DERIVATIVES

Derivatives

Derivatives

Question 1:

The two international equity markets which we have considered for the performance analyses are FTSE 100 index and Singapore index (SGX). The period of consideration ranges from 6 February 2012 to 15 April 2012.

Predictions for FTSE 100 index

It is expected during the above stated period that demand for shares is likely to increase as the central will stimulate economy's growth with additional printed money. Therefore, buying shares will be the first priority of the willing buyer. Similarly, dividend yield on FTSE 100 index is likely to exceed 10-year government bonds similar trend was noticed in the second quarter of 2012. Due to high inflation, there will be price pressure on most of the equities listed on the exchange. It can also be predicted that recovery phase might not start as the results of last quarter of the year 2011 presents a picture of the second wave of falls, which will eventually lead to more bad debts or another credit crunch. Similarly, the Euro zone crises and spending cuts in the disposable income is expected to hamper demand in UK.

Predictions for Singapore index (SGX)

With high risk t the earnings outlooks, the equity market is expected to be beaten down to a price equivalent to book value of market indicators. Although the market is expected to grow with a weighted average of 10%-22% from February 2012 to April 2012, I believe that the Singapore index (SGX) is expected to see returns ranging from 10%-30% As a result I think a neutral stance is needed in order to cover risk of an investor (Singapore exchange, 2011).

(2) Actual performance of FTSE 100 index

The FTSE 100 managed to be between levels of 5892.20 (6 February 2012) points 5666.82 points (16 April 2012). Despite economic growth in France, it has not been able to convince traders. Similarly, news from the France regarding avoiding of recession this year has also not been able impress traders. In contrast to news from France, the yield on the newly structured Greek government bonds climbed to top 20pc which reflects traders view, about the high risk prevailing in the country, despite its recent £109bn bail-out package presented by the Greek government. Similarly Investors believe on the possibility that strength in stock markets seen during this period might just have gone too rapidly.

Actual performance of SGX

The Singapore exchange managed to be between levels of 3296.74 points (6 Feb. 2012) and 3371.98 points (16 April 2012). The increase in exchange can be as seen as the GDP growth has improved in the first quarter of 2012. This rebound growth has led to some economists to expect a turnaround in the economy this year. The manufacturing sector has seen correction during this period. It has recovered by 14.7 percent as compared with the last quarter of the year 2011.similarly Sectors like electronics and precision engineering have rebounded and have presented better results as compared with the 4th quarter of 2011. Economist also believe that accelerated growth in the services sector (up by 6.9 percent) quarter-on-quarter basis will also contribute in the growth of the index (financial time, 2012).

Question 2:

1) Strategies

Our investor believes that FTSE 100 index will remain at ...