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The cookie production process begins with the person in charge of mixing making sure that he is using the right ingredients for the right cookies. He then enters that information in the computer which determines the correct amount of ingredients to be used to create those cookies. The information about the ingredients is then automatically sent to giant mixing machines where the ingredients are combined with proper amounts of eggs, water, and flavorings. After the ingredients are mixed, the batter is poured into a cutting machine where it is cut into individual cookies. The cookies are then dropped onto a conveyor belt and transported through one of two ovens. Once the cookies come out of the oven, they are placed on cooling racks where workers place them in boxes manually. The boxes are then wrapped, sealed, and labeled automatically.

1. Briefly describe the cookie production process.

The cookie production process begins with the person in charge of mixing making sure that he is using the right ingredients for the right cookies. He then enters that information in the computer which determines the correct amount of ingredients to be used to create those cookies. The information about the ingredients is then automatically sent to giant mixing machines where the ingredients are combined with proper amounts of eggs, water, and flavorings. After the ingredients are mixed, the batter is poured into a cutting machine where it is cut into individual cookies. The cookies are then dropped onto a conveyor belt and transported through one of two ovens. Once the cookies come out of the oven, they are placed on cooling racks where workers place them in boxes manually. The boxes are then wrapped, sealed, and labeled automatically.
2. What are two ways that the company has increased productivity? Why did increasing the length of the ovens result in a faster output?

The company has increased productivity by:

  1. Cutting the non-filled cookies into diagonal shapes. The non-filled cookies require less time to cook than the filled ones and the diagonal-cut cookies require less space than the usual round ones. Therefore, the diagonal cut is the ideal shape for the non-filled cookies, increasing production time for non-filled cookies exponentially.
  2. Increasing the length of each oven by 25 feet. This result in the capacity to bake more cookies at one time due to a larger oven capacity.

3. Do you think that the company is making the right decision by not automating the packing of cookies? Explain your reasoning. What obligation does a company have to its employees in a situation such as this? What obligation does it have to the community? Is the size of the town a factor? Would it make a difference if the company was located in a large city? Is the size of the company a factor? What if it was a much larger company?

I don’t think the company is making the right decision by not making the best use of technology possible in the packing of its cookies. This is cause for possibly millions of dollars that the company could have gained in added revenue due to the increase in production. I believe companies have the obligation to be good to employees that have been there from the start and who depend on them for their livelihood. Therefore, I think the company is making a good ethical choice to keep the 20 women working there, especially being that this is a small community where everyone is watching and the women are most likely part of that community. If this was a larger company, it would probably either create other positions for these women, terminate them after creating some type of compensation package for them.

4. What factors cause Lew-mark to carry minimal amounts of certain inventories? What benefits results from this policy?

Lew-mark to carry minimal amounts of inventories for cookies because of limited shelf life of products and for labels because it does not want to order too many labels that will have to be thrown away later.

5. As a consumer, what things do you consider in judging the quality of cookies you buy in a supermarket?

As a consumer, I consider the expiration dates, the packaging, and the overall appearance of the cookies and the package altogether. Even if the cookies are not from a brand name company, they must look good enough for me to want to eat them.
6. What advantages and what limitations stem from Lew-Mark’s not using preservatives in cookies?

Not using preservatives helps the company maintain customer loyalty by appealing to a health-conscious segment of the market. However, the lack of preservatives also causes a shorter shelf life for the cookies, causing the company to use more ingredients more often.

7. Briefly describe the company’s strategy.

The company’s strategy is to a. differentiate its products from its competitors by providing certain features that promote great quality products that customers value (i.e. without preservatives and additives), b. maintain a good community and employee relationship by acting ethically with its employees and focusing on healthy products (i.e. keeping the women employed), and c. maintain customer loyalty by specifying the products to the customers’ liking (i.e. soft and not too sweet).

 

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1. Compare the advantages and disadvantages of the survey to those of observation. Under which circumstances could you make a case for using observation? The primary advantage to a survey over that of an observation study deals with the actual collection of data. With a survey the data collected is normally known and often is directed to specific answers due to the survey format where observational studies collect data in a haphazard way. However, observation can be a useful tool in certain situations. Observation is a very useful tool when the study must be concealed from the participants. In this manner someone can observe and the participants do not know they are involved in a study. This does present an ethical dilemma but often is required for successful data collection and study.

Session IX

March 29, 2007

 

 

 

  1. Compare the advantages and disadvantages of the survey to those of observation.  Under which circumstances could you make a case for using observation?

The primary advantage to a survey over that of an observation study deals with the actual collection of data.  With a survey the data collected is normally known and often is directed to specific answers due to the survey format where observational studies collect data in a haphazard way.  However, observation can be a useful tool in certain situations.  Observation is a very useful tool when the study must be concealed from the participants.  In this manner someone can observe and the participants do not know they are involved in a study.  This does present an ethical dilemma but often is required for successful data collection and study.

