa, CBOE, Eurex etc. Derivatives exchange act as an intermediary to all related transactions, ETD is usually traded in standardised derivative contracts. (ISDA, 2009) There are few major derivative contracts which consist of forward, future, option and swap contract. Forward Contract A forward contract is a contract negotiated at present that gives the contract holder both the right and full legal obligation to conduct a certain asset transaction at a specific future time, amount, price and other terms. (Schweser, 2002) The party to the forward contract that agrees to buy the financial or physical asset has a long forward position and is called the long. The party to the forward contract that agrees to sell or deliver the asset has a short forward position and is called the short. (David, 2003) For instance, Lam Soon Company signed a contract under which they agree to buy a tonne of crude palm oil (CPO) from their supplier 30 days from now at a price of RM2,500. Lam Soon Company is the long and the supplier is the short. Both parties have removed uncertainty about the price they will pay or receive for the CPO in the future date. If 30 days from now CPO are trading at RM2,580 per tonne, the short (supplier) must deliver the CPO to the long (Lam Soon) in exchange for a RM2,500 payment. If CPO are trading at RM2,420 on the future date, the long must purchase the CPO from the short for RM2,500, the contract price. Forward contract is usually negotiated directly between the two parties, therefore it is an OTC market forward contract. The forward contracts have the advantage of being flexible (the parties design the contract to meet their specific needs). However, Stalla (2000) had concluded that forward contracts have three major disadvantages: They are illiquid. Because the terms of a forward contract are usually designed to meet the specific needs of the contracting parties, it is difficult for either one of them to close out its side of the contract, either by selling it to a third party or by getting the counterparty to cancel the agreement without demanding an excessive buyout price. They have credit risk. Forward contracts usually require neither party to the agreement to post collateral, make any mark-to-market transfers of funds over the life of the contract, or make any margin deposits to give assurance that it will be able fulfil its obligations under the terms of the agreement (although such clauses could be inserted into a forward contract by mutual consent of the parties). Consequently, a typical forward agreement is based on trust, each party to the agreement must trust that its counterparty will perform in the agreed-upon manner. This exposes both contracting parties to the risk that the counterparty might default on its obligation. They are unregulated. No formal body has the responsibility of setting down rules and procedures designed to protect market participants. Generally, the only protection given to parties involved in the OTC forward market is that of contract law. Future Contract A futures contract is a forward contract that has been highly standardised and closely specified. As with a forward contract, a futures contract calls for the exchange of some goods at a future date for cash, with the payment for the goods to occur at the future delivery date. The purchaser of the contract is to receive delivery of the good and pay for it, while the seller of the contract promises to deliver the goods and receive payment. The payment price is determined at the initial time of the contract. (Adhar, 2006) Futures contracts are usually traded on futures exchanges (ETD), rather than in an OTC environment. Hence, futures contracts are unique forms of forward contracts that designed to reduce the disadvantages of forward contracts. The future contracts terms have been standardised so that can be traded in a public marketplace. Due to standardisation, futures contracts are lesser flexible than forward agreements, hut it also makes them more liquid. (Copeland, et al., 2004) According to Schweser (2006) points, in order to safeguard the clearinghouse, which act as the buyer to every seller and the seller to every buyer, the exchange requires traders to post margin and settle their accounts on a daily basis. Before trading, the trader must deposit funds, called margin with their broker (who, in return, will post margin with the clearinghouse). The purpose of margin is to ensure that traders will perform their contractual obligations. There are three types of margin. The first deposit is called the initial margin which had been explained above. Any losses for the day are removed from the traders account and any gains are added to the traders account. If the margin balance in the traders account falls below a certain level (called the maintenance margin), the trader will get a margin call and have to deposit more money (called the variation margin) into the account to bring the account back up to the initial margin level. (Stalla, 2000) For instance, Lam Soon buys a 30 days future contract of CPO at RM2,500 per tonne. The initial margin was RM2,500. The next day the price of CPO plummetsRM50. Therefore Lam Soon has just lost RM50. At the end of the day, the daily