Foreign Direct Investment

Foreign Direct Investment has risen drastically in the last twenty years in many developing countries, and is currently considered as a source of economic stimulus in these nations (Carkovic  Levine 2002, p.48). The Direct Foreign Investment is mostly from the Asian companies as well as from other countries in the EU. The growth in the Foreign Direct Investment coincides with the reduction in the differences in economic growth of developing and developed countries (Mwilima, 2003, p.54). Libya has also not been left out in the growth of Direct Foreign Investment in its economy.

This paper is interested in analyzing the impact of Foreign Direct Investment in small and medium business enterprises in Libya. Looking at the trend in the recent years, research has shown that there has been increased Foreign Direct Investment by foreign companies in the small and medium businesses in Libya. There has been increased influence of this investment in the business arena in the Libyas economy. This paper will try to explore various roles played by the Direct Foreign Investments and their impacts in the businesses operations.

Research Problem
There has been increased Foreign Direct Investment in the small and medium business enterprises in Libya (Otman Karlberg, 2007, p.246). However, there is no adequate information available that can be used to gauge the performance of these investments in the overall economy of the country. Due to this problem in the country economic planners find it difficult to account for the impacts of these Foreign Direct Investments in the businesses. The information gap has made it difficult for government in planning. The Libya government is not sure whether to encourage or discourage these investments in the economy. This paper will try to bridge the information gap so that the government can have adequate information for national planning. 

Objective of the Research
Broad objective
To determine the Impact of Foreign Direct Investment in Small and medium business enterprises in Libya
Specific objectives
To determine the effect of Foreign Direct Investment in the growth and development of small and medium business enterprises in Libya
    
To determine the major types of business that Foreign Direct Investment has been invested in.
To determine the major countries which are source of Foreign Direct Investment invested in small and business enterprises in Libya
Hypothesis
    
Direct foreign investment has a positive impact in the growth and development of small and medium enterprise in Libya.
Most of direct foreign investment invested in small and medium business is channeled to the industrial sub-sector.
Most of the Direct Foreign Investment invested in small and medium scale business enterprises in Libya originates from EU.

Literature Review
 Direct foreign investment (FDI) is said to play an important role in the growth and development of business in the developing countries (African Development Bank 2004, p.12). Many studies have shown that it provides business access to new technology, cheaper production facilities, and new management skills (Dunning  Narula, 1999, p.26). Foreign Direct Investment is where a firm from one country makes physical investment in another country (Goldstein, 2003, p.14).

Supporters of foreign investments point out that that Direct Foreign Investments gives benefits to both the giving and the receiving countries. They argue that there are usually mutual benefits that accrue from these investments. Opponents of DFI point out that multinationals give stiff competition to business in weaker economies thus forcing the local enterprises out of business.

There has been rapid growth in the FDI in the developing countries, especially in Africa, which is remarkable before FDI was held with suspicion which made many countries to put strict regulations on its use in financing project (Pigato, 2000, p.24). Globalization and trade liberalization have made the FDI to grow in the recent years. The balance of payment data shows that between 1988 and 1990 the annual FDI investment in middle income countries grew from 17bn to 139bn. The East Asia countries attract the highest amount of FDI despite the current financial crisis (UNCTAD 1995, p.15).

Most developing countries have come to a consensus that FDI can be an important resource to the growth and development of weak economies (United Nations Conference on Trade And Development 2002, p 8).  This realization has made many countries to start competing for FDI, which has made these states to set up bodies that encourage the flow of FDI and also lessen the regulations governing FDI in their countries (United Nations Conference on Trade And Development, 1999, p.21).

Libya is a country that had for a long time blocked the FDI flow in its economy, which according to research shows that it affected the economy in a negative way. In the recent years, the country has lifted these regulations and encouraged the FDI flow in the economy, especially in the small and middle level business enterprises.

RESEARCH METHODOLOGY
This chapter will focus on research methodologies adopted by the researcher, which involve data collection methods, procedures, sampling techniques used, population size and the administration of the methodologies. In this view, the researcher shall be able to obtain the required information in a systematic manner.

Research Design
A case study approach will be adopted which will involve intensive analysis of various aspects of FDI and the role they play in small and medium scale business in Libya. The overall purpose of a case study is to obtain comprehensive information about the research object. Its primary advantage is the opportunity it affords for thorough and detailed examination analysis of research problem so that findings can be applied directly to object inquiry. It also allows precise judgments of facts and cause of certain phenomena.

Target Population
It is imperative that the population to be studied before the research is carried out.The research will adopt the method of choosing entrepreneurs of small and mediums businesses through random sampling technique. The target population will be 300 small and medium size enterprises to adequately analyze the impact of FDI in their operations. The sampling size will be based on purposive sampling whereby a sample size of 50 small and medium size enterprises will be used for the study. The sample size is chosen to ensure that adequate information will be obtained for the study. It is meant to enhance convenience, effectiveness and efficiency as well as minimizing chances of errors in data collection and analysis. Also, the research boundaries within the firms and implies that the research will be carried out fairly and easily within the given time limit and financial constraints.

Sampling Techniques and Procedures
Quota sampling method will be adopted in obtaining the sample from each enterprise which is intended to constitute the entire sample required by the researcher, the study will be confined to selected participants to ensure that the research is thorough and has a manageable sample size. Further, it meant to give comprehensive and accurate information collected and therefore makes the sample size a representative of the population under study.

Financial Decision Making

PurposeTo provide a critical review on the development and evolution of different appraisal methods, their significance to a company and the need for the company to revise the existing policy for evaluating future capital projects. RecommendationThe company should use DCF techniques for investment appraisal.
Prepared byManaging Director INVESTMENT APPRAISAL DECISIONS A BRIEF REVIEW

Companies in todays world are always looking at ways to develop and change. This compels the senior management to be faced with a variety of different proposals. This is of critical importance as the companies only have limited resources available with investors only willing to offer limited amounts of finance. The managers are therefore face the need to decide which proposals to undertake. Investment appraisal refers to a process of identifying investments that result in maximizing the profits of a company from its investments, resulting in an increase to the wealth of shareholders.
The has been defined as
The theory of capital budgeting reconciles the goals of survival and profitability by assuming that management takes as its goal, the maximization of the market value of the share holders wealth via the maximization of the market value of ordinary share (Drury 2000)

The investment appraisal decisions usually involve planning for the expenditures required to undertake a project (initial and over its total life), and the revenues a company expects to generate from such investment. Investment appraisal can also be defined as a trade off between current funds for future benefits.
Almost every capital investment project passes through 3 stages of development
Project definition
Financial valuation
Implementation and review.
The techniquesmethods generally used by the managers for evaluating capital budgeting decisions can be categorized into two basic methods

Traditional Non-DCF methods
Payback method.
Accounting Rate of Return (ARR).
DCF methods
Net Present Value method.
Internal Rate of Return.
Discounted payback.

NEED FOR HAVING A CORPORATE POLICY FOR INVESTMENT APPRAISAL
The process of making capital investment decision policy is critical to companies because it has an impact on the availability of resources and shareholders wealth. It is of utmost importance that a company should make best possible use of its resources and make best possible decisions. This is only possible when the financial managers are aware of the risk and uncertainties in the environment. Such decisions necessarily involve an element of risk as there is always some uncertainty relating to the future cash flows of the project and the companys cost of capital.

It is therefore necessary for a company to have a corporate policy for the identification of investment appraisal projects that takes in to account the related risks and expected cash flows associated with the project and provide information that is relevant for decision making.

SIGNIFICANCE OF INVESTMENT APPRAISAL DECISIONS TO A COMPANY
Investment decisions are considered as the most critical aspect when defining success for a company. These decisions affect the future profitability and the availability of resources for a company. If not taken prudently they might endanger the continuity of a company and may exhaust availability of cheaper sources of finance for a company.  The success of many businesses mainly depends on the utilization of resources available to them. The choice of choosing between capital investment projects for a company starts with the objective of adding to the market value of the company by choosing viable investment and financing decisions.

The key responsibility of the financial managers is to select the most profitable choice among all the available capital investment options. This is critical to the companies in two ways first, such decisions have an effect on the operations and profitability of the company in periods beyond current year, secondly one of the major concepts in modern financial managements associates the market value of a company as equal to the discounted value of the future cash flows it expects to yield from its investments in projects.

For organizations, decisions regarding commitment of resources have implications on many aspects of operations in a corporation. Investment appraisal is not only critical to the financial managers but is also essential to people throughout the company.
The investors of a company prefer to get rich not poor, this is why they expect from the managers of the company to invest in every project that is expected to pay more than what it is actually going to cost. (Richard and Stewart 2007)

ANALYSIS OF THE INVESTMENT APPRAISAL METHODS

A) PAYBACK Payback method compares the amount of time a project takes to recoup its initial investment in other words, it is the period of time taken by a project to equate projects inflows to the projects outflows.
The payback method for evaluating investment appraisal projects is one of the most popular techniques used by managers. Payback method is mostly as a first screening method when deciding for investment in a capital project. The payback for a particular project is compared with the companys targeted payback.
This method however has certain drawbacks, such as
The method doesnt incorporate the effect of time value of money when comparing projects.
It ignores the future profitability of projects i.e. cash flows from the projects after it recoups its initial investment are not taken in to consideration at all.

It is unable to distinguish between projects with same payback period.
Payback method should not be used in isolation as it may cause the company to invest in projects that have a negative NPV.

B) ACCOUNTING RATE OF RETURN
This method attempts to calculate the rate of return an investment should yield if it has to be undertaken. If this rate exceeds the companys targeted rate of return the investment is undertaken.
This method provides the financial managers a quick and simple way of calculation and looks at the entire life of a project (investment), however there are certain disadvantages such as
It is based on accounting profits and not cash flows (accounting profits are based on certain cash and non cash income and expenses, or both)
It ignores the time value of money.