 

  1. You wish to analyze the pedestrian traffic that passes a given store in a major shopping center.  You are interested in determining how many shoppers pass this store, and you would like to classify these shoppers on various relevant dimensions.  Any information you secure should be obtainable from observation alone.

Things that could be observed and useful in this situation may include: total number of people passing store; number of people entering store; number and type of shopping bags being carried; and direction of pedestrian.

 

  1. Assume you are the manufacturer of modular office systems and furniture as well as office organization elements (desktop and wall organizers, filing systems, etc.).  Your company has been asked to propose an observation study to examine the use of office space by white-collar and managerial workers for a large insurance company.  This study will be part of a project to improve office efficiency and paperwork flow.  It is expected to involve the redesign of office space and the purchase of new office furniture and organization elements.
    1. What are the varieties of information that might be observed?
    2. Select a limited number of content areas for study, and operationally define the observation acts that should be measured.

Observation varieties might include number of moves to accomplish a task, what tasks are conducted at the same time, and number of types of papers or forms used in a period of time and location of such forms.  We wish to determine how much time is spent moving or turning in an office chair to access files in a desk drawer to determine if there is a better placement or file method to improve efficiency.  For this observation we define a file access as any access to the file drawer under a desk, whether it is removing, adding, or simply looking at the contents.  We also want to define moving as any rolling of the chair from a location to be able to access the file drawer.  The chair move must directly lead to the file drawer access.  This movement would also include any rotation of a swivel chair to access the file drawer.

 

  1. Distinguish between the following:
    1. The relative value of communication and observation.

With communication there is a two-way street between the research and the respondent which assists in collecting the proper information to answer the given question.  With observation the collection process is one direction only.  The researcher or observer is not providing any information to the respondents but is gathering information from them.  In a relative nature the observation can enhance the information obtained through a communication study but I feel the less subjective nature of a communication study makes it a better choice for scientific research.

    1. Nonverbal, linguistic, and extra-linguistic analysis.

Nonverbal analysis is the analysis of the many unspoken forms of communication that include body movements, motor expression s, and exchanged glances.  Linguistic analysis involves the study of the language used and what information is presented.  Extra-linguistic analysis involves the study of communication that have been defined as including method of communicating (pitch, loudness, timbre) along with speaking rate and rhythm, communication domination and vocabulary and pronunciation peculiarities.

    1. Factual and inferential observation.

A factual observation would include items such as a shopper bought 3 shirts.  There is data to support this observation and thus the observation is factual.  However, an inferential observation could be stated that a shopper prefers greens shirt to blue shirts.  This could be based on the fact that the shopper bought 2 green shirts and one red shirt.  The observer then made the inference that the shopper prefers greens but there is no substantial data to support this observation.

 

  1. Based on present or past work experience, suggest problems that could be resolved by using observation-based data.

A problem that could be solved using an observation-based study is concerning whether to implement a lunch vending area at a business operation.  Observations could be made of the number of people who bring their lunch to work each day and those who go out for lunch to see if there is sufficient numbers to warrant a vending area for lunch services.

 

  1. Discuss the guidelines for the final individual research project.  This project will be anonymously reviewed and evaluated for its appropriateness to be considered for presentation or publication in discipline related journal.
    1. The final project must be prepared in a manuscript format (word document) using APA style in approximately 30 (double spaced, size 12) pages.  Maximum of 40 pages.
    2. Your individual research project must address a scientific research work aimed at solving a problem or answering questions within the following context:
  1.                                                               i.      Title page including the research title
  2.                                                             ii.      A brief table of contents
  3.                                                               i.      A brief introduction to your proposal
  4.                                                             ii.      Statement of the problem including your research questions and/or research hypotheses
  5.                                                           iii.      Significance and/or importance of the study (why are you doing this?)
  6.                                                           iv.      Assumptions
  7.                                                             v.      Limitations
  8.                                                           vi.      Definitions of terms
  9.                                                               i.      Background
  10.                                                             ii.      A brief historical review (similar works and their findings)
  11.                                                           iii.      Rationale for your research proposal including advantage, disadvantages, supporting theories
  12.                                                               i.      Research design
  13.                                                             ii.      Instrument used such as survey questionnaire, telephone interview, etc.
  14.                                                           iii.      Population of the study.
  15.                                                           iv.      Sample (participants, respondents, etc)
  16.                                                             v.      Data collection methods
  17.                                                           vi.      Data analysis (How are you going to analyze the data collected?)
    1. Chapter I – General area of concern (introduction).
    1. Chapter II – Review of Literature
    1. Chapter III – Methodology
    1. Chapter IV – Findings
    2. Chapter V – Summary, conclusions, and recommendations and implications.
    3. References
    4. Depending on the nature, topic and type of research, the items mentioned above may change, and we will be flexible on the format.
    5. The final project should include findings, summary, conclusions, recommendations, and implications.

The guidelines appear to be straightforward.  This is the same project we completed for our group projects with the addition of the data collection, analysis, and conclusion development.  All the necessary specific are given such as suggested content volume along with a pretty well defined paper format to follow.

