Trading out of town shopping centers against city

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trading out of town shopping centers against city blocks) ...where the real profits lie ** A property derivative is a financial derivative whose value is derived from the value of an underlying real estate asset 5. How might property derivatives improve the stability of the property market? Idea that instead of rushing to sell physical assets when prices go down, real estate investors can hedge against possible drops in prices and thus not cause panic when prices do start dropping as part of their losses are covered by hedge o “By permitting property investors to reduce their exposure without dumping physical assets, they may also help to bring over-enthusiastic property prices down to earth more gently than otherwise” o Allows fairer prices to arise in market as house selling/buying don’t depend on high fixed transaction costs Essentially, derivatives allow investors to buy and sell exposure to the property market without having to buy and sell actual buildings. Property-transaction costs are a costlier part of the deal while pure swaps are a small percent o can take months to complete a property deal o For those who like property but need to minimize their exposure to it, derivatives offer a way to shed risk while retaining high-yielding physical assets
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Other indirect forms of property investment—mutual funds or shares in property companies, for example—often have high costs attached and, like direct investment, require a knowledgeable eye for winners D. Read “Metallgesellschaft: A waste of resources?” (Item 16.1) and answer the following questions: i. Explain carefully the strategy being followed by MGRM. Why was it hedging in the futures market? What was the underlying position in oil that it was hedging? How exactly was it hedging? Did the hedge expose it to basis risk? Strategy- o Had long-term fixed-price contracts to sell fuel to petroleum stations and small businesses o forward trade, sold forward oil Why hedging- to guard against rise in fuel prices Underlying position- short position (buy in future at a set price) o Stood to gain from a fall in oil prices How- o Buying futures in NYMEX Not hedging in swaps: costlier, the instrument’s underlying asset is based on their exact risk o Contract was to deliver fuel for several years o But had to buy short-dated futures every month Basis risk- timing in mismatch between short term hedge and long term liability ii. Explain why a fall in the price of oil exposed MGRM to a liquidity problem. Was this just a liquidity problem or was it a true loss? It was a liquidity problem o Fall in oil price caused NYMEX to demand larger deposits o Triggered a cash squeeze o Parent company withheld resources needed to maintain strategy o Parent company could have solved problem by supplying liquidity iii. How did accounting standards contribute to the problem? German accounting standards value asset and liabilities at the lower cost or market value German accountant wrote down value of future contracts as oil prices fell Did not recognize value of firm’s long term contracts to deliver fuel o American audit: $61m profit o German audit: $291m loss
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