C) NET PRESENT VALUE
Net present value differentiate between products, recognizing the concept of time value of money, i.e. 1 received today worth more than a 1 received tomorrow. This is because 1 received today, can be invested by a company in a project that starts earning immediately. The method discounts (present value) the future cash flows that a company expects to earn from a project using it cost of capital. This present value is then compared with the present value of all the cash outflows (initial and subsequent), thus if the discounted value of the future cash flows exceed the required investment, the investment is considered worthwhile.

D) INTERNAL RATE OF RETURN
Internal Rate or Return (IRR) method of investment appraisal attempts to determine the total yield on an investment, by attempting to find a rate that equates the initial cost of an investment with its cash flows in the future years, i.e. it is the rate at which the NPV is zero. IRR is calculated using interpolation and rationalizes accepting the investments for which the IRR exceeds the target rate of return.
IRR is easily understood by both financial and non financial managers, however one of the drawbacks of IRR is that it ignores the relative size of the investment, i.e. two projects with different volumes of initial cash outlay and future cash inflows may have same IRR.

E) DISCOUNTED PAYBACK   
Discounted payback method takes in to account the time value of money and calculates the time for a project to pay for its initial investment based on the present value of the cash flows expected from the project. The method however, cannot estimate how profitable any investment would be.

F) OTHER METHODS
In addition to the techniquesmethods discussed above there are other advanced techniquesmethods for e.g. CAPM, which also account for the risk in an investment before analyzing it viability for the company.

SURVEYS OF CURRENT PRACTICES
Many survey authors and books have expressed concerns over the use, of techniques that do not use discounted cash flows, by the respondents. As Dopuch et al. (1974) states it seems reasonable that a discounting approach to investment analysis is to be preferred over a non-discounting approach.
Further Bierman and Smidt (1993) argued that measures which, do not involve the use of discounted cash flow method can give rankings of investments that are obviously incorrect.

Similarly, they concluded that non-discounting methods are inappropriate and that the net present value rule should be employed in preference to other techniques discounting cash flows. (Brealey and Myers 1991)
In a survey of large UK companies carrying on capital budgeting decisions, it has been noted that there has been a significant increase in the number of companies switching to Discounted Cash Flow (DCF) methods of investment appraisal for evaluating their capital investment decisions. They identified that 75 and 85 of UK firms are now applying Net Present Value (NPV) and Internal Rate of Return (IRR) respectively. (Pike 1996)

A most recent study in UK by Arnold and Hatzopoulus (2000) revealed that DCF techniques have taken over as most widely used techniques by larger firms they reported almost 96 of the firms using NPV or IRR techniques.

Based on the evaluation of the above discussed investment appraisal methods and current practices evident from various survey results it is an obvious step for the company to change its policy of evaluating investment proposals from traditional Pay Back and Accounting Rate of Return methods to DCF methods for investment appraisal as DCF techniques apply discounting arithmetic to the expected future cash slows from an investment to determine whether the investment is expected to earn a satisfactory return for the company.

They also offer a number of benefits over the other appraisal methods.
They explicitly and systematically incorporate the time value of money concept.
They take in to account all relevant cash flows of the project.
Payback method however can be used as the first screening method in conjunction with DCF methods of investment appraisal.

Also based on the discussion above, the company should undertake investment in the proposed project as it has a positive NPV of 5.088 million, with an IRR of 24.02 that is higher than the current cost of capital for the company.

Current Stimulus Package

The current financial crisis that we find ourselves in, today, referred to by many as an economic meltdown or credit crunch, is considered to rival the Great Depression of the last century. The beginnings of this crisis can be traced back to the sub-prime mortgages in the United States. Once considered by financial institutions as one of their more profitable operations, the sub-prime mortgage business started to unravel in the beginning of the year 2007. In February, the Federal Home Loan Mortgage Corporation (Freddie Mac) announced that it will no longer acquire the sub-prime mortgages and related securities with the highest risk levels. Soon after that, New Century Financial Corporation, a leading sub-prime mortgage lender in the United States, started proceedings for protection under the now infamous chapter 11 bankruptcy laws (Wall Street Journal 123).
   
To add to the woes, news came that the Federal National Mortgage Association (Fannie Mae) was facing a crisis too. Before going into further details of the economic turmoil created by the sub-prime mortgage crisis, it is important to understand what exactly sub-prime mortgages are and what exactly did these two corporations, central to the crisis, actually do.
   
Basically, the difference between a prime and a sub-prime mortgage stems from the credit of the borrower. In the United States, a borrower with a FICO score of less than 660 was considered to be sub-prime. Another form of instruments that played a major part in causing the sub-prime crisis is an Alt-A mortgage. A mortgage in which the quality of the mortgage or the underwriting is considered to be deficient is referred to as an Alt-A mortgage. These deficiencies may include the lack of proper documentation, low or no down payment, basically, anything that makes the mortgage more likely to default than a prime mortgage (Brooks and Simon 12).

Edward Pinto, a former credit chief officer for Fannie Mae says that the start of the sub-prime crisis goes back even to 1993 when both Freddie Mac and Fannie Mae started to purchase risky loans and represented them as prime mortgages while they actually were sub-prime or Alt-A mortgages. Fannie Mae has admitted to this practice in a third quarter 10-Q report in 2008 (Wallison 9-13).

It is easy to understand why such a practice is being referred to as one of the principal causes of the financial crisis that the world is in today. The market, particularly, rating agencies and investors, was unaware of the actual number of sub-prime or Alt-A mortgages which had infested the financial system in 2006 and 2007 (Wallison). The majority of these mortgages were in the possession of Freddie Mac and Fannie Mae. As of 2008, the total sub-prime and Alt-A mortgages outstanding was around 26 million, out of which a whopping 10 million were held or guaranteed by Freddie Mac or Fannie Mae. 5.2 million was held by other government agencies while the four largest US banks held or guaranteed 1.4 million of these sub-prime or Alt-A mortgages (Brooks and Simon 12).

The securities issued by these organizations understated the actual amount of sub-prime and Alt-A mortgages that formed the underlying instrument. As a result, credit rating agencies, issued higher ratings to these securities based on the historical rates of default common among prime mortgages. However, since a large part of the mortgages labeled as prime were in fact sub-prime or Alt-A, the actual rate of default was much higher. When these actual rates started to show themselves in 2007, it became apparent that the securities had been wrongly classified and when losses began to show, the investors lost all confidence in the ratings mechanism. As a result they fled the market for mortgage backed securities, even for all sorts of asset backed securities, causing the mortgage backed securities market to collapse in its entirety (Wallison 124).
   
The US government sprung into action under President George Bush and the Housing and Economic Recovery Act of 2008 was passed by the United States Congress on the 24th of July 2008. The act has been primarily designed to allow the US government to address the financial crisis ebbing from the sub-prime mortgages. The act is intended to restore the public confidence in Freddie Mac and Fannie Mae and authorizes the Federal Housing Administration to guarantee 300 billion in new 30 year fixed rate mortgages for sub-prime borrowers. It also authorizes states to refinance sub-prime loans using mortgage revenue bonds. The Act also establishes two new federal entities, the Federal Housing Finance Agency out of the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight.

On the 7th of September 2008, James Lockhart, the director of the Federal Housing Finance Agency (FHFA), announced that Freddie Mac and Fannie Mae were being placed under conservatorship run by the FHFA. The decision received public support by Henry Paulson, the then United States Treasury Secretary and Ben Bernanke, the Chairman of the Federal Reserve Bank.

When these two organizations were first bailed out in September 2008, the Congress had put in place a 200 billion limit, a 100 billion for each as the federal assistance. Last year the Congress revised its estimates and raised this limit to a total of 400 billion. On Christmas eve 2009, the Treasury once again revised its estimates and removed the 400 billion cap for the amount of assistance the government believes will be needed to keep Freddie Mac and Fannie Mae in business.  (Hagerty and Holzer,pp.98-100) 

Many observers believe that when back in 2005, the Senate Banking Committee had adopted tough regulatory legislation which would have led to more auditing requirement and a higher degree of oversight and scrutiny for the two organizations, could have saved America from the sub-prime debacle. However, the legislation was passed out of the committee and never came to vote (Wallison 12).

The issues underlying the Freddie Mac and Fannie Mae debacle are numerous. The companies have already stated that they will only be able to pay the preferred dividends they owe stockholders by further making more borrowings. Even though the companies are still no where near profitable, the Government needs them to prevent foreclosures on default mortgages. The government has directed both the organizations to pursue this loss-incurring strategy and this is the reason why the Treasury had to lift the cap from the limit on financial assistance (Wall Street Journal 123).

As confusing as things already are, the picture gets even more blurry. The outlays on Freddie Mac and Fannie Mae are still not being accounted for as federal outlays, even though the government basically controls both organizations. Even more worrying is the fact that the combined loan of 5 trillion in mortgages that are part of the two companies balance sheet is not being accounted for as part of the national debt (Wall Street Journal 12).

Political critics of the Obama administration are also calling the timings of the removal of the cap a subterfuge. After the 31st of December, the administration wouldve needed the consent of the Congress to increase the exposure of the taxpayers beyond 400 billion (Wall Street Journal).
Another reason behind the removal of the cap is the phenomenon known as rolling the dice. Interestingly enough, this is also being touted as one of the reasons that caused the sub-prime mortgage crisis in the first place. With a multitude of players including the Federal Housing Administration, both Freddie Mac and Fannie Mae and a host of Wall Street banks, all competing for loans to create mortgage-backed securities, the incentive to lower risk measurement standards was very high (Wallison 95-100).