 

  1. Please see the URL below and develop and post on Forum 9 a questionnaire based on your learning. http://www.indiana.edu/~educy520/sec5982/wee_3/questionnaire_development_frary.pdf.

 

This survey is to find out if people are willing to pay a higher price for electricity generated by alternative energy sources; in this case, by using biomass fuels, such as corn, soybean, sawdust, etc.  In order to help us determine how willing people are, please respond to the following questions:

 

Amount of last electric bill:

Number of kilowatt-hours (KWH) used on last bill:

To support use of alternative energy sources, how much more would you have been willing to pay on that last bill:

County of residence:

NOTE: This information will be used only by the researchers, and will not be shared with anyone.  Thank you for your assistance.

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Review and discuss the following very important topics on the discussion board with example.
    1. Developing a research proposal
  1.                                                               i.      Developing a topic
  2.                                                             ii.      Preparing the research proposal
  3.                                                           iii.      Issues to consider
  4.                                                           iv.      Sample research proposals.
  5.                                                               i.      Research methods and design terminology, not a categorization of these methods:
    1. empirical
    2. theoretical
    3. qualitative and quantitative
    4. action research
    5. case study
    6. ethnographic
    7. experimental
    8. interventionist
    9. phenomenological
  6.                                                             ii.      Further research methods and design terminology
    1. longitudinal
    2. developmental
    3. correlation
    4. multi-method research
    5. triangulated data
    6. grounded theory research
    7. interpretive
    8. historical
    9. descriptive
    10. evaluative
  7.                                                           iii.      Managing your research
    1. why do projects fail or succeed
    2. goals, objectives and scope
    3. the project plan
    4. the four components
    5. work breakdown structure
    6. identifying dependencies
    7. network diagrams
    8. schedules and timelines
    9. budget and resources
    10. risk management
    11. monitoring and change control
    12. time management
  8.                                                           iv.      Identifying how you spend your time
    1. Covey’s time management matrix
    2. first things first
    3. plan weekly and implement daily
    4. time management tips
  9.                                                             v.      Reporting your research thesis structure guidelines
    1. abstracts
    2. introductory chapter’s
    3. methods chapters
    4. discussion chapters
    5. body chapters
    6. results, discussion and conclusion chapters
    7. academic style in thesis writing
    8. using impersonal language
    9. cohesion
    10. concise writing
    11. technical language
    12. thesis writing and persuasion
    13. formal writing
  10.                                                           vi.      References
    1. Research models and methods, research methodology

The first two sections are the hardest components to complete in the research process.  Determining what you wish to research and defining and focusing that topic enough to be doable is not a trivial task.  Once the time has been taken to accomplish this feat you must then determine how to conduct the research or what type of design is best suited to the problem at hand.  The research question development will affect the remainder of your research project and can either make the project a success or failure depending on the time and thought involved in this step.  The time required for development of the question which includes the review of literature is substantial and thus should be concluded as thoroughly as possible.

 

Once the problem has been completely and concisely defined the research methodology and design should be selected.  There are many designs listed in this list and each has a place in the research process depending on what type of information is required to assist in developing and answer.  When selecting a particular design the more focused the research question the easier this selection will be simply because the options for the data required will be reduced highlighting one method over the others.  Your review of literature will give you some insight into what information others have selected to answer similar questions which will allow you to better judge the effectiveness of the selections you make.

 

After this you must begin the research.  This section should be easily accomplished if you stick to your design and timeline and meet your goals and objectives.  However, once you fall behind is will be quite difficult to catch back up.  I like the option listed here that you should plan weekly and implement daily.  This seems like a good piece of advice for any project.  Taking the time to fully plan you project up front with the proper documentation and diagrams will make the implementation of that plan operate much more smoothly.  You will probably still encounter issues that you did not think of but this should be reduced.

 

Once you have finished with the implementation and execution of your research design and methodology you are practically completed.  The final task is to prepare a document discussing your research topic and its findings and conclusions in detail.  This type of report is again no small feat but if your first step of research question development was done correctly you should have all the information needed to prepare this document.  You begin by introducing your topic and providing the specifics of your project such as limitations, assumptions, and operational definitions.  You then provide information concerning some basic history and review of similar studies while showing why your topic is important enough to be under study as well as how the answers to your research question will be beneficial to those who read the document.  Finally you discuss your methodology and design followed by results of your design and any conclusions you were able to development from those results.  Quite easy while yet being quite important in the grand scheme of research.

 

The style used should be dictated by the sponsor or solicitor of the research project.  Otherwise an appropriate style and format for the topic of the research project should be determined and used.  Your writing style should be clear and concise and should exclude personal language that could lead the reader to infer bias in the results and/or conclusions.  This is a scholarly work and should be written in a scholarly manner; punctuation, grammar, and spelling are all key to the reception of your final report.  This is a document to report the research question and associated findings but should also be written in a manner to express your knowledge and understanding of the topic and its interrelationships.  The report is your research project once completed.

