¶ … Hedging and Its Importance to the Securities Markets It has over 400 brands including Lipton and Slim Fast. These 400 products contribute to over $1 billion in sales annually. Unilever is global companies with more than 53% of its sales in overseas markets. It is also a very socially conscious company with many of it initiatives aimed at providing better quality of life for all stakeholders involved, especially those in emerging markets. In fact, many of Unilever's products have a social mission attached to them. For example, the product Lifebuoy is aimed to promote better hygiene practices through hand washing in emerging nations.
In simple terms, hedging is a form of insurance. It is a mechanism used to help shield investors and companies from the negative occurrences within the ordinary business environment. If properly hedged, when negative events do affect a business or individual, the damages incurred will be significantly less. A common example is that of insurance on an automobile or house. In the event of a catastrophic wreck or fire, and depending on the level of insurance purchased, an individual can recover the value of the lost car of home. In exchange for this reassurance, the individual would be required to pay monthly premiums whether or not the event actually occurred. In essence the individual is hedging him or herself against the likelihood of an event that would negatively impact the value placed on the particular car or home. Similarly, companies also hedge to reduce the impact of environmental factors on their business. For example, the airline industry is notorious for hedging against rising fuel and commodity prices. Hedging is so important within this industry that often, the company that can hedge more efficiently is frequently the most profitable company. Usually, when hedging, the instruments used have negative correlations. Correlation coefficients are used to determine the movements of two instruments when one instrument remains constant. The measurements are between negative one and positive one. A correlation coefficient of 1 means the instruments move in tandem with one another. A correlation coefficient of negative one means the instruments move in opposite directions, while a correlations coefficient near zero means there is no established relationship. Noting our previous example of the home and home insurance, the correlation between these two instruments would be near negative one. As the value of the house declines due to a catastrophic event such as a hurricane, the value of the insurance policy increases. Below is a simple chart depicting these movements.
Value of Home ($250,000)
Value of Insurance Policy ($0)
Value of home appreciates over the Value of policy remains constant
A negative event occurs such as a fire, hurricane, flood, or earthquake which destroys the home.
Value of Home ($0)
Value of Insurance Policy ($250,000)
Home is destroyed and has no value
Homeowner can now claim funds from policy
As can be seen from this example, hedging plays an important role of guarding against potential losses whether for an individual investor, corporation, or government.
Finally two commonly used hedging strategies used by companies are options and futures contracts. These instruments are used heavily be commodity intensive industries to keep the price of commodities fixed. For example, individual investor purchases shares of Unilever and wants to protect themself from the downside risk associated with the stock. The individual may enter into a put option which allows the individual to sell at a predetermined price. If the stock falls below this predetermined price, the investor in unaffected because of the prior price agreement. Similarly, Unilever may want to protect itself from the price volatility of tea used to produce its Lipton Ice tea product. In order to accomplish this, Unilever may decide to enter into a futures contract. This futures contact allows Unilever to purchase tea at a predetermined price in the future. This can be either a disadvantage or a superior competitive advantage for Unilever. If for example, the price of tea skyrockets, then the hedge would have been profitable. However, if the price of tea declines, Unilever is still obligated to pay the contracted price for the goods even if it's at a higher price. Over the course of this document, I will explain how Unilever uses hedging as a means to remain profitable in a global business environment.
Through both a social responsible and consumer driven business model, Unilever has achieved financial and social success for over 100 years.
How Unilever uses futures and other derivatives to hedge against rising costs
For purposes of this paper, we will discuss how Unilever uses hedging to continue its profitable operations within the North American market. To begin, commodity prices essential to the general operations of Unilever have been rising over the course of the last few years. The first and arguable most important of these commodities is fuel. Being a global company with 53% of its revenue stemming from overseas markets, Unilever depends heavily on transportation. This comes in the form of freight, boat, trucks and other methods of transportation. Below is a chart depicting fuel price increases from 2006. As depicted by the chart, gasoline prices have recently plummeted which is an advantage for Unilever and its global operations.
Chart I: Gasoline Price Volatility
Another important element to the Lipton Ice tea product is sugar. Like gasoline, sugar is yet another commodity susceptible to price volatility. Below is a chart depicting sugar prices over the last year. As noted by the chart sugar prices are too falling. The question is, by how much have sugar and gasoline prices fallen. The third chart below depicts both commodities superimposed upon one another.