On Christmas Eve 2009, the Treasury also took a lenient view of a key requirement of the 2008 bailout package. The Treasury does not require Freddie Mac and Fannie Mae to shrink their own portfolios of mortgages, which go up to a combined total of 1.5 billion. Consequently, risk taking will increase and the two troubled organizations will again indulge in rolling the dice (Timiraos 45-48).

The crisis in the housing industry and the problems associated with managing Freddie Mac and Fannie Mae were not the only outcomes of the whole sub-prime mortgage fiasco. On the contrary, this was just the beginning of a difficult period for the global economy as the aftershocks from the failure of two Americas biggest financial institutions set off a reaction that toppled banks worldwide and tested governments all over the world.

Bear Stearns, the fifth major Wall Street bank was the first victim. Bear Stearns was one of the banks which had heavily invested in the incorrectly rated mortgage-backed securities. By the time the whole sub-prime mortgage fiasco became public knowledge the crash had already begun and the cash strapped Bear Stearns went running to the Federal Reserve which was able to offer a lifeline in the form of an emergency funding deal in collaboration with JP Morgan Chase  (Wallison 12-14).

While the emergency funding line may have rescued the failing bank from bankruptcy, it was not enough to restore the markets confidence. In short, investors simply retreated. Bear Stearnss stock fell down by more than 45 and lost market capitalization to the tune of around 3.2 billion. The news also had an effect on other financial stocks and markets across the globe experienced a sharp downturn as Wall Street started to wobble. The Dow Jones index went down 194 points and the FTSE Eurofirst 300 index, which comprises of companies from all over Europe, went down 1.1. In both the indexes, the fall was led by the stocks of banks and financial institutions (Craig, McCracken and Lucchetti 56).
   
The Federal Banks decision to come to the rescue of Bear Stearns had a sort of a signaling effect on the financial markets. Market participants believed that in case other banks and financial institutions found themselves in the same situation, and there were signs then that this was very probable, the United States government and its agencies, and perhaps others, would come to their rescue as well (Wallison 45).
   
As the world was soon to find out, this was not to be the case. When Lehman Brothers found itself in troubled waters and unable to find a buyer, the Federal Reserve and the US government stood by while the fourth largest bank on the Wall Street filed for bankruptcy. Had the market participants believed that the government would not rescue any more banks, they might have had perhaps hedged themselves better against counterparty risk and the repercussions of the failure of Lehman Brothers might have been controlled. This is an entire debate and one that is futile for now  (Wallison 45).
   
After the fall of Lehman Brothers, market participants realized that they had to take stock of their counterparty risk and this realization led to the freezing of inter-institution or inter-bank lending. This freeze, many analysts believe, is the actual start of the financial crisis that was to devastate economies across the globe  (Karnitschnig, Solomon and Pleven).
   
Sunday, the 13th of September 2008, proved to be a crucial day for the American financial markets. With the governments refusal to provide a financial backstop for Lehman Brothers, two of the most potential buyers, Barclays PLC and Bank of America dropped out of the picture. On the same day, Bank of America took over another Wall Street giant, Merrill Lynch for 50 billion, buying every share each for a price of 29 (Craig, McCracken and Lucchetti 78).
   
As the negotiations concerning the sale of Lehman fell apart and the news spread, brokerage firms, traders and hedge funds started to gauge their exposure to Lehman and to separate themselves from trades with the unfortunate bank. Lehmans specialists traded in about 200 blue chip stocks and regulators rushed about trying to reassign them to the remaining brokers to facilitate trade on Monday when the New York Stock Exchange would open (Karnitschnig, Solomon and Pleven 98).
   
Other banks and financial institutions also sprang into action and a group of 10 major commercial and investment banks announced that they would form a pool to create their own borrowing facility. Made up of about 70 billion of their own money, would use the pool to try and ride out the looming crisis. Major players in the pool included the Citigroup Inc., Credit Suisse Group and Deutsche Bank AG also reaffirmed their commitment to mitigate the market volatility (Craig, McCracken and Hilsenrath 65).
   
Another cause of concern for Wall Street honchos on that fateful Sunday was American International Group Inc (AIG). Executives at Americas largest insurance giant worked the weekend trying to raise 40 billion they thought were necessary to avoid a downgrade of its credit rating which wouldve proved to be very costly for all stakeholders. 
   
The crisis intensified on Monday as the credit rating of the insurance giant was downgraded and AIG was forced to post 14.5 billion as collateral. The Treasury and the Federal Reserve decided on Tuesday that the consequences of letting a giant such as AIG fall would be too far widespread and could prove to be catastrophic for the American economy. Under the terms of the agreement, the Federal Reserve will lend 85 billion to AIG while obtaining control of 79.9 of its shareholding through equity participation notes, a form of warrants  (Craig, McCracken and Hilsenrath 63).
   
September 2008 will be remembered as the month in which the landscape of Wall Street was changed forever. Two of the largest independent brokerages firms were swept out of the picture while the government was forced to engineer rescues that will allow it to influence and control the housing and insurance industries for the years to come.
   
On 17th February 2009, President Barrack Obama signed the 787 billion economic stimulus package into law. The package is designed to address core issues with investments in healthcare, energy, infrastructure, education and is touted to create or save as many as 3.5 million jobs. The package also contains a variety of tax cuts, approximately amounting to 282 billion. The White House has also promised unprecedented transparency and accountability  (Meckler 91).
   
The US President has the unenviable task of ensuring that stimulus package is enough to put the American economy back on track and the American people back to their jobs. A year into the stimulus package and President Obama is facing lower and lower popularity ratings but remains a staunch supporter of his stimulus package.

According to the Centre for the Study of Financial Innovation (CSFI) (2005), a robust financial regulatory climate exists in London, but when compared to other cities, London was ranked higher than Tokyo, in terms of regulatory efficiency. The study further revealed that London, compared to Tokyo, had a much larger pool of financially savvy, experienced international finance staff and executives, whose first language is English, which also happens to be the worlds primary business language (Mainelli, 2006). A majority of the respondents from the Corporation of Londons survey, also said that despite the active oversight authority in London, regulators there were generally fair, because the Financial Services Authority (FSA) in the UK listens and considers all points of view, before taking action. This Wimbledon effect (Mainelli, 2006, p. 4), was cited by respondents, as being very reassuring. A predictable oversight atmosphere is also conducive to a stress free and stable work environment in London, compared to Tokyo. As a result of this, employees in financial services firms complete more trades per day, compared to their Japanese counterparts (Slater, 2004)

I admit I have a penchant for business and trading.  Not a single day goes by without me reading up on the latest fashion trends and marketing techniques.  Having parents who are trading agents for a shoe company, I have been immersed in the trading and retail industry since I was little.  As such, it becomes second nature for me to spend most of my time navigating around the shopping malls, exhibition centers and fashion shows to help them design shoes.  It was from these early memories that I developed a keen sense of understanding for business and started to dream that one day I can be a successful banker.

I have always seen my success as being hinged on my ability as a manager.  As the boss of a Japanese clothing store on Yahoo Shopping, I have had the challenge and opportunities to not only apply my initiative to harness new technologies but also to develop new management techniques.  It was through this that I was able to not only cost down several of the retail items but I also improved marketing and visibility of the store through the internet and social networks.

Prior to me taking over the business, the retail market in Japan was struggling, particularly for clothes.  The basic operation model is that the seller flew to Japan and brought clothes back to Taiwan.  It was pretty difficult to predict which kinds of clothes would be welcomed by the consumers and thus translated into high costs including the business trip fees and risks of storage, making the prices too high to afford.  Realizing this, I reversed the condition by making use of technology and the Internet. I utilized the tactic of cutting down the profit margin to sell more.

The first step was just like other sellers, I went shopping for the newest fashion in clothes.  However, I used myself as model, putting on the clothes, taking the pictures and then uploading these pictures to the Yahoo Shopper.  By checking my website everyday, I traced the orders of the buyers and control the costs of storage.  Obviously, the competitive power of my store sales and my customer number surged in a short time.  The end was that more and more sellers imitated my operation model.

Through this experience, I feel that I have demonstrated a firm grasp of the cost downapproach as well as my business acumen.  The success I experienced with my store is but the beginning of my journey.  Given the success of my fledgling business career, I decided to embark upon this quest to further hone and improve what talent I had in this field to eventually become the Head of the Treasury Department.  I decided that I needed to get the training and experience that was necessary for me to realize my dream.  I believe that everyone has dreams in different life stages and it is only in the pursuit of these dreams will people never feel regret.  I have seen a childhood dream of mine come true and look forward to setting another benchmark which is getting this MBA.

Management Report

The Export-Import Bank of the United States (EIB) is a governmental export credit agency.  The agency refused to approve of loans and guarantees to three American firms in the process of obtaining contacts to participate in the construction of the Three Gorges Dam in China.  This management report analyzes the decision of the EIB.  It is determined that the decision was an ethical one, as it was based on scientific reports that the construction of the Dam would be an environmental disaster for the people of China.  Contrary opinions are considered through this report.  The fact that the Chinese government acknowledges that the construction of the Three Gorges Dam is environmentally dangerous substantiates the intelligent stance of the EIB.
  
Export credit agencies support domestic firms to export their products or services (Esty  Sesia, 2007, 11).  On the other hand, the International Finance Corporation, an institution of the World Bank Group promotes economic growth in developing countries mostly by investing in sustainable private corporations in these countries without requiring guarantees from their governments (International Finance Corporation, 2010).  Whereas the entire World Bank Group made financial commitments worth only 19.3 billion in the year 2000, export credit agencies around the world make investments worth 100 to 200 billion each year.  Referred to as the driving force of the global economy, these agencies use taxpayer dollars to make it both less risky and cheaper for domestic companies to invest or export abroad.  They do this by providing credit and loans to developing nations so they can buy from rich countries.  They also provide insurance or guarantees to reimburse exporters or banks should they suffer losses in poor countries (Goldzimer, 2003).
    