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Based on the company’s 10-K/A filing with the SEC, JetBlue’s strategy for success is product leadership with customer value proposition. As a matter of fact, this is JetBlue’s core strategy, “provides high-quality customer service at low fares primarily on point-to-point routes” (JetBlue, 2005). This is also proven by the company’s focus on offering alternative choices to customers by serving “underserved and large metropolitan areas that have had high average fares” (JetBlue, 2005). As a result of these strategies, the company has one of the highest load factors (percentage of aircraft seating capacity actually utilized in a given period) in the United States.

ANSWERS

Question 1
Based on the company’s 10-K/A filing with the SEC, JetBlue’s strategy for success is product leadership with customer value proposition. As a matter of fact, this is JetBlue’s core strategy, “provides high-quality customer service at low fares primarily on point-to-point routes” (JetBlue, 2005). This is also proven by the company’s focus on offering alternative choices to customers by serving “underserved and large metropolitan areas that have had high average fares” (JetBlue, 2005).
As a result of these strategies, the company has one of the highest load factors (percentage of aircraft seating capacity actually utilized in a given period) in the United States.

Question 2
One of the most critical business risks that JetBlue faces that may threaten its ability to satisfy stockholder expectations if higher jet fuel prices which contributes to a majority of its operating expenses. The company can control or mitigate the impact of this risk by hedging or entering into contracts locking in on a specific future price for jet fuel.
Another risk is foreign exchange risk. A portion of the company’s revenues are denominated in currencies other than the US dollar. This risk can be minimized by entering into foreign currency hedging contracts.

Question 3
Certainly, the concept unit level activities can be applied to an airline. Examples of unit level activities are operating the airplane on the air which affects the cost of jet fuel and providing ancillary services to passengers which affect the crew’s salary. JetBlue, to manage its jet fuel costs, has embarked on fare promos such as cheaper fares for passengers with no check in baggage – heavier load means higher jet fuel costs. On the other hand, it manages its labor cost by shortening the turnaround times of its airplanes.

Question 4
The concept of batch level activities can easily be applied to an airline such as JetBlue. Two examples of batch level activities are the maintenance of the company’s fleet and training flight crew. JetBlue to manage its fleet maintenance and training activities just upgraded its fleet such that it does not have to maintain different types of aircraft which makes maintenance and crew training complicated. With a uniform type of aircraft, JetBlue’s crew needs only to be trained to fly a single aircraft.

Question 5
An example of a customer level activity for JetBlue is the maintenance of the company’s customer loyalty program – TrueBlue Flight Gratitude while an example of an organization sustaining activity for the airlines is its activities to comply with Federal Aviation Administration’s and other relevant government agencies’ rules and regulations.

Question 6
Given jet fuel costs, we can use the number of departures as the transaction driver for JetBlue while we can use the number of miles flown for an aircraft as the duration driver. I believe that the number of miles flows or the duration driver is the more accurate activity measure between the two drivers. This is so because the number of miles flown actually distinguishes that the number of miles flown by an aircraft directly affects its fuel consumption. Moreover, the relationship of the number of miles flown and fuel consumption is much more direct than that of the number of departure and fuel costs.

References
JetBlue (2005). 10-K/A. Retrieved August 31, 2009. Available at http://www.sec.gov/Archives/edgar/data/1158463/000104746905005739/a2153142z10-ka.htm.

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We begin with a brief and straightforward introduction to the basic concepts, properties and pricing principles of financial derivatives, and a clear statement of the main subject of the book-the valuation problem of option pricing.