settlement process marks Lam Soons margin account to market by taking RM50 out of the account leaving a balance of RM2,450. Now, assume the maintenance margin level is at 70%. If Lam Soons margin balance falls to or below RM1,750, Lam Soon gets a margin call and has to bring their account back up to the initial RM2,500 level. There are several advantages to using forward or futures contracts as a substitute for trading in the spot markets of commodities: (Sorid, n.d) Transaction costs are much lower and liquidity is better in the futures markets than in the spot markets. There is no need to store or insure physical assets if forward or futures contracts are used. Forward and futures contracts may be sold short, as well as bought long. This may not always be possible if one were trading the actual underlying assets themselves. There is a great deal of leverage in forward and futures contracts. A trader can control on a large position with only a small initial deposit. If the futures contract with a value of RM100,000 has an initial margin of RM10,000 then one percent change in the futures price which is RM1,000, would result in a 10 percent change relative to the traders initial costs. Since there is no margin is required with a forward contract, control can be obtained with no money down. There is flexibility, especially with forward contracts, that can be used to create specialized risk/return patterns. Price risk can be accepted or eliminated by using forward or futures contracts without compromising any holdings of an underlying asset. Thus, a jeweller can sell the price risk associated with holding an inventory of gold without actually disturbing the physical inventory itself. This makes it easy to adjust ones financial exposure to commodity markets, even if ones physical exposure must be maintained for business purposes. The primary disadvantage of using futures contracts for speculative trading would involve a great deal of leverage, so that large losses can occur. In effect, holding a futures position with only the margin requirement on deposit in a brokerage account is the same thing as having purchased the underlying asset on margin. Another closely related disadvantage is that futures (but not forward) contracts subject the trader to margin calls to meet daily settlement obligations. This requires participants to have a cash reserve that can be drawn upon to meet these demands for additional cash. (Sorid, n.d) Option Contract According to the Chicago Board Options Exchange (CBOE) 2008, an option is a contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. The owner of a call option has the right, but not the obligation to purchase the underlying good at a specific price for a specified time period. While the owner of a put option has the right, but not the obligation to sell the underlying good at a specific price for a specified time period. To qualify these rights, the options owner has to pay a premium to the seller of the option for buying the option. (CBOE, 2008) The seller of the option is called an option writer. Options have four possible positions: (CBOE, 2008) Call option buyer Call option writer or seller Put option buyer Put option writer or seller In these contracts, the rights are with the owner of the option. The buyer that pays the premium receives the right to buy or sell the underlying asset on specific time and price. The writer or seller of the option receives payment and obligates to sell or purchase the underlying asset as agreed in the contract of the option owner. (Akmeemana, n.d.) For instance, BAT share is selling at RM50 while its call option is at RM10. The call option can be exercised for RM45 with a life span of 5 months. The exercise price of RM45 is called the options strike price. The RM10 price of the option is called the option s premium. If the option is purchased for RM10, the buyer can purchase the stock from the option seller over the next 5 months for RM45. The seller, or writer of the option gets to keep the RM10 premium no matter what the stock does during this time period. If the option buyer exercises the option, the seller will receive the RM45 strike price and must deliver to the buyer a share of BAT stock. If the price of BAT stock falls to RM45 or below, the buyer are not obliged to exercise the option. Note that the option holders can only exercise their right to act if it is profitable to do so. The option writer, however, has an obligation to act at the request of the option holder. A put option is the same as a call option except the buyer of the put has the right to sell the put writer a share of BAT at any time during the next five months in return for RM45. The owner of the option is the one who decides whether to exercise the option or not. If the option has value, the buyer may either exercise the Option or sell the option to another buyer in the secondary options market. (Tatum, 2010) For short-term investment horizons, options trading can produce lower transaction costs than the outright purchase and sale of the underlying assets themselves. Besides, options can he used to execute some tax strategies. (Skousen, 2006) Swap Contract A swap is an agreement between two or more parties to