The Export-Import Bank of the United States (EIB) is a government-owned export credit agency (Goldzimer).  The agency refused to provide loans and guarantees for the construction of the Three Gorges Dam in China (The U.S. Export-Import Bank and the Three Gorges Dam, 2000, 1).  Export credit agencies of Canada and various European nations agreed to finance the project nevertheless (Schucking, 1998).  In this report, we analyze EIBs managerial decision to refuse finance for the building of the worlds largest dam in China (Hvistendahl, 2008).      

EIBs Refusal to Finance Contracts for the Three Gorges Dam 
As China demanded loans and export credit guarantees before foreign contractors could participate in the construction of the Three Gorges Dam, three U.S.-based companies, Caterpillar, Voith Hydro and Rotec Industries were refused guarantees and loans by the Export-Import Bank of the United States.  The Bank was set to refuse all domestic companies for the project, the reason being that the construction of this dam is environmentally hazardous (The U.S. Export-Import Bank and the Three Gorges Dam, 1-2).  Schucking writes that the United States is the only country that has clear cut environmental and social standards for its export credit and investment insurance agencies.  In fact, the chairman and president of the EIB, Martin A. Kamarck would refuse to approve finance and guarantees for the Three Gorges Dam today just as he did back in 1996 (The U.S. Export-Import Bank and the Three Gorges Dam, 2).  Today, even the Chinese government acknowledges the fact that the Three Gorges Dam is an environmental catastrophe endangering millions of lives as it triggers landslides, alters ecosystems and causes various other environmental problems (Hvistendahl).
    
Esty (2003) states that ethical standards must be applied in project finance decisions (6).  Kamarck had made the correct decision to refuse loans and guarantees for the Three Gorges Dam, and Dick Shoemaker, heading the United Automobile Workers at Caterpillar had made a perfectly reasonable statement connecting U.S. taxpayer funds to an unethical project, thereby support Kamarcks decision.  Even the Deputy National Security Adviser to President Clinton had said that the United States does not wish to fund or back a project that raises human rights as well as environmental concerns.  However, Dennis Hastert, an Illinois Congressman did not have ecological and human rights concerns on his mind when he stated that it is best for the EIB to support American companies for the project in China regardless of politics (The U.S. Export-Import Bank and the Three Gorges Dam, 2-3).  As a matter of fact, EIBs decision not to back the construction project had nothing to do with the political relationship between the United States and China.  As Kamarck explained, the EIB was backing several projects in China at the time (The U.S. Export-Import Bank and the Three Gorges Dam, 2).  The decision not to finance the construction project was a matter of principle.  According to Kamarck, the project did not meet EIBs environmental guidelines (The U.S. Export-Import Bank and the Three Gorges Dam, 2).  Had the construction project met EIBs guidelines, the export credit agency would not have refused loans and guarantees to domestic companies seeing that America is a business leader that would always try to strengthen its economy. 
    
Donald Manzullo, another Illinois Congressman, had remarked that EIBs refusal to back the project in China would hurt the American economy (The U.S. Export-Import Bank and the Three Gorges Dam, 9).  His opinion was as uninformed as that of Hastert, given that EIB management has the best interests of the U.S. economy at heart.  In fact, EIB serves to promote American goods and services abroad (The U.S. Export-Import Bank and the Three Gorges Dam, 3).  Mocking the decisions of EIB management must be considered an instance of negative politics.  Regardless of the extent of profits expected by Caterpillar, Voith Hydro and Rotec Industries through their contracts in China, the decision made by the EIB management must be respected (The U.S. Export-Import Bank and the Three Gorges Dam, 2-3).  Despite the fact that the Three Gorges Dam was expected to become a major source of renewable power for an energy-hungry nation, the decision of the EIB management was an informed one, as scientists from around the world had already warned of the dangers of constructing the dam (Hvistendahl). 
    
At the time that the EIB management decided not to support domestic companies to participate in the construction of the Three Gorges Dam, the Chinese government was defending the project (Hvistendahl).  But, the EIB relied on an assessment prepared by its Engineering and Environment Division, according to which the project raised serious questions concerning population relocation, protection of the natural ecology, water qualityandmitigation of the effects of natural disasters (The U.S. Export-Import Bank and the Three Gorges Dam, 6-7).  The United States government took a wiser stance toward the project than the Chinese government at the time.  In the economic sense, hurting the Chinese population to build a dam would reduce the capacity of Chinese human resources, which in turn would hurt the global economy.  Scientists had warned that the dam construction would increase disease and lead to a reduction in biodiversity to boot (Hvistendahl).  Although scientists words fell on deaf ears in China, the United States EIB management made an environmentally and economically sound decision, bearing in mind that all ecosystems are linked and environmental problems in any part of the world tend to adversely affect the entire planet  a fact that is widely known today (Hvistendahl).
    
Indeed, disregard for environmental problems in China would have eventually hurt the American economy.  Had the EIB decided to grant loans and guarantees to domestic companies for their participation in the construction of the Three Gorges Dam, the Chinese people hurt by the construction would have blamed all export credit agencies, including EIB, responsible for the project.  Furthermore, companies based in the United States would have lost countless valuable customers in China had the construction project adversely affected the latters lives.  By making an ethical decision, the EIB had aligned itself with the United States political and economic goal to remain as a political and business leader for developing countries and emerging markets to continue looking up to.  Manzullo and Hastert had a limited view of the American political economy when they criticized EIBs decision to refuse to back the construction project in China. 
    
According to Esty, project finance is meant to increase the value of a project (1).  As the Three Gorges region is a development hub at present, it is a serious mistake to finance a project that is expected to have detrimental effects on society, environment and the economy (Hvistendahl Goldzimer).  The EIB management understood that it would not be adding value to a project by providing loans and guarantees for the Three Gorges Dam.  Rather, in this case, project finance would have reduced the value of the project in question.  The Chinese governments acknowledgement of the fact that the Dam is dangerous is further proof that the project was essentially worthless.  Moreover, all export credit agencies should follow the example of EIB before making decisions to finance projects with the potential to harm the world.   

In this Modern Furniture Company case, there are relative issues to be tackled in order to implement strategic and long-term planning that will enable the company to stand firm amidst all crisis that will come its way.  The primary concern of the Board of Directors and Executive Committee is to ensure the companys long-term survival (CourseSmart, 2010).  The most important aspect of  a companys existence is the proper management of its finances.  It is the responsibility of  Financial Management to allocate funds to current and fixed assets, to obtain the best mix of financing alternatives, and to develop an appropriate dividend policy within the context of the firms objectives (McGraw-Hill, 2008). 

The financial statements of a company are important because these are used by the Management in making decisions.  The analysis of these financial statements however, involves the examination of  relationships among financial elements and making comparisons with relevant information. Ratio analysis is the most common form of financial analysis.  It provides relative measures of the companys conditions and performances (Answers.com, 2009).  To apply the financial statement analysis, let us take into account Modern Furniture Company whose Chief Financial Officer, Al Rosen is taking into consideration stock repurchasing as against cash dividend issuances.  He needs to perform the following calculations before he can made recommendations to the CEO and the Board of Directors. (Data based on the Complete Modern Furniture Company case)

a.) What is the firms PE ratio  The Price-Earnings Ratio (PE) is the measure of how expensive a stock is.  It is a valuation of the companys current share price compared to its per-share earnings. It is calculated as the market value per share divided by the companys EPS (Earnings per share).
                       
PE Ratio    88.00 (market value per share)   4.00  (EPS)
          22  means that  the investors are willing to pay 22 times per dollar of earnings.
    In general, a high PE suggests that investors are expecting higher earnings growth in a company as compared to companies having lower PE ratio (Investopedia, 2010).  But it is important to note that PE ratios are useful when compared to companies of the same industries but it is not useful when compared to companies that belong to different industries.    
b.) If  the firm paid the cash dividend,  what would be its dividend yield and  
dividend payout ratio per share
        
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price.  In the absence of any capital gains, the dividend yield  is the return on investment for a stock (Investopedia, 2010).  Dividend yield is calculated as follows
                                   
Dividend yield    1.60 (dividends per share)  88.00 (price per share)
                    1.80  that a company will payout in dividends in
        relative to its share price.
Dividend payout ratio is the percentage of earnings paid to shareholders in dividends.  The payout ratio provides an idea of how well earnings support the dividend payments (Investopedia, 2010).  It is calculated as follows
              
  
 Dividend payout ratio    1.60 (dividend per share)  4.00 (EPS)
                   40 is the percentage of earnings to be paid to
                shareholders in dividends.
c.) If a stockholder held 100 shares of stock and received the cash dividend, what would be the total value of his portfolio (stock plus dividends)  The total value of the stockholders portfolio is 8,960.00 computed as follows
Market value of stocks (100 shares  88.00)         8,800.00
Add Dividends (100 shares  1.60)                  160.00  
                                     -------------
Total value of portfolio                     8,960.00                                
d.) Assume instead of paying the cash dividend, the firm used the 4.8 million of excess funds to purchase shares at slightly over the current market value of 88.00 at a price of 89.60. How many shares could be repurchased (Round to the nearest share)  The shares that could be repurchased are 53,571 shares computed as 4.8 million divided by 89.60.

e.) What would the new earnings per share be under the stock repurchase alternative The new EPS would be 4.073 calculated as net income which is 12 million divided by outstanding shares less stock repurchased (3,000,000 shares  53,571 shares  2,946,429 shares).

f.) If the PE ratio stayed the same under the stock repurchase alternative, what would be the stock value per share  If a stockholder owned 100 shares, what would now be the total value of his portfolio  Considering PE ratio is the same under stock repurchase alternative, the stock value per share would be 89.606 computed as PE ratio of  22 multiplied by the new EPS which is 4.073, the result is 89.606.  The stockholders total portfolio value would be 8,960.60.
   