Chapter 1
Risk Management and Financial
Derivatives
We begin with a brief and straightforward introduction to the basic concepts,
properties and pricing principles of financial derivatives, and a clear
statement of the main subject of the book-the valuation problem of
option pricing.
1.1 Risk and Risk Management
Risk-uncertainty of the outcome.
Risk can bring unexpected gains. It can also cause unforeseen losses,
even catastrophes.
Risks are common and inherent in the financial markets and commodity
markets: asset risk (stocks…), interest rate risk, foreign exchange risk,
credit risk, commodity risk and so on.
There are two totally different attitudes toward risks:
1. Risk aversion: quantify an identified risk and control it, i.e., to
devise a plan to manage the exposed risk and convert it into a desired form.
Basically, two kinds of plans are available: a. Replace the uncertainty with
a certainty to avoid the risk of adverse outcomes even if this requires giving
up the potential gaining opportunity. b. Be willing to pay a certain price
for the potential gaining opportunity, while avoiding the risk of adverse
outcomes.
2. Risk seeking: willing to take the risk with one’s money, in hope
of reaping risk profits from investments in risky assets out of their frequent
price changes. Acting in hope of reaping risk profits from the market price
changes is called speculation.
Financial derivatives are a kind of risk management instrument. A
derivative’s value depends on the price changes in some more fundamental
2 Mathematical Modeling and Methods of Option Pricing
underlying assets.
Many forms of financial derivatives instruments exist in the financial
markets. Among them, the three most fundamental financial derivatives
instruments are: forward contracts, futures, and options. If the underlying
assets are stocks, bonds, foreign exchange rates and commodities
etc., then the corresponding risk management instruments are: stock
futures (options), bond futures (options), currency futures (options) and
commodity futures (options) etc.
In risk management of the underlying assets using financial derivatives,
the basic strategy is hedging, i.e., the trader holds two positions of equal
amounts but opposite directions, one in the underlying markets, and the
other in the derivatives markets, simultaneously. This risk management
strategy is based on the following reasoning: it is believed that under normal
circumstances, prices of underlying assets and their derivatives change
roughly in the same direction with basically the same magnitude; hence
losses in the underlying assets (derivatives) markets can be offset by gains
in the derivatives (underlying assets) markets; therefore losses can be prevented
or reduced by combining the risks due to the price changes.
The subject of this book is pricing of financial derivatives and risk management
by hedging.
1.2 Forward Contracts and Futures
Forward contract – an agreement to buy or sell at a specified future
time a certain amount of an underlying asset at a specified price.
A forward contract is an agreement to replace a risk with a certainty.
The buyer in the contract is said to hold a long position, and the
seller is said to hold a short position. The specified price in the contract
is called the delivery price and the specified time is called maturity.
Let K-delivery price, and T-maturity, then a forward contract’s
payoff VT at maturity is:
VT = ST – K, (long position)
VT = K – ST, (short position)
where ST denotes the price of the underlying asset at maturity t = T.
Risk Management and Financial Derivatives
long position \. short position
Forward Contracts are generally traded OTC (over-the-counter).
Future—-same as a forward contract, an agreement to buy or sell at a
specified future time a certain amount of an underlying asset at a specified
price. Futures have evolved from standardization of forward contracts.
Futures differ from forward contracts in the following respects:
a. Futures are generally traded on an exchange.
b. A future contract contains standardized articles.
c. The delivery price on a future contract is generally determined on an
exchange, and depends on the market demands.
1.3 Options
Options- an agreement that the holder can buy from, or sell to, the
seller of the option at a specified future time a certain amount of an underlying
asset at a specified price. But the holder is under no obligation to
exercise the contract.
The holder of an option has the right, but not the obligation, to carry
out the agreement according to the terms specified in the agreement. In an
options contract, the specified price is called the exercise price or strike
price, the specified date is called the expiration date, and the action to
perform the buying or selling of the asset according to the option contract
is called exercise.
According to buying or selling an asset, options have the following types:
call option is a contract to buy at a specified future time a certain
amount of an underlying asset at a specified price.
4 Mathematical Modeling and Methods of Option Pricing
put option is a contract to sell at a specified future time a certain
amount of an underlying asset at a specified price.
According to terms on exercise in the contract, options have the following
types:
European options can be exercised only on the expiration date.
American options can be exercised on or prior to the expiration date.
Define K- strike price and T- expiration date, then an option’s
payoff (value) VT at expiration date is:
VT = (ST – K)+, ( call option)
VT = (K -ST)+, ( put option)
where ST denotes the price of the underlying asset at the expiration date
K K
call option put option
Option is a contingent claim. Take a call option as example. If ST, the
underlying asset’s price at expiration date, is higher than the strike price
K, then the holder of the option can exercise the rights to buy the asset
at the strike price K(to gain profits). Otherwise, the option is a worthless
paper. Thus, to price an option is essentially to set a price to this kind
of contingent claims. The significance of this fact goes well beyond the
scope of derivatives pricing, and applies to many other industries such as
investment and insurance etc.
The price paid for a contingent claim is called the premium. The
needs of clients vary. Correspondingly, there exist a variety of options-the
financial products developed by financial institutions. Every type of options