exchange sets of cash flows over a period in the future. The parties that agree to the swap are known as counterparties. The cash flows that the counterparties make are generally tied to the value of debt instruments or the value of foreign currencies. Therefore, the two basic kinds of swaps are interest rate swaps and currency swaps. (Schweser, 2006) Unlike the highly structured futures and options contracts, swaps are custom tailored to fit the specific needs of the counterparties. The counterparties may select the specific currency amounts that they wish to swap, whereas exchange traded instruments have set values. Similarly, the swap counterparties choose the exact maturity that they need, rather than maturity dates set by the exchange. This flexibility is very important in the swap market, because it allows the counterparties to deal with much longer horizons than can be addressed through exchange-traded instruments. Also, since swaps are not exchange traded, it gives the participants greater privacy, and they escape a great deal of regulation. (Hodgson, 2006) According to Hodgson (2996), the advantages of swap agreements over conventional traded derivatives can be summarised as below: Swaps are highly flexible and can be custom made to fit the requirements of the parties entering into them. The swap market is virtually unregulated, in contrast to the highly regulated futures market. This could change, however, since regulators usually abhor a regulation vacuum and probably will, eventually, seek to bring the market under their protection. The cost of transacting in the swap market is low. Swaps are private transactions between two parties. Often, swaps are off-balance sheet transactions that can be used, for example, to enable a firm to reposition its balance sheet quickly without alerting competitors. The disadvantages of swaps include: Because swaps are agreements, a party who wants to enter into a particular swap must find a counterparty that is willing to take the other side of the swap. Swaps can be illiquid; once entered into, a swap cannot easily be terminated without the consent of the counterparty. Because there are no margin deposits or a clearinghouse that help ensure, or will guarantee, that the agreements will be honoured, the integrity of swaps depends solely upon the financial and moral integrity of the parties that have entered into them. In other words, the swaps have more credit risk than futures contracts. The Demand of Derivatives Based on the statistics of the Bursa Malaysia Derivatives Berhad, the total exchange of derivatives during the year 2009 was up to 6,137,827 contracts. The crude palm oil futures (ETD) is the most liquid future in Malaysia, total of 4,008,882 contracts with average of 334,074 contracts traded monthly during year 2009. (Bursa Malaysia, 2010) Figure 2.1 shows the monthly price traded and the monthly volume of crude palm oil futures (FCPO) traded in Bursa Malaysia from year 1985 until March 2010. The green colour bar represents the price close on the month end was above the open price open on the beginning of the month, while red colour bar indicates the closing price is below the open price. Figure 2.1 indicates that there was less transaction traded during the eighth decade of the 20th century until 2002. The number of FCPO contract traded keep on increasing especially start from year 2002, and is quite popular in recent year, the volume of transaction exceeded 150,000 contracts each month. FCPO is extremely high volume in 2008 because the global oil price is at its peak at USD145 per barrel. FCPO traded at its pinnacle in November 2006 which recorded 360,650 contracts in a month. This showing that the FCPO is high in demand in Malaysia as compare to previous years. Figure 2.2 shows the history chart of FTSE Bursa Malaysia Kuala Lumpur Composite Index Futures (FKLI) traded in Bursa Malaysia from December 1995 until March 2010. There was a high trading volume during the 1997 Asian Financial Crisis due to the high fluctuate of the Kuala Lumpur Composite Index (KLCI). 148,318 future contracts were traded in September 1998. There were at least 40,000 future contracts traded in the following years of 1998. The volume traded increasing rapidly in 2007 as Malaysian economy recovers. KLCI went as high as 1400 points during the last 3 years. 302,321 future contracts were trade in August 2007, which is the highest volume recorded in history. Based on Figure 2.2 trading volume trend, it can be concluded that speculators were heavily involve in trading FKLI in 1997, where the Asian Financial Crisis tragedy occurred and in its peak in 2007 . KLCI fluctuation was elevated during these two event (circled in the chart). For the global market, the market for options developed rapidly in early 80s. The number of option contract sold each day exceeded the daily volume of shares traded on the New York Stock Exchange. According to the Bank for International Settlements, the total OTC derivative outstanding notional amounted to USD605 trillion as of June 2009. Factors That Influence Derivatives Trading Mike Singh (2010) said that trading derivatives will have lesser risk than other trades because investor are not buying into the company