From this observations, one can see that  because of the stock repurchased alternative, even though the outstanding shares were reduced, there was an increase in the earnings per share (EPS) and eventually an increase in the market value of the remaining shares.  This kind of decision is very important for the Board of Directors and Executive Committee because from this action, they would be able to intensify their long-term plan strategies that would benefit not only the company but also its Management and employees.  Repurchasing ones stocks is a form of investment in your own company.

Jollibee Foods Corporation

Jollibee Foods Corporation is owned by a Chinese-Filipino Family, Tan, and is headed by Tony Tan Caktiong (TTC). From its humble beginnings as an ice cream parlor, the fast-food chain grew into a national favorite in the Philippines. The historical events in its home country have forced the leaders to create strategies that would enhance its operations and increase revenue. A great part of the business depends on the franchises owned by different people all over the country and in different parts of the globe. However, the company encountered problems as they entered the international market.

The Key Issue
After reading the case study written on Jollibee Foods Corporation, it is obvious that the company is facing difficulties with regard to international expansion. There are several strategies used in the past but success seems to be out of the companys reach. The company also has limited resources that makes international business ventures a big gambling game. The combination of scarce resources and risky tight competition in the international scene made it more difficult for the international and overseas managers to make decisions that would benefit and gain the agreement of the international and domestic partners.
   
Most of the disagreements from the Philippines and international counterparts rose because of a) the stringent rules offered by the need to standardize the operations of the fast food chains, regardless of whether it is located in the domestic or international territories and b) the need to fit to changing cultures abroad. Being a fast food chain requires uniformity according to the standards set by the mother company. One of the characteristics of the fast food chain that make it appealing to people is that it gives people the assurance that they can get what they expect each time they visit the store, regardless of the location. Jollibee Foods Corporation has decided to bring this characteristics and made the domestic and international chains parallel to one another. The decision to transport the Philippine standards to the international chains clashed with the need to customize the fast-food chain according to the needs of the people. It is clear that there is a clamor for a  customized Jollibee  that would address the food preferences and traditions of each country. However, this need can not be given because it brought pressure on operations and quality control, making it difficult for the managers here to oversee the chains abroad that use different protocols. The situations is especially true for the decision of Jollibee to move into the San Francisco area using the Filipino-to-Asian-to-Hispanic-to-Mainstream approach. The question remains as to whether this strategy could lead to a successful business venture in light of the difficulties faced in previous attempts to international expansion.

Recommendations
Based on the problem identified, the company needs to strategically use their resources. If the company can not introduce massive changes into their operations to suit the culture of the new market, it is best to stay within areas that have large Filipino populations. Doing so would provide the fast food chain with a ready market. One of the known areas in the US that has a significant number of Filipino consumers is that of Hawaii. Considering the large segment of people who share the Filipino culture, the place could serve as the best starting point for the company.
   
Likewise, the company should develop standards for the countries where there is a great concentration of successful Jollibee chains. Where the economies of scale would permit, it is best for the company to construct an operations office in the country and provide all necessary powers to the head. The purpose of doing this is to allocate the responsibility of maintaining the operations and control on a single unit. With this, the Philippine headquarters could save time and resources because there is a central unit they can refer to when they need the information regarding the quality and operations of the different chains. Lastly, they should allow the international chains to incorporate culturally significant food items that can be controlled by the front-line employees.

Global Wine Wares New World Challenges Old

Globalization is a phenomenon that has revolutionized the way in which competition and dynamics of all industries have changed. The effects of a globalized economic system have modified the way in which the wine industry functioned. There was a surprising drop in the consumption of wine of the traditional wine brewers between the years 1976 and 1990 by almost 25. This translates into significant drop in sales for the traditional wine industry that has several distributed strongholds across the globe.
The global consumption of wine was by no means decreasing  rather there was an appreciation in the amount of wine being drunk worldwide. However, the major chunk of the expansive market was taken away by the new players in the industry namely Britain, Australia, New Zealand and South Africa. Though there was potentially nothing wrong in the manner in which the French produced wine, fact remained that the innovative ways of wine making were fast becoming popular amongst the wine consumers.

The French took great pride in the method of brewing their wine and thus were not willing to change the status quo by employing the latest techniques of wine brewing. This was particularly due to the It can be said that the French refused to accept the fact that the marketplace and demand for wine had changed. Dwelling on past pride and refusal to acknowledge the fact that the customers now had different tastes was a major flaw for the French. The same was the case with the German, Italian and Spanish firms that were not willing to change the taste of their wines by assessing the change in consumption and habits of the consumers over time. The major blow was to the French and British wine brewers who lost a great portion of their market share to the Australians and Kiwis owing to the latter satisfying the customer demand for new tastes and quality. It is true that AOC regulations hindered the use of innovative techniques for wine production in France, fact remains that the initial reactions of the giant bloc of breweries was cold and jest-like. Their belief was that their customers had a firm affliction to their traditional tastes and that the new entrants would soon go out of business (Barlett, Cornebise  McLean, 2009). Though what happened was quite the opposite, the French and its neighboring wine breweries had an important lesson to learn from the incident.
   
The foremost lesson for the European brewing companies was to understand the fact that consumer tastes had changed. The traditional wine standards were no longer a constant for the wine consumers and the new entrants had brought in a wave of innovation in the method of preparing wine that the consumers enjoyed. The case depicts that the French wine makers considered their work as an art and thus there was little chance of blending the processes to match the competitors that had gained a strong hold of te market by 1990.     In order to compete with the Kiwi and Australian wine makers, the European breweries needed to match the culture of innovation and understand the changes in habit and taste of the wine consumers.

The bottom line is that the French, Italian, Spanish and British wine makers needed to learn a lesson from the new entrants in the market rather than smirking with them. It is still possible for them to get back a part of the lost market share by following innovative practices in wine making that would make the wines more compatible with the tastes of the consumers  something that is changing as rapidly as the innovation that is being done to keep up with the globalization effects of consumer change.

In order for the company to achieve excellence, it would necessitate highly competent Chief Executive Officers to direct its vision into the reality. A proactive CEO in relation to decision making particularly in formulating strategic actions as well as its goals and objectives with due consideration to the companys strengths and weaknesses  will eventually turn into higher productivity as well as profits in spite of continuously unstable market environment. Hence, the objective assessment of the companys strengths and weaknesses will first and foremost be materialized and will be then necessary in preparing course of strategic actions.

Strengths of Development Bank of Singapore Limited (DBS)
With this regard, the strengths as well as weaknesses of Development Bank of Singapore Limited (DBS) which is considered as primary source of financial products and services in Singapore and even in Southeast Asia providing indispensable business and banking solutions will be critically examined in this article to ensure the sustainable advancement of the companys state as well as its global economic stand. This can be done upon the recognition of DBS strength in terms of business mix having characterized as highly diversified conveying moderate investment risks. This can be exemplified in various banking dealings of DBS among private consumers and other financial institutions. DBS also actively participate in the global money markets including Central Treasury and Central Operations. Thus, DBS offers extensive varieties of financial services and apparently does not merely rely on a single business section. In doing so, it facilitates DBS in compensating possible losses in one business dealing to another business section. Furthermore, it is of great assistance for DBS in understanding which business section is having economic gains or losses.
 In furtherance, DBS has its strength in terms of strategic location in Singapore and extending to various Southeast Asian. 

In Singapore and Hong Kong alone, its clienteles are almost five million in providing financial products and services having two trademarks in the former such as DBS as well as POSBthe primary source of clienteles given its nature of mass oriented bank presently having. The combination of these two banks in Singapore enables them to have 80 offices and almost a thousand ATMs all over the country. Moreover, DBS has been well recognized bank participant in the economic market of small and medium enterprises or SMEs acquiring the highest market share in terms of equipment as well as trade financing. This wide ranging business area has been serving by almost 14,000 employees in diverse culture of over 30 nationalities. Lastly, DBS financial products and services are most excellently renowned and highly reliant as viewed by its clienteles. This also has been proven in the awards given by international credit raters of being AA- as well as Aa1 in the value of assetsmaking it one of the premier banks in South East Asian regions. In this sense, DBSs prevailing economic market posture together with its high brand representation provides a momentous competitiveness.

Weaknesses of DBS
In viewing the other side of the story, however, DBS has a weak position in terms of its very inadequate coverage in other geographical location receiving a high risk in business dealing since it functions frequently and its high dependence in economic markets of both Singapore and Hong Kong in spite of its other earning in other Asian countries. Throughout the financial report of 2008, DBS earnings primarily came from Singapore and Hong Kong only. Although it is beneficial for DBS in these markets, however, being highly dependent can be harmful and even impede its maneuver in the long run. One critical scenario is when there is another financial economic crisis in Asia region, just like in the present crisis in Dubai, which can immediately and drastically pull down DBSs earnings as well as its various financial investments.