requires pricing. Option pricing is the main subject discussed in this book.
Taking into account the premium p, the total gain PT of the option holder
at its expiration date is
Risk Management and Financial Derivatives 5
[ Total gain ] = [ Gain of the option at expiration ] – [ Premium 1,
(call option)
(put option)
1.4 Option Pricing
As a derived security, the price of an option varies with the price of its
underlying asset. Since the underlying asset is a risky asset, its price is a
random variable. Therefore the price of any option derived from it is also
random. However, once the price of the underlying asset is set, the price
of its derived security (option) is also determined. i.e., if the price of an
underlying asset at time t is St, the price of the option is Vt, then there
exists a function V(S, t ) such that
whereV(S, t)is a deterministic function of two variables. Our task is to determine
this function by establishing a model of partial differential equations.
VT, an option’s value at expiration date, is already set, which is the
option’s payoff:
(ST – K)+, (call option)
VT = { (K – ST)+. (put option)
6 Mathematical Modeling and Methods of Option Pricing
The problem of option pricing is to find V = V(S, t), (0 < S < m, 0 5
t < T), such that
V(S,T) = (S – K)+, (call option)
(K – S)+. (put option)
In particular, if a stock’s price at the option’s initial date t = 0 is So, we
want to know how much to pay for the premium p, i.e.
The problem of option pricing is hence a backward problem.
1.5 Types of Traders
There are three types of derivatives traders in the security exchange markets:
1. Hedger
Hedging: to invest on both sides to avoid loss. Most producers and
trading companies enter the derivatives markets to shift or reduce the price
risks in the underlying asset markets to secure anticipated profits.
Example A US company will pay 1 million British Pound to a British
supplier in 90 days. Now it faces a currency risk due to the uncertain
USD/Pound exchange rates. If the Pound goes up, it will cost the company
more for the payment, thus will hurt the company’s profits. Suppose the
exchange rate is currently 1.6 USD/Pound, and the Pound may go up, the
company may consider the following hedging plans:
Plan 1 Purchase a forward contract to buy 1 million Pound with 1,
650,000 Yuan 90 days later, and thus lock the cost of the payment in USD.
Plan 2 Purchase a call option to buy 1 million Pound with 1, 600,
000 USD 90 days later. The company pays a premium of 64, 000 USD
(assuming a 4% fee) for the option.
The following table shows the results of the above risk-avoiding plans.
current rate
(USD/Pound)
90 days later
rate(USD/Pound)
no hedging
(USD)
forward contract
hedge(USD)
call option
hed~e(USD)
Risk Management and Financial Derivatives 7
One can see from this example: if the company adopts no hedging plan,
its payment will increase if the Pound rate goes up, and thus will hurt its
total profits. If the company signs a forward contract to lock the cost of
the 90 days later payment, it has avoided a loss if the Pound goes up, but
it has also given up the opportunity of gaining if the Pound goes down. If
the company purchases a call option, it can prevent loss if the Pound goes
up, and it can still gain if the Pound goes down, but it must pay a premium
for the option.
2. Speculator
Speculation: an action characterized by willing to risk with one’s
money by frequently buying and selling derivatives (futures, options) for
the prospect of gaining from the frequent price changes.
A speculator assumes the price risk, hoping to gain risky profits by
holding certain positions (long or short).
Speculators are indispensable for the existence of hedging business, and
they came into markets as a necessary result of the growth of the hedging
business. It is speculators who take over the price risks shifted from
the hedgers, and thus become the major bearers of the risks in the derivatives
markets. Speculation is an indispensable lubricant in the derivatives
markets. Indeed, frequent speculative transactions make hedging strategies
workable.
Comparing to investing in an underlying asset, investments in its options
are characterized by high profits and high risk, since an investment in
options markets provides a much higher level of leverage than an investment
in the spot markets. Such an investor invests only a small amount of money
(to pay the premium) but can speculate on assets valued dozens of times
higher than that of the invested money.
Example Suppose the price of a certain stock is 66.6 USD on April
30, and the stock may go up in August. The investor may consider the
following investing strategies:
A. The investor spends 666, 000 USD in cash to buy 10, 000 shares on
April 30.
B. The investor pays a premium of 39,000 USD to purchase a call option
to buy 10, 000 shares at the strike price 68.0 USD per share on August 22.
Now examine the investor’s profits and returns in two scenarios (ignoring
the interests).
Situation I The stock goes up to 73.0 USD on August 22.
Strategy A. The investor sells the stocks on August 22 to get 730,000
8 Mathematical Modeling and Methods of Option Pricing
USD in cash.
return =
730 Ooo – 666 Oo0
100% = 9.6%;
666 000
Strategy B. The investor exercises the option to receive a payoff:
payoff = 730 000 – 680 000 = 50 OOOUSD
return =
50 000 – 39 000
39 000
x 100% = 28.2%.
Situation I1 The stock goes down to 66,O USD on August 22.
Strategy A. The investor suffers a loss:
loss = 666 000 – 660 000 = 6000USD,
Strategy B. The investor receives a payoff:
payoff = (660 000 – 680 000)+ = 0.
The investor loses the entire invested 39, 000 USD, hence a loss of 100%.
3. Arbitrageur
Arbitrage: based on observations of the same kind of risky assets,
taking advantage of the price differences between markets, the arbitrageur
trades simultaneously at different markets to gain riskless instant profits.
Arbitrage is not the same as speculation: speculation is to seek profits
promised by predictions of the future prices, and is thus risky. Arbitrage
is to snatch profits originated in the reality of the price differences between
markets, and is therefore riskless.
An opportunity for arbitrage cannot last long. Since once an opportunity
for arbitrage arises, the market prices will soon reach a new balance
due to actions of the arbitrageurs and the opportunity will thus disappear.
Therefore, all discussions in this book are founded on the basis that arbitrage
opportunity does not exist.

