Ivey Publishing

Options, Futures and Other Derivatives

Hull, J.C.,5/e (United States, Pearson, 2003)
Prepared By Maxime Charlebois, Ph.D. Candidate (Finance)
Chapter and Title Chapter Matches: Case Information
Chapter 2:
Future Markets and the Use of Futures for Hedging

LUFTHANSA: TO HEDGE OR NOT TO HEDGE . . .
Stephen Sapp

Product Number: 9B00N022
Publication Date: 2/2/2001
Revision Date: 1/12/2010
Length: 3 pages

Lufthansa, the flagship German airline, was undertaking an aggressive expansion program. The chairman of the board had negotiated a deal with Boeing for the purchase of 20 new aircraft at a cost of US$500 million. The U.S. dollar was at historic highs and he had to decide how much, if any, of the US$500 million purchase price to hedge and best method to use. Since Lufthansa's revenues were mainly in deutsche marks and this amount was payable in one year, he needed to determine how to deal with the resulting foreign exchange risk by examining principle foreign exchange hedging strategies. Covenants restricting Lufthansa to take on new debt made it critical that he be sure of the financing and risk exposure before finalizing the deal.

Teaching Note: 8B00N22 (6 pages)
Industry: Transportation and Warehousing
Issues: Exchange Rates; Risk Management; International Finance; Hedging
Difficulty: 4 - Undergraduate/MBA


Chapter 3:
Forward and Futures Prices

A. LYON FANNE
Ron G. Wirick

Product Number: 9A96B030
Publication Date: 9/9/1996
Revision Date: 2/5/2010
Length: 14 pages

Professor Fanne was contemplating a strategy to profitably exploit the small-firm, January effect whereby small cap firms tended to outperform large cap firms in January. He was considering using futures contracts.

Issues: Investment Analysis; Investments
Difficulty: 4 - Undergraduate/MBA


Chapter 4:
Interest Rate Futures

VENTRA GROUP INC. - HEDGING STRATEGY
Robert W. White, Kathryn Fric

Product Number: 9A96B016
Publication Date: 5/14/1996
Revision Date: 2/5/2010
Length: 15 pages

By the end of June 1995, the recent acquisition of Peerless-Cascade had been fully integrated into Ventra Group Inc.. Dwight Rollins decided that he could now turn his attention to Ventra's foreign exchange and interest rate exposures as well as Ventra's debt policy. With future expansions planned, management of the foreign exchange and interest rate exposures had become a central issue.

Teaching Note: 8A96B16 (461 KB)
Industry: Manufacturing
Issues: Derivatives; Risk Management; Financial Strategy; Foreign Exchange
Difficulty: 4 - Undergraduate/MBA


Chapter 5:
Swaps

VIDEOTRON LTEE
Robert W. White, Paul Noreau, Sandeep Bhargava

Product Number: 9A96B021
Publication Date: 5/14/1996
Revision Date: 2/5/2010
Length: 14 pages

The assistant treasurer of Videotron Ltee (Videotron) pondered over the Citibank proposals that lay on his desk. Videotron was about to launch a US$150 million, 10-year high yield issue in almost a week's time. Since Videotron's business was transacted almost exclusively in Canadian dollars, it would be exposed to foreign exchange risk on the US-dollar denominated interest and principal debt payments. In light of the recent and dramatic depreciation of the Canadian dollar against the U.S. dollar, the treasurer wondered if he should hedge this exposure. The Citibank Canada exposure management team had proposed hedging techniques using either forwards or cross-currency swaps. (A Microsoft Excel spreadsheet is available for use with this case, product 7A96B021.)

Teaching Note: 8A96B21 (281 KB)
Industry: Information, Media & Telecommunications
Issues: Bonds; Derivatives; Risk Management; Hedging
Difficulty: 4 - Undergraduate/MBA


Chapter 8:
Trading Strategies Involving Options

RICK THOMPSON'S STOCK INVESTMENT: OPTIONS
Stephen R. Foerster

Product Number: 9A99N009
Publication Date: 4/22/1999
Revision Date: 1/21/2010
Length: 7 pages

An investment advisor for National Securities Inc. was preparing to meet with a client. Based on the advisor's recommendation, the client had previously added an auto parts company to his portfolio of stock investments. Now, as he became more sophisticated, the client wanted to understand the potential benefits and risks of trading call options and put options. This case is the third in a series of three cases that focus on a variety of stock investment decisions. (See 9A99N006 AND 9A99N007.)

