Finance Assignment | Risk Financing and Insurance

Added on - 28 Jan 2020

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Risk Financing andInsurance1
TABLE OF CONTENTSINTRODUCTION...............................................................................................................................3PART 1..................................................................................................................................................31. Stating the important determinants of decision making in relation to the exercising of anoption..............................................................................................................................................32. Assessing the minimum and maximum value of the option.......................................................3PART 2..................................................................................................................................................4Describing the pros and cons of hedging strategy which is used by the airline companies inrelation to the fuel costs...................................................................................................................4CONCLUSION...................................................................................................................................7REFERENCES....................................................................................................................................82
INTRODUCTIONIn financial market, risk is one of the major factors which closely influence return aspect ofinvestors. Hence