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2. Describe a component of civic duty (based on lessons 11-20) you would like to become more active in. How would you go about it? Include all of the following: • A goal and three steps you will take to achieve your goal • Your goal and steps should each be (at least) a fully-developed paragraph. • You should include why you have chosen the goal and the steps. • Save your work as a Word document and submit to the dropbox.

  1. Review your work in lessons 11-20.
  2. Describe a component of civic duty (based on lessons 11-20) you would like to become more active in. How would you go about it? Include all of the following:
  • A goal and three steps you will take to achieve your goal
  • Your goal and steps should each be (at least) a fully-developed paragraph.
  • You should include why you have chosen the goal and the steps.
  • Save your work as a Word document and submit to the dropbox.

Nursing is considered a noble profession. I would certainly like to become a nurse as it is related to the serving of those who are in distress. Helping those who cannot help themselves is not an easy task but any nurse can very dedicatedly, professionally and efficiently handle that. The profession has seen many changes. There had been times when nursing was not considered to a good profession but with the passing time the world has realized that the patients need much more than the assistance and round-the-clock care, which medicines prescribed by a doctor cannot give. Thus a need for the qualified nurses arose and a professional makeover of the curriculum of the nursing’s course was introduced. The study of the modern curriculum helped the nurses to get equipped with professional knowledge and hence adding a value to their profession. And in developed country like U.S., nurses are well qualified to take care of critically ill patients.

In many big hospitals, senior nurses now head their own teams to facilitate the patients. However, with changing times, many things related to nursing, be it their uniform or the bag of instruments they carry, has been changed. Initially they used to carry just a first aid box because their responsibilities were restricted in giving first-aid treatment to patients. Especially, during wars, nurses’ prime responsibility in army bases was to give first-aid treatment to the soldiers. However, now the time has changed. The advanced and professional curriculums in nursing colleges are now equipped to train nurses in such a manner, so that they can take care of the patients like a doctor in emergency situations. So, nurses now no longer carry first aid boxes. Rather they carry kits like doctors, which consist of stethoscope, thermometer, blood-pressure measuring instrument, blood-sugar checking instrument; disposable syringes etc. Thus they have been groomed to professionally act like a doctor in his absence.

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Limited government is a type of government in which minimal governmental intervention in personal liberties and the economy is applicable. The intervention beyond a limit is generally disallowed by law, and everything is bound as per the written constitution. It is very much associated or related to free market libertarianism or classical liberalism. The theory of limited government contrasts with the idea of socialism or communism that propagates equal opportunity of earning and wealth distribution. Among modern democracies, USA is the classic example of limited government where individual freedom and liberty thrive under limited government intervention.

Limited government is a type of government in which minimal governmental intervention in personal liberties and the economy is applicable. The intervention beyond a limit is generally disallowed by law, and everything is bound as per the written constitution. It is very much associated or related to free market libertarianism or classical liberalism. The theory of limited government contrasts with the idea of socialism or communism that propagates equal opportunity of earning and wealth distribution. Among modern democracies, USA is the classic example of limited government where individual freedom and liberty thrive under limited government intervention.

The government of the United States operates under the terms of a fundamental charter and has limited powers. The fundamental charter is the written Constitution which explains what the state should do and what it shouldn’t and it also specifies certain procedures in dealing with citizens. There is another document named Bill of Rights, which is attached with the Constitution that limits the power of the United States government in two ways. First, it restricts the range of power of the governmental as it says that there are certain areas — the areas of conscience, expression and association — into which the government should not channelize itself. Second, the Bill of Rights fixes certain forms which the government must follow whenever people are concerned. The Fourth, Fifth, Sixth and Seventh Articles of the Bill of Rights specify action and procedures of government from acting unfairly with the people. Thus USA’s constitution has sufficient checks and balances to run the country according to the principles of limited government, which is very conducive to citizens who thrive in their lives under minimal government intervention.

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While experimenting with various word art options, the best I could find was the editing of text along with text groups. This tools allows users to change, format or use the text of their choice inside a word document. the sub options that are available in it like Spacing, Even Height, WordArt Vertical Text, Align Text etc. provide the users with a good deal of freedom to work on the text of their choice. The size, format or even the position of text can be formatted with the help of these options available in the word art.

While experimenting with various word art options, the best I could find was the editing of text along with text groups. This tools allows users to change, format or use the text of their choice inside a word document. the sub options that are available in it like Spacing, Even Height, WordArt Vertical Text, Align Text etc. provide the users with a good deal of freedom to work on the text of their choice. The size, format or even the position of text can be formatted with the help of these options available in the word art.

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He seem’d to find his way without his eyes; For out o’ doors he went without their helps, And, to the last, bended their light on me.

Ophelia
He seem’d to find his way without his eyes;
For out o’ doors he went without their helps,
And, to the last, bended their light on me.

First Player
‘But who, O, who had seen the mobled queen–‘

Polonius
By heaven, it is as proper to our age
To cast beyond ourselves in our opinions
As it is common for the younger sort
To lack discretion.

Claudius
Welcome, dear Rosencrantz and Guildenstern!
Moreover that we much did long to see you,
The need we have to use you did provoke
Our hasty sending.

Gertrude
Good gentlemen, he hath much talk’d of you;
And sure I am two men there are not living
To whom he more adheres.

Rosencrantz
Happily he’s the second time come to them; for they
say an old man is twice a child.

Guildenstern
But we both obey,
And here give up ourselves, in the full bent
To lay our service freely at your feet,
To be commanded.