or buying the underlying product. Instead, the risk is placed on performance. Due to its low risk factor, investment and commercial banks, end users such as floor traders, corporations, and mutual and hedge funds, are major types of firms that utilize derivatives. A much lower initial investment start up in derivatives trading, derivatives give an edge to those who decline or do not want to invest as much as is required to purchase stock. Derivatives can be a good way to balance ones total portfolio by spreading the risk throughout a variety of investments, rather than putting all eggs into a basket. Besides that, trading derivatives can be a good short term investment. Compared to some stocks and bond, derivatives is an financial instrument that can pay off in a shorter time frame such as days, weeks, or a few months. Stock and bonds are long-term investments and may over the course of many years. As the shorter turnaround time, derivatives can be a good way break into the market and mix short and long-term investments. (Siems, 1997) Numerous resources are available for learning about derivatives trading and many options are available. Hence derivatives are variety and flexibility, this point of view was supported by Mike Singh, 2010. Derivatives can derive profit from changes in equity markets, currency exchange rate, interest rates around the world. It also include the commodities changes in global supply and demand such as precious and industrial metals, agricultural products, and energy products such as petroleum and natural gas. This show that derivatives trading are available on a global scale. Getting involved in the global economy opens international options that may not be available through the traditional stock market. From the points given above, he concluded that there are three reasons for derivatives trading. First, trading derivatives are lesser risk than other trades. Second, trading derivatives are a good short term investment. Third, trading derivatives are variety and flexibility. Hence, derivatives trading may be a good trading option if someone are looking outside of trading traditional stocks and bonds. The International Swaps and Derivatives Association, Inc. (ISDA) announced the results of a survey done on the derivatives usage by the worlds 500 largest companies. According to the survey, 94% of these companies use derivative instruments to hedge and manage their financial risks in business. The foreign exchange derivatives are the most widely used instruments with total 88% of the sample, followed by interest rate derivatives which is 83% and commodity derivatives. There are two benefits which are most widely recognised attributed to derivative instruments, risk management and price discovery. Risk management could be the most vital purpose of the derivatives market. Derivatives also used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect, bearing extra risk by speculations. (Kuhlman, 2009) Price discovery is the prediction of information about future cash market prices through the futures market. There is a relationship between an assets current (spot) price, its futures contract price, and the price that people expect to prevail on the delivery date. By using the information contained in futures prices today, market observers can form estimates of what the price of a given commodity will be at a certain time in the future. Futures markets serve a social purpose by helping people make better estimates of future prices, so that they can make consumption and investment decisions more wisely. (Sorid, n.d) The derivatives market are broadly classified into three uses: Hedging Speculation Arbitrage Hedging Hedging is a way to enter into transactions that expose the entity to risk and uncertainty that fully or partially offsets one or more of the entitys other risks and uncertainties. (Elliot Elliot, 2005) One reason why companies attempt to hedge these price changes is because they are risks that are peripheral to the central business in which they operate. Hedging also refers to managing risk to an extent that makes it bearable. (Kameel, 2008) Equity Hedging Traders can use derivatives to hedge or mitigate risk in the stock market. Entering into a derivative contract can cover part or all of the losses if the value of their underlying position moves in the opposite direction. For equity forward contracts, where the underlying asset is a single stock, a portfolio of stocks, or a stock index, work in much the same manner as other forward contracts. An investor who wishes to sell 100 shares of BAT stock 90 days from now and wishes to avoid the uncertainty about the stock price on that date, could do so by caking a short position in a forward contract covering 100 BAT shares. A dealer might quote a price of RM48 per share, agreeing to pay RM4,800 for the 100 shares 90 days from now. The contract may be deliverable or settled in cash as described above. The stock seller has locked in the selling price of the shares and will get no more if the price (in 90 days) is actually higher, and will get no less it the price actually lower. (Sharma, 2009) For equity future example, an individual stock trader can minimise the stock trading risk by