More so, DBS experienced a delicate in terms of its operational performance in 2008. Its earnings from interest accounted for only 8,122 million Singaporean dollars (SGD) which is considerably down to 10.65 upon comparison to the previous year having SGD 9,090 million. In relation to DBS net earnings, it comprises only for SGD 1,929.00 million which is also a significant reduction of 15.32 than the year 2007 with SGD 2,278 million. Conversely, DBS total earning has decreased by 2 from SGD 6,163 million in 2007 to only 6,053 million in 2008. In essence, the internal earnings development of DBS has been negatively distressed because of its inability to perform well in its operations. Apparently, this might probably be directed to an insufficient situation in meeting its responsibility to maintain and keep its advancement and extensions of effective future plans. Prospective Plans

If given the opportunity of being a CEO of DBS, the fundamental system to be applied is to reinforce the companys strengths and to eliminate or better yet transform its corresponding weaknesses into valuable assets. So, the primary action is to have an intense focus on geographically diversifying its business dealings. This kind of global strategic extension would facilitate enhancement process of reaching other potential markets. Eventually, DBS needs to supplementary fortify its internal operational development by means of complementary and strategic acquirements in support to its current business dealings. This acquirement will then improve the DBS existence in other Asian markets hence upholding its competitiveness in the region. Lastly, DBS must integrate innovative financial products and services to gain higher suppleness to grab potential development. Having this kind of prospective plans for DBS, it will, in effect, strengthen its strengths of well its business mix diversification while lessening its inadequate experience in other geographical areas. Consequently, this also addresses DBS weakness of deficit in internal performance.

Evidently enough, in spite of DBSs continuing economic growth, it also faces inadequacies in the present and even in the future. Nonetheless, it only necessitates to continuously revolutionizing its strengths into its superior form and completing the transformation of weakness into valuable strength to ensure the success of DBS even in the presence of challenging economic environment.

Finance

This is a research paper that will address three main areas in the study of finance. The first part is the UK capital markets where the paper will look at the structure and the roles of that particular capital market. The second part of the paper will look at an assortment of derivative instruments that include the swaps, the options and the futures while the third part of this paper will define the Eurocurrency and then focus on the Eurocurrency markets where it will look at the benefits and the dangers of the existence of the Eurocurrency markets in the global fiscal systems.

The structure and role of the UK capital markets
The UK capital markets are debt and equities market where entrepreneurs and governments can raise funds for long term purposes. It is a market in which money for a period for more than one year. It has the financial services authority as a regulator that oversees the capital markets in their specific jurisdiction to ensure that the investors are cushioned from frauds among other responsibilities (Michie, 1999). There are two types of capital markets the primary and the secondary market. In the primary one, a process called underwriting is used to sell bonds or stocks to investors while in the secondary markets, the securities that are already in existence are purchased and sold among the investors.

One role of the capital markets is raising capital for business. The capital markets give an opportunity for businesses and companies to raise expansion capital through selling of stocks to the public. Very many companies have raised money for expansion or for meeting their strategic plans through the sale of shares to the public through the capital markets (Michie, 1999). The second role is that of mobilization of savings for investment creating a rational method of allocation of resources when idle savings are invested in shares. These idle deposits that were previously kept in bank remain active under the capital markets especially in the promotion of businesses and government ventures, thus contributing to a stronger economic growth and improving the levels of productivity of firms and businesses. The UK stock market also facilitates mergers and takeovers of companies thus helping in growth of companies.  This helps the companies to expand their product lines, promote the channels of distribution, increase their niche in the market and also cushion themselves against volatility. It also improves corporate governance especially because it has a variety of businesses under its control and the businesses will tend to, make improvements on their efficiency and management to meet the specifications of the capital markets and the shareholders demands (Michie, 1999).

This is why public companies that are regulated by the capital market authorities are usually better managed than the private ones that are not under the jurisdiction of the capital markets authority. The other role of the capital markets authority is to provide opportunities for investment for the small investors. Large business require a lot of capital base but investing in the different investment tools offered by the capital markets is convenient for the small investors and it gives the a chance to own a share of big companies if they do not have the wherewithal to start their own companies.

Finally, it helps the government in raising its capital for the numerous projects it undertakes. Through the capital market, the government will sell bonds to the public in order to finance infrastructural developments and other projects.  This opportunity provided by the capital markets reduces the levels of taxation in the country because, to raise money for such projects, the government otherwise tax the citizens.   

Swaps, Futures and Options as Forms of Derivatives
Swaps
A swap is a form of a derivative where two parties that counter each other engage in exchange of benefits of the financial instrument of one party to those of the others. The benefits accrued depend on the type of financial instrument at stake. Particularly, in the swap, the two parties often exchange a cash flow stream against the others cash flow stream. The streams in the financial circles are referred to as the swap legs (Howells Bain, 2004). The agreement of the swap usually defines the period when the cash flows are supposed to be paid and the manner in which they are calculated. At the initiation of the contract, one of these cash flow series is dictated by variables like interest rates, rates of foreign exchange, and prices of commodities or equities. The cash flows are usually calculated over a principal amount that has a notional nature that in normal circumstances cannot be exchanged between two counterparties. This means that the swaps can be used to generate an exposure that is unfunded to an asset that is underlying, since the counteracting parties have the capacity to earn profit or even make loss from the price movements without being required to make a posting of the notional amount to serve as collateral (Howells Bain, 2004).

Options
An option is a contract bade between a party that is buying and another party that is selling which ensures that the buyer has the right, to buy or sell an asset purchased before or at the expiry of the time that had been agreed usually at a price that is called the strike price. In return for the option granted, the seller will thus collect the amount payable from the buyer. There are two types of options, the call and the put option. The former gives the buyer the right to purchase an asset that is underlying while the latter gives the buyer the right to sell the same asset. The seller is obliged to sell the asset at the price that has been agreed should any buyer wish to earn that bright (Howells Bain, 2004).

Futures
A futures contract is a contract that is standardized that allows one to buy or sell a specific commodity  that has a standard quality at a specified date in the future at a price that is determined by the market that is referred to as a futures price. The contracts are usually traded at an avenue called the futures exchange and they are not directly traded like the stocks, bonds or other securities, though they are still securities themselves. They are part of the derivative securities that are not usually direct. What determines the prices of these derivative tools is the equilibrium that exists between the forces of supply and demand among the purchase and the sell orders on the exchange at the time that the contract is being sold or purchased in the market.

Benefits and Risks of the existence of Eurocurrencies
Eurocurrency markets are facilities that are used by banks to hold deposits from countries that use different currencies form the one that is used in the country of that bank (Apergis, 1997).   One of the benefits of the Eurocurrencies is that they enable players in the finance sector to escape the numerous regulations and restrictions that are very costly, imposed by various governments. Some of these impediments that players in the financial sector try to escape by utilizing Eurocurrencies include requirements of reserve, the FDIC fees that are charged allover the world in the financial markets, and the restrictive regulations that hinder competition among banks. The other benefit of using the Eurocurrency is the existence of the Eurodollar as the benchmark since the US dollar is the domineering currency in the Eurocurrency trade making the minimum amount of short term loan to be one million Eurodollars. Banks also prefer Eurocurrencies because they have a wider profit margin than any other form of currencies (Apergis, 1997).

Central banks and regulators are concerned about Eurocurrency because they are considered stateless money, and they have very little regulations,which include restrictions such as taxes, restrictions on capital movements and exchange controls which regularly apply to currency.However, bank deposits do not apply to Eurocurrency markets.Banks utilize Eurocurrency markets to turn over profit it is more profitable to store and move funds in Eurocurrency markets than the countries that are not involved in Eurocurrency.Euro banks tend to arbitrage with low cost of market and flip the funds earned by these deposits for a higher profit from the market, this practice is preferred by banks because of the lack of government restrictions placed on these loans.This creates a problem if countries are trying to regulate their capital flows.Eurocurrency spreads are generally narrower than a single countries currency spread due to their lack government regulations.  The interest rates in the Eurocurrency markets are more competitive than in the domestic financial markets and the ability to borrow in unrestricted markets creates fluidity in the global fiscal systems. The improved international financing has led to the liberalization of the fiscal markets at the domestic level thus reducing the varying interest rates between countries.

Finally, the Eurocurrency markets have engineered global economic expansion due to the freedom of fiscal accessibility it affords investors and lenders. However, there are some dangers that arise from the existence of the Eurocurrency markets and one of them is partial regulation that can allow the infiltration of rogues in this fiscal system that can destabilize the whole system. Secondly, the Eurocurrencies markets have exposed most currencies to volatile climates due to the speculative nature of the market and this has made the currencies to suffer speculative attacks in the process (Apergis, 1997). The other risk involved in this case is the belittling of the international fiscal policies especially due to the unregulated nature of the Eurocurrency markets which can set dangerous precedence.

Valuation for Risk Assessment

The wide acceptance and use of the Portfolio theory has drew criticism from its detractors in the basis of the argument of the market efficiency hypothesis. Its utilization as a primary source of assessing risk on a companys and regulators perspectives calls for the ideology that the imperfections of a financial market does not call for the methodology used in risk management.
   
Perhaps, the systematic assumptions derived from risk management debunks the probabilistic nature of risk its very inception questions the figures derived from Value-at-Risk measures.
   
The attempts to provide alternative theories surrounding risk measurement and management
MotivationWhy do we care about the problem and the results If the problem isnt obviously interesting it might be better to put motivation first but if your work is incremental progress on a problem that is widely recognized as important, then it is probably better to put the problem statement first to indicate which piece of the larger problem you are breaking off to work on. This section should include the importance of your work, the difficulty of the area, and the impact it might have if successful.

Problem statementWhat problem are you trying to solve What is the scope of your work (a generalized approach, or for a specific situation) Be careful not to use too much jargon. In some cases it is appropriate to put the problem statement before the motivation, but usually this only works if most readers already understand why the problem is important.