Hamlet
Ay, sir; to be honest, as this world goes, is to be
one man picked out of ten thousand.

Voltimand
That it might please you to give quiet pass
Through your dominions for this enterprise,
On such regards of safety and allowance
As therein are set down.

 

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He seem’d to find his way without his eyes; For out o’ doors he went without their helps, And, to the last, bended their light on me.

Ophelia
He seem’d to find his way without his eyes;
For out o’ doors he went without their helps,
And, to the last, bended their light on me.

First Player
‘But who, O, who had seen the mobled queen–‘

Polonius
By heaven, it is as proper to our age
To cast beyond ourselves in our opinions
As it is common for the younger sort
To lack discretion.

Claudius
Welcome, dear Rosencrantz and Guildenstern!
Moreover that we much did long to see you,
The need we have to use you did provoke
Our hasty sending.

Gertrude
Good gentlemen, he hath much talk’d of you;
And sure I am two men there are not living
To whom he more adheres.

Rosencrantz
Happily he’s the second time come to them; for they
say an old man is twice a child.

Guildenstern
But we both obey,
And here give up ourselves, in the full bent
To lay our service freely at your feet,
To be commanded.

Hamlet
Ay, sir; to be honest, as this world goes, is to be
one man picked out of ten thousand.

Voltimand
That it might please you to give quiet pass
Through your dominions for this enterprise,
On such regards of safety and allowance
As therein are set down.

 

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An insurance company is reviewing its current policy rates. When originally setting the rates they believed that the average claim amount was $1,800. They are concerned that the true mean is actually higher than this, because they could potentially lose a lot of money. They randomly select 40 claims, and calculate a sample mean of $1,950. Assuming that the standard deviation of claims is $500, and set ® = :05, test to see if the insurance company should be concerned.

Some Hypothesis Testing Examples
One Tailed (Upper Tailed)
An insurance company is reviewing its current policy rates. When originally setting the rates they
believed that the average claim amount was $1,800. They are concerned that the true mean is actually
higher than this, because they could potentially lose a lot of money. They randomly select 40 claims, and
calculate a sample mean of $1,950. Assuming that the standard deviation of claims is $500, and set ® = :05,
test to see if the insurance company should be concerned.
Solution
² Step 1: Set the null and alternative hypotheses
H0 : ¹ · 1800
H1 : ¹ > 1800
² Step 2: Calculate the test statistic
Z = x ¡ ¹0
¾=
p
n
=
1950 ¡ 1800
500=
p
40
= 1:897
² Step 3: Set Rejection Region
Looking at the the picture below, we need to put all of ® in the right tail. Thus,
R : Z > 1:96
² Step 4: Conclude
We can see that 1:897 < 1:96, thus our test statistic is not in the rejection region. Therefore we
fail to reject the null hypothesis. We cannot conclude anything statistically significant from this test,
and cannot tell the insurance company whether or not they should be concerned about their current
policies.
One Tailed (Lower Tailed)
Trying to encourage people to stop driving to campus, the university claims that on average it takes
people 30 minutes to find a parking space on campus. I don’t think it takes so long to find a spot. In fact
I have a sample of the last five times I drove to campus, and I calculated x = 20. Assuming that the time
it takes to find a parking spot is normal, and that ¾ = 6 minutes, then perform a hypothesis test with level
® = :10 to see if my claim is correct.
Solution
² Step 1: Set the null and alternative hypotheses
H0 : ¹ ¸ 30
H1 : ¹ < 30
² Step 2: Calculate the test statistic
Z = x ¡ ¹0
¾=
p
n
=
20 ¡ 30
6=
p
5
= ¡3:727
² Step 3: Set Rejection Region
Looking at the the picture below, we need to put all of ® in the left tail. Thus,
R : Z < ¡1:28
² Step 4: Conclude
We can see that ¡3:727 < ¡1:28, thus our test statistic is in the rejection region. Therefore we reject
the null hypothesis in favor of the alternative. We can conclude that the mean is significantly less than
30, thus I have proven that the mean time to find a parking space is less than 30.
Two Tailed
A sample of 40 sales recepts from a grcery store has x = $137 and ¾ = $30:2. Use these values to test
whether or not the mean is sales at the grocery store are different from $150.
Solution
² Step 1: Set the null and alternative hypotheses
H0 : ¹ = 150
H1 : ¹ 6= 150
² Step 2: Calculate the test statistic
Z = x ¡ ¹0
¾=
p
n
=
137 ¡ 150
30:2=
p
40
= ¡2:722
² Step 3: Set Rejection Region
Looking at the the picture below, we need to put half of ® in the left tail, and the other half of ® in
the right tail. Thus,
R : jZj > 2:58
² Step 4: Conclude
We can see that j ¡ 2:722j = 2:722 > 2:58, thus our test statistic is in the rejection region. Therefore
we reject the null hypothesis in favor of the alternative. We can conclude that the mean is significantly
different from $150, thus I have proven that the mean sales at the grocery store is not $150.