Chart II: Sugar Price Volatility
Chart III: Sugar and Gasoline price volatility
From the three charts above, we can see that gasoline prices have increase 13.7% over the course of this year alone. Meanwhile, sugar prices have dropped nearly 20% over the same period. From this brief and subtle amount of information, we can infer that gasoline prices may need to be hedged to help remedy price volatility. Likewise, it may be advantageous to allow sugar prices to drop as they currently are. However, the future is unknown. Due to this uncertainty Unilever may instead enter into futures contracts for both commodities in order to have a constant budgeted amount in regards to commodity prices.
Finally, in regards to the Lipton Ice Tea product line, we must also consider world tea prices. As with gasoline, Tea prices across the world are increasing. In fact, Tea prices have nearly doubled from there 2003 low. As a result, Unilever may also want to engage in futures or options contacts to help mitigate this risk
Unilever's Hedging Strategy
As apparent form the four charts above, it is now, more important than ever for Unilever to hedge against this volatility. First, rising commodity prices are reducing the margins on many of its North American products. When margins are reduced at a faster rate than sales, profitability is diminished. As a publically traded company, investor's desire continued sustainable growth commensurate with the risk taken for a given security. If Unilever fails to deliver the results investors' desire, the stock price may soon plummet as investors leave to more profitable endeavors. In an effort to help avoid this risk Unilever engages in various hedging strategies discussed in its financial statements. In terms of its financial statements Unilever values all derivatives at fair value, which are reflected in the earning report. In addition, gains and losses from derivative contracts are recognized in the immediate period in which they occurred. Unilever does not use derivative financial instruments for speculative purposes. Instead, Unilever, according to the financial statements…
It has over 400 brands including Lipton and Slim Fast. These 400 products contribute to over $1 billion in sales annually. Unilever is global companies with more than 53% of its sales in overseas markets. It is also a very socially conscious company with many of it initiatives aimed at providing better quality of life for all stakeholders involved, especially those in emerging markets. In fact, many of Unilever's products have a social mission attached to them. For example, the product Lifebuoy is aimed to promote better hygiene practices through hand washing in emerging nations.
The documents we provide are to be used as a sample, template, outline, guideline in helping you write your own paper, not to be used for academic credit. All users must abide by our "Student Honor Code" or you will be restricted access to our website.
" (Grassi, 2007) III. HEDGE FUNDS REBOUND FROM SUBPRIME SUMMER in SEPTEMBER It is related in an October 10, 2007 report that Hedge funds "rebounded nicely from the summer of subprime in September, posting one of their months in a decade." (FINalternatives, 2007) Hedge funds rose 3.27% in September in what is stated to be "the largest increase in four years, and the second largest in eight." (FINalternatives, 2007) the gains are
The investors have responsibility to invest based on the social needs. The retail investor, can for example is thus a person who buys socially responsible unit trusts or mutual funds. Actually the investment that is being touted as responsible investment is the work of socially beneficial institution like pension funds, and some charitable foundations. Normally the institutional investors do not enter the socially responsible investment scenario. Of late however
Unfortunately, determining which fund to go with for a retail investor is difficult, as there are many unscrupulous fund managers who might seek to take advantage of the fact that they are playing with other people's money and making (at least) the management fee. This can lead even scrupulous hedge fund managers to take unnecessary risks. The danger of hedge funds being mismanaged truly cannot be overstated. For example, Bernie
Risk Management in Hedge Funds A research of how dissimilar hedge fund managers identify and achieve risk The most vital lesson in expressions of Hedge Fund Management comes from the inadequate name of this kind of alternative investment that is an alternative: The notion that all methodical risks are differentiated away is not really applicable here, with the Hedge Fund returns, in realism, representing a mixture of superior administration of market
As a consequence, investors may suffer. Importance of the Study It is necessary and pertinent to discuss the importance of any study, and this particular study is important to many people across many countries. Not only does it have importance for people who are trusting people with their pension and hedge funds in Germany, but it also has importance for people who are considering a career working with these funds and
Financial Derivatives This study emphasized the importance roles of financial derivatives, which has been known for the last decade and its effects on the Global financial crisis. It further analyzes the impact of financial derivatives and how it can be controlled to prevent corporations from incurring a lot of risks. It also explains the existence of financial derivatives since 1970, to the recent Global Financial Crisis which occurred in the 2006. Risk