ApproachHow did you go about solving or making progress on the problem Did you use simulation, analytic models, prototype construction, or analysis of field data for an actual product What was the extent of your work (did you look at one application program or a hundred programs in twenty different programming languages) What important variables did you control, ignore, or measure

ResultsWhats the answer Specifically, most good computer architecture papers conclude that something is so many percent faster, cheaper, smaller, or otherwise better than something else. Put the result there, in numbers. Avoid vague, hand-waving results such as very, small, or significant. If you must be vague, you are only given license to do so when you can talk about orders-of-magnitude improvement. There is a tension here in that you should not provide numbers that can be easily misinterpreted, but on the other hand you dont have room for all the caveats.

ConclusionsWhat are the implications of your answer Is it going to change the world (unlikely), be a significant win, be a nice hack, or simply serve as a road sign indicating that this path is a waste of time (all of the previous results are useful). Are your results general, potentially generalizable, or specific to a particular case

In every investment being done at a financial market, there is always a certain degree of risk involved. With the advent of the financial crisis, traders has been adamant in dipping into the financial markets with the stability of financial markets such that there is an accepted knowledge that the risk of obtaining the true valuation of an investment may not hold true in the long run. As such, the development of more statistical yet difficult models are done that primarily the reason of their developments are to appease the individuals or organizations to characterize, identify and act upon the financial risks. In a most basic sense, the drive to be successful is attuned to the intention of adopting hopefully more stringent measures to escape the financial risks.
   
Galichon (year) echoes that the single most used measure of financial risk is the Value -at   Risk measure. Furthermore, it is also used as a benchmark measure to budget capital regulatory requirements.
   
Lozovaia and Hizhniakova (year) discusses the importance of the Portfolio theory as to Value at Risk, such that by its definition, the Portfolio theory attempts to provide reasoning that the concept of diversification can be accomplished to reduce further risk and maximize returns on a portfolio, and that Value at Risk attempts to discuss the loss that can be derived on a particular portfolio.
   
The applications of the modern portfolio theory with regard to financial risk is still practical. In congruence to an efficient financial market, the behavior and decisions of all interested parties must be attuned to that of an inefficient market.

Purpose of the Study
    For a companys management, the practical application of risk to management decisions regarding investment and debt-transfer decisions. For example, the management may consider extending a takeover bid to another company in compliance to their one of their company goals in securing a market share percentage in their industry (Kraft V. Cadbury).
   
It has also been established that regulators have been vigilant in maintaining an efficient financial market in their scopes such that the financial markets are integrated. In this line of reasoning, the general truth that the financial markets are the compounds of one global market in which every company wishes to penetrate. As such, the inefficiency of the global market will have ripple effects on the aggregate financial markets, and that the effects of market inefficiencies (financial bubbles, The Great Depression) has lead the regulating consensus on not letting history repeating itself.
   
The prudential regulation of financial institutions requires the maintenance of     minimum levels capital as reserves against financial risks. The Basel Committee     on Banking Supervision, The US Federal Reserve Bank, The US Securities and     Exchange Commission, and regulators in the European Union have converged on     VAR as a benchmark risk measure.
   
Jorion (year) further added that the contribution of VAR measures lies in the imposition of a structured methodology for critically thinking about risk. Though there are studies that provides a clear grasp and measure on risk, organizations are then reprimanded by restrictive impositions by regulatory bodies by implementing the judicious function of VAR.

Since the modern portfolio theory assesses the asset valuation (or asset-pricing), regulators act as protectants to financial crisis in markets and instigators of ethical behavior and practices in stock market transactions of companies. The independent regulator also has forwarded the cause of companies implementing self-regulation policies in the company s core values and framework.

Rationale of the Study
The basis for this study perhaps is to take a studied look at the ethical considerations of valuation and risk in companies.
   
In the modern times, we have yet to learn from the historical events regarding the catastrophic events of incorrect valuation that is mostly derived from greed.
   
Though it is a company s core to earn profit (by reducing debt), we have yet to learn from the Japanese, that the concept of achieving profit is merely a benefit, as the concept of being in the business is the major key of success.
   
In a world were money is still power, it is a hard concept for profit-driven companies to integrate the attitude of a true businessman much demonstrated by the Japanese.
   
Liker (year) quotes Jim Press, Executive Vice President and C.O.O of Toyota Motor Sales in North America

The purpose of the money we make is not for us as a company to gain, and it s not for us as associates to see our stock portfolio grow or anything like that. The purpose is so we can reinvest in the future, so we can continue to do this. That is the purpose of our investment. And to help society and to help the community, and to contribute back to the community that we re fortunate enough to do business in. I ve got a trillion examples for that.  (72)               
   
It is to note that he is one of the two American Managing Directors of Toyota. As such, the philosophy is not just limited to the Japanese.
Literature Review
   
Financial risk management is a process to deal with the uncertainties resulting from financial markets (Horcher, year, p. 3). Considering the volatility of financial markets, it is essential that risks must be identified and addressed for management to develop strategies in managing a company through the financial markets at minimum risk.
   
A company s framework of company goals evolves in the success of the company in its capability to achieve its company objectives. As such the efficiency of risk measures must be at optimum such that it balances the success in achieving company objectives as accepted by the management, and the amount or value of risk that the company can tolerate with such undertaking of corporate strategies.
   
The emphasis of valuation of a company lies in the company s interest to be attractive to the people of interest investors, financing institutions, and stakeholders alike.
   
In a stock market, valuation is as important such that a company will be exposed to a variety of opportunities to be competitive and strong in such a volatile market. The volatility of the market presents opportunities of a company to be financially attractive to these persons of interest. Investors, for one, will likely apply themselves in the long run as present andor future stakeholders, which may also present capitalization opportunities for the company to expand and grow bigger. On the other hand, financing institutions will present opportunities as well, somewhat the same as the investors, by way of financing capital expenditures and other management decisions by the company due to its attractive credit ratings.
   
On the other hand, information might as well spell power in a ever-changing world. In a stock market, the valuation of a company is correlated to the exchange of information taking place in the financial market.
Portfolio theory
   
The beginnings of the portfolio theory were derived from Harry Max Markowitz, an American economist who was notable with his then eventual development of the theory today.
   
Elton and Gruber (year, p. 25) observes
 Markowitz (1952, 1959) formulated the portfolio problem as a choice of mean and variance of a portfolio of assets. He proved that the fundamental theorem of mean variance portfolio theory, namely holding constant variance, maximize expected return, and holding constant expected return minimize variance. These two principles led to the formulation of an efficient frontier from which the investor could choose his or her portfolio, depending on individual risk preferences.

Value at Risk
Value at risk is a method of assessing risk that use statistical techniques that measures the worst expected loss over a given horizon under normal market conditions at a given confidence level (Jorion, year). As such, these risk measures provide interested users a summary measure of market risk.
   
Furthermore, the use of these measures provides a total insight of a portfolio s risk that accounts for leverage, correlations, and current positions. In a nutshell, Value at Risk measures provide a formidable future of the effects of management decisions with the considerations of risks being identified. It would also allow interested parties to look into the efficiency of management strategies and regulatory statutes in a financial market.

Research Methodology and Proposed Approach   
It is appropriate for management and regulators to acknowledge the exposure of a company to such risks (Horcer, year, p. 205).
   
For our study, we can adopt the ARIMA model. Considering that stock valuations are affected by  random walks , random-walk and random-trend are apt as statistical methods for forecasting sample data of time series variables.
   
The basis of using the ARIMA model is under the presumption that stock prices evolve according to its randomness. The correlation of the randomness of stock prices is with the degree of efficiency of a financial market.
   
To measure the pract
    A nonseasonal ARIMA model is classified as an ARIMA(p,d,q) model, where
p is the number of autoregressive terms,
d is the number of nonseasonal differences, and
q is the number of lagged forecast errors in the prediction equation.

To identify the appropriate ARIMA model for a time series, you begin by identifying the order(s) of differencing needing to stationarize the series and remove the gross features of seasonality, perhaps in conjunction with a variance-stabilizing transformation such as logging or deflating. If you stop at this point and predict that the differenced series is constant, you have merely fitted a random walk or random trend model. (Recall that the random walk model predicts the first difference of the series to be constant, the seasonal random walk model predicts the seasonal difference to be constant, and the seasonal random trend model predicts the first difference of the seasonal difference to be constant--usually zero.) However, the best random walk or random trend model may still have autocorrelated errors, suggesting that additional factors of some kind are needed in the prediction equation.

ARIMA(0,1,0)  random walk In models we have studied previously, we have encountered two strategies for eliminating autocorrelation in forecast errors. One approach, which we first used in regression analysis, was the addition of lags of the stationarized series. For example, suppose we initially fit the random-walk-with-growth model to the time series Y. The prediction equation for this model can be written as where the constant term (here denoted by mu) is the average difference in Y. This can be considered as a degenerate regression model in which DIFF(Y) is the dependent variable and there are no independent variables other than the constant term. Since it includes (only) a nonseasonal difference and a constant term, it is classified as an ARIMA(0,1,0) model with constant. Of course, the random walk without growth would be just an ARIMA(0,1,0) model without constant

To identify the use of derivatives in managing the different myriad risks that every business faces since their inception.

The purpose of this research is to highlight the concept of derivatives and its applications in minimizing the risk. This paper also focuses on different derivates and some arising issues related with risk management from the eye light of real business world. 

This research paper will discuss on how the derivates help the management to minimize the risk, derivative instruments that the industry used year by year, along with real world examples and also debates on the policy issues with respect to derivatives etc. Moreover, this paper also discusses on the different shortfalls of derivates in assessing the risk.   

For the purpose of this research paper, only secondary sources were used. Most of the data that has been referred to is obtained from various business journals, online articles and most importantly books relevant to the course and has been referenced in the bibliography.

Businesses, faced with myriad risks, seek to protect themselves from the consequences of adversity. We know the fact that investors dislike risk and managing the well diversified portfolios. Every level of corporate executives is concerned over calculating Beta (). Perhaps the most important aspect of risk management involves derivative securities. Basically a financial derivative is a financial instrument that may be linked to a specific financial instrument or an indicator or a commodity. Financial derivatives facilitate the trading of specific financial risks in financial markets in their own right.

According to Gerald I. White, Ashwinpaul C Sondhi, and Dov Fried (pg.591), different tools of derivatives include
Options whose values depend on the price of the some underlying assets
Futures  Swaps whose values depend on the interest rate  exchange rate level
Commodity Futures whose values depend on the commodity prices
Financial derivatives derive their values from the price of underlying items, which may include the reference price. In financial derivatives, no principal amount is advanced in order to be repaid and income investment does not accrue. Examples are futures, forwards, options, hedges, warrants and swaps (Wilmott, Paul and Howison, Sam, 1995, p.14).

When one speaks of the relevance of derivatives in financial forecasting, the question that arises next is about the response of the market once the trading of derivatives commences. The pioneers of this instrument broadly suggest that market efficiency and liquidity on the spot market improve once derivatives trading comes in to play. The market makers or the speculators generally have a preference over implementing their positions using derivatives rather than using a sequence of trades on the underlying spot market. If we think practically rather than theoretically that if we assess the derivatives in a feasible manner like gathering information, research and forecasting activities, these would safeguard our investment, increases the rate of return through efficient market. From a market microstructure perspective, derivatives markets may reduce the extent to which informed speculators are found on the spot market, thus reducing the adverse selection on the spot market (LiPuma, Edward and Lee, Benjamin, 2005, p404).

Derivatives also help reduce the risks faced by liquidity providers on the spot market, by giving them avenues for hedging. These effects help improve liquidity on the spot market. Derivatives can certainly help out the business world in different ways, some of which are described below
Debt Capacity Derivatives can reduce the volatility of cash flows and this would help out in order to reduce the probability of bankruptcy. Firms with lower operating risk can use more debt, and this can lead to an increase in the stock prices due to interest tax savings.

Financial Distress Investor who hold the stock often worry about the rising interest rates on debt and this could create a situation of bankruptcy which could make the cash flow fall from the expected levels and this is what creates financial distress.

Borrowing Cost Input costs especially the interest rate on debt raises the cost of financing, so in contrast with the problem, SWAP rescues and minimizes the interest rate risk so that the borrowing cost is cut down.
Maintaining the Optimal Capital Budget Most of the firms worry over the raising capital through equity financing because it raises the flotation cost. So, this phenomenon suggests that capital budget is financed through debt plus internally generated funds, mainly from retained earnings. In the early period, internal cash flow is low and they may be too low to support the optimal capital budget, causing firms to either slow the pace of investment or incur high cost associated with equity financing. By smoothing the cash flows, derivative can alleviate this problem.
The following table (Jorian, 2000) depicts a list of instruments that are traded and used in the derivative industry

The following table (Jorian, 2000) reveals the importance of derivatives that are used in the industry along with their respective sizes.

An ideal example in this case would be of IBM, as depicted by Gerald I. White, Ashwinpaul C Sondhi, and Dov Fried (pg.608). IBM faces a lot of risks with respect to finance that can be managed through hedging. IBM operates in about 35 functional currencies and is both a significant lender and a borrower in global capital market. It concerns interest rate and foreign currency exposures. The company
Uses a derivative, primarily swaps, to convert fixed rate to variable rate debt (fair value hedges) and to fix the rates on variable debt and anticipated issues of commercial paper (cash flow hedges).
Designates a significant portion of its non-U.S. dollar debt as a hedge of its net investment in foreign operations. It also uses currency swaps and forward contracts to hedge this exposure.
Uses foreign currency forward and option contracts to hedge foreign currency denominated anticipated royalties and other cash flow.

Manages the cash and exposures of its subsidiaries centrally, and uses currency swaps and forward contracts to hedge its exposure to exchange rate changes for both functional and non-functional currencies.   
This highlights the fact that how multinational enterprises like IBM are working up on different forms of derivatives (hedge, swap, option, etc) to manage and forecast risk. Another important use of derivatives is when borrowing money from the futures market, using shares as collateral. Then as a borrower one may act in a following manner

Sell a million dollars of Nifty on the spot market. Make delivery, and get paid. This is your borrowed funds.
Simultaneously, buy a million dollars of Nifty futures.
Hold these positions till the futures expiration date.
On the futures expiration date, buy back the Nifty shares on the spot market. When you pay for them, you are repaying your loan.

This practice is worth doing when the interest rate obtained by borrowing from the futures market is lower than that which can be obtained through alternative fully collateralized borrowing avenues.
At one level a market index is used as a pure economic time-series. Liquidity affects this application via the problem of non-trading. If some securities in an index fail to trade today, then the level of the market index obtained reflects the valuation of the macro economy today (via securities which are traded today), but is contaminated with the valuation of the macro economy yesterday (via securities which traded yesterday). This is the problem of stale prices. By this reasoning, securities with a high trading intensity are best-suited for inclusion into a market index.

As we go closer to applications of market indexes in the indexation industry (such as index funds, or sector-level active management, or index derivatives), the market index is not just an economic time-series, but a portfolio which is traded. The key difficulty faced here is again liquidity, or the transactions costs faced in buying or selling the entire index as a portfolio (Shah  Thomas, 1998, p.173).
Developing Derivatives Exchanges There have been many attempts at starting derivatives exchanges. As with spot exchanges, there have been relatively few successes in terms of obtaining highly liquid markets. (Tsetsekos  Varangis, 1997, p.03).

Trading Through Derivative Create Threat To Financial Sector Derivatives trading does bring a whole new class of leveraged positions in the economy. In fact, to the extent that equity derivatives make it easier for policy makers to eliminate leverage on equity spot market, it will help reduce the vulnerability of equity market. It is with OTC derivatives that there are more serious policy concerns, about the extent to which a few large failures can destabilize the financial system. This is because OTC derivatives innately involve credit risk, and there is a clear channel for contagion  where the failure of one firm impacts upon its counterparties (Steinherr, 1998, p.212).

Another important question would be whether we can use index futures and index option market in a stock market. There may be several factors that play a role in terms of the choice of index, some of which are described below Diversification Stock market indexes should be well diversified, in order to ensuring that speculators or hedgers are not vulnerable to the industry risk or an individual company risk. Sharpes Ratio of the index is reflective of such diversification.

Liquidity of the index The index should be easily tradable on the cash market. This, in part, relates to selecting stocks in the index. The implication of a high liquidity of the indexs components would be that the index is less noisy.

Liquidity of the market Index traders have a strong incentive to trade on the market which supplies the prices used in index calculations. This market should feature high liquidity and be well designed in the sense of supplying operational conveniences suited to the needs of index traders (Shah  Thomas, 1998, p.174).
Operational issues Regular maintenance of the index is necessary along with a steady evolution of securities in the index in order to keep pace with the changes occurring in the economy. The calculations involved in the maintaining these indexes should be accurate and reliable. Incase a stock trades at multiple venues, index computation should be done using prices from the most liquid market.

The shortfalls of some derivative instruments are stated below
Forward markets reflected poor liquidity and unreliability derived from counterparty risk. This is also called credit risk.

Too much flexibility is one of the basic problems of forward markets. Forward markets can be compared to real estate markets where buyers and sellers find each other using telephones. This brings in inefficiency and time wastage. Every user faces the risk of not trading at the best price available in the country.
In the narrow sense one could state that hedges ineffectiveness refers to the fact that derivative may not precisely hedge the underlying risk.

In an option market the owner of the call option benefits from the price increases but has limited down size risk if the stock price decreases, since the loss of value of an option can never exceed the call premium.
It is much crucial for business sector to meet with current complex environment where the bundles of information and rumors are evolving in our surrounding. With the increasing levels of globalization in a competitive environment the sword of risk is highly opened up so it requires the frame work and highly profound risk management team to cope up with the situation and adopt risk management systems that can quantify, measure and monitor to meet with tomorrows pace. 

After all the assessment it would be safe to assume that
Futures contracts trade at an exchange with pricetime priority. All buyers and sellers come to one exchange. This reduces search costs and improves liquidity.

Forward contract avoids the illiquidity that goes along with the unlimited customization of forward contracts.
In my point of view clearing corporation adopts an enormous risk by giving out credit guarantees to brokerage firms.

Future contract builds a sophisticated risk management system in order to survive.
Electronic trading has generated a real time risk monitoring system.
Options may vary with respect to futures which are free to enter into, but can generate very large losses.
Problem arises in hedging when Hedge is constructed improperly due to reported high returns, using derivative for speculative purpose.

Futures contracts are standardized  all buyers or sellers are constrained to only choose from a small list of tradable contracts defined by the exchange (Shah  Thomas, 1998, p.193).
The informative note is that there are no exchange-traded financial derivatives in many parts of the world.
Worldwide, the most successful equity derivatives contracts are index futures, followed by index options, followed by security options. (Hunt, Philip and Kennedy, Joanne, 2004, p200-202).
Hedging facilitates financial mangers by allowing them to lay emphasis on running their core businesses without having to worry about macro economic indicators.
The risk free rate of interest affects the value of an option.
In an option market as price volatility increases, the chance that the stock will go up or down in value increases.

The greater price volatility of the underlying asset, the greater the chance the stock price will increase and the greater the time value of the option.
The trading process for options is similar to the future contracts.
The advantage of swap dealers in swap market is that they generally guarantee swap payments over the life of the contract.