IMCM ASSIGNMENT

IMCM Assignment

IMCM Assignment

Introduction

The company selected for the purpose of this assignment is AstraZeneca. AstraZeneca plc is a British-Swedish pharmaceutical company formed on 6 April 1999 by the re-merger of Swedish Astra AB and British Zeneca Group plc. Zeneca had been part of Imperial Chemical Industries (ICI), as three divisions that were spun off from ICI on 1 June 1993. It is a public company and is listed on the London Stock Exchange, the New York Stock Exchange and the OMX exchange. It is a constituent of the FTSE 100 Index. AstraZeneca develops, manufactures, and sells pharmaceuticals to treat disorders in the gastrointestinal, cardiac and vascular, neurological and psychiatric, infection, respiratory, pathological inflammation and oncology areas.

The corporate headquarters are in London, United Kingdom, the research and development (R&D) headquarters are in Södertälje. Major R&D centres are located in India, Sweden, the U.K. and the U.S. AstraZeneca has a large R&D centre in Cheshire, U.K.; this centre acts as one of Zeneca's main hubs. AstraZeneca has laboratories in a large country estate on the east side of the A34 road north of the Monk's Heath crossroads in Cheshire in England.

Part I: UK Yield Curve

Yield curves are usually upward sloping asymptotically: the longer the maturity, the higher the yield, with diminishing marginal increases (that is, as one moves to the right, the curve flattens out). There are two common explanations for upward sloping yield curves. First, it may be that the market is anticipating a rise in the risk-free rate. If investors hold off investing now, they may receive a better rate in the future. Therefore, under the arbitrage pricing theory, investors who are willing to lock their money in now need to be compensated for the anticipated rise in rates—thus the higher interest rate on long-term investments.

However, interest rates can fall just as they can rise. Another explanation is that longer maturities entail greater risks for the investor (i.e. the lender). A risk premium is needed by the market, since at longer durations there is more uncertainty and a greater chance of catastrophic events that impact the investment. This explanation depends on the notion that the economy faces more uncertainties in the distant future than in the near term, and the risk of future adverse events (such as default and higher short-term interest rates) is higher than the chance of future positive events (such as lower short-term interest rates). This effect is referred to as the liquidity spread. If the market expects more volatility in the future, even if interest rates are anticipated to decline, the increase in the risk premium can influence the spread and cause an increasing yield.

The opposite position (short-term interest rates higher than long-term) can also occur. For instance, in November 2004, the yield curve for UK Government bonds was partially inverted. The yield for the 10 year bond stood at 4.68%, but was only 4.45% for the 30 year bond. The market's anticipation of falling interest rates causes such ...