Teaching Note: 8A99N09 (6 pages)
Industry: Finance and Insurance
Issues: Investment Analysis; Derivatives; Valuation; Investments
Difficulty: 4 - Undergraduate/MBA


Chapter 13:
General Approach to Pricing Derivatives

MERRILL LYNCH CANADA INC. LIQUID YIELD OPTION NOTES
Robert W. White, K. Scott Dorsey, Bryan Mekechuk

Product Number: 9A96B008
Publication Date: 5/14/1996
Revision Date: 2/5/2010
Length: 17 pages

This case addresses the issues involved with fitting a complex financial instrument to an issuer and an investor. It elicits the participants to consider the unique requirements of issuers and investors and how the features of an instrument fulfil those requirements. The examination of the liquid yield option notes demonstrates that complex instruments can be broken down into a basket of primitive securities to assist the students in understanding the behaviour of the instrument and how it is priced.

Teaching Note: 8A96B08 (227 KB)
Industry: Finance and Insurance
Issues: Derivatives; Innovation; Financial Institutions; Bonds
Difficulty: 4 - Undergraduate/MBA


Chapter 14:
The Management of Market Risk

CORPORATE DERIVATIVES USAGE AND RISK MANAGEMENT: A FRAMEWORK AND CASE STUDIES
Stephen R. Foerster, Dan Chiu

Product Number: 9A96B029
Publication Date: 5/28/1996
Revision Date: 2/5/2010
Length: 17 pages

The focus of this note is to present a risk management framework for current and potential corporate end users of derivatives products. Several high profile cases of derivatives problems are presented in the context of the framework. The note also examines where the process has failed and how the failures could have been prevented.

Issues: Risk Analysis; Risk Management
Difficulty: 4 - Undergraduate/MBA


Chapter 16:
Interest Rates Derivatives and the Use of Black’s Model

RBC MORTGAGE CAPPER
Robert W. White, Neil Rabovsky

Product Number: 9A96B010
Publication Date: 5/14/1996
Revision Date: 2/5/2010
Length: 22 pages

The treasurer of Royal Bank Mortgage Corporation proposes a new residential mortgage product whereby the Royal Bank would use its derivative technology expertise to marry an interest rate cap with a variable rate mortgage. Key issues to be addressed are the design and the demand of the product and the cost to hedge the capped mortgage. As well, the risks and exposures to Royal Bank would require careful consideration before any decision is made.

Teaching Note: 8A96B10 (13 pages)
Industry: Finance and Insurance
Issues: Risk Management; Financial Institutions; Derivatives; Innovation
Difficulty: 4 - Undergraduate/MBA


Chapter 17:
Interest Rate Derivatives and Models of the Yield Curve
Chapter 18:
Exotic Options

IFC MANUFACTURING - FOREIGN EXCHANGE HEDGING
Craig Dunbar, Chand Sooran

Product Number: 9A99N010
Publication Date: 6/8/1999
Revision Date: 1/21/2010
Length: 19 pages

IFC Manufacturing, an automobile parts producer, was attempting to raise capital to fund expansion in Mexico. In order to secure financing, the creditor banks required an assessment of the IFC's financial risk management apparatus. IFC had exposures to foreign exchange and interest rates. IFC had grown aggressively by acquiring firms on both sides of the Canadian-U.S. border, funding these purchases in U.S. dollars. The case allows for discussion of a number of issues, including: internal controls (the Group of Thirty recommendations for good derivatives practices), risk measurement and management. Data is provided which allows students to qualify translational and transactional risk exposures. Information is also provided allowing students to evaluate IFC's portfolio of hedging instruments which includes plain vanilla options, single barrier options, double barrier options and average rate options.

Teaching Note: 8A99N10 (14 pages)
Industry: Manufacturing
Issues: Risk Management; Foreign Exchange; Derivatives; Bank Lending
Difficulty: 4 - Undergraduate/MBA