hedging using futures market (Exchange-traded derivatives). A stock trader is extremely aware of economy downturn. If the trader expected an economy downturn is coming which will cause the share price to drop, the trader can protect against down fall of stocks equity by opening a short position of the FTSE Bursa Malaysia KLCI Futures (FKLI) to hedge against his stock portfolio. So if the economy downturn does happen, the trader will gain profit from the FKLI. However, there will be a loss if the trader close the position of the stock during the economy downturn, but the gain from the FKLI will cover some or over the losses from the stock market. Thus, this can reduce the risk by FKLI futures hedging. (Copeland, et al., 2004) For stock option contracts, one call priced at RM6 with a strike price of RM30 gives the holder the right to purchase 100 shares of the stock at RM30 per share until the exercise date. The contract has a money value of RM600 (RM6 x 100 shares). For put options. the concepts are the same, except that the option gives the holder the right to sell 100 shares of the stated stock at RM30 per share through the exercise date. Commodity Hedging Commodity is a physical substance which there is demand, such as basic resources and agricultural. The most popular commodities in Malaysia include CPO, gold, tin, rubber and latex. (Amadeo, 2003) For instance, an airline company which the fuel is the biggest cost item for an airline taken care of, might want to get protection against the fuel price crisis. The airline company might enter into a future contract to hedge the fuel price. They will sign up a future contract with the fuel supplier (OTC derivative), promising that they will buy a certain amount of fuel at a certain price for the next certain months. The contract will definite the price that the airline company to pay for buying the fuel in future. In case the fuel price go higher than the contract price, then the fuel will have a cheaper price. If the fuel price gone down without the airline company expectation, which mean the contract price is higher than the market price, in that incident, the airline company might not want to exercise the contract price. In return, the airline company need to pay certain of fund to the fuel supplier as the contract fee. (Larry, 2005) Malaysian Airline System Berhad (MAS) announced a RM1.34 billion fuel hedge gain in the second quarter ended 30 June 2009. (Francis, 2009) Idris Jala (2009), the Managing Director and Chief Executive Officer of Malaysia Airlines said that he had decided not to unwind the fuel hedges so that the company can remain protected against the volatile fuel prices. MAS had hedged 47% of its fuel requirement at USD103/ bbl WTI for the year ended 2009 from 31 March 2009. Further highlighting the volatility of fuel prices, the fuel price increased 47% since April 2009, those airlines that did not hedge will be affected by the fuel price increasing, said Idris Jala, 2009. While MAS fuel bill increasing in tandem with the fuel price, MAS total fuel bill will be lower as the gains from the fuel hedges will partly offset the higher fuel cost. Foreign exchange (Forex) Hedging In international trading, dealings with forex play a significant role. There will be a significant impact on business decisions and outcomes if got any fluctuations in the forex rate. Many international trade and business dealings are shelved or become unworthy due to significant exchange rate risk embedded in them. Therefore, companies will use forex hedging with forwards, future, option. (Joseph Nathan, 1999) Forex hedging with forwards Forex forward rate is an agreement between two parties (OTC derivatives) to fix the exchange rate for a future transaction. In Malaysia, there are some banks do provide Forward Rate Agreements (FRA) service such as Bank Islam Malaysia, Maybank, EON Bank Group, CIMB Bank Group, HSBC Bank Malaysia, etc. A company simply transfer the risk to the bank when they entering into a FRA with a bank. Of course the bank internally will do some kind of arrangement to manage the risk. (Currencies Direct, 2010) For instance, a Malaysian construction company, Ban Lee Hin Engineering Construction Sdn Bhd just won a contract to build a bridge road in Philippines. The contract is signed for 10,000,000 Peso and would be paid for after the completion of the work. This amount is consistent with Ban Lee Hin minimum revenue of RM750,000 at the exchange rate of RM7.50 per 100 Peso. However, since the exchange rate could fluctuate and end with a possible depreciation of Peso, Ban Lee Hin enters into a forward agreement with Philtrust Bank in Philippines to fix the exchange rate at RM7.50 per 100 Peso. The forward contract is a legal agreement, and therefore constitutes an obligation on both parties. The Philtrust Bank may have to find a counter party for such transaction, either a party who wants to hedge against the appreciation of 10,000,000 Peso expiring at the same time, or a party that wishes to speculate on an increasing the value of Peso. If the Philtrust Bank itself plays the counter party, t hen the risk would be borne by the bank itself. By entering into a forward contract, Ban Lee Hin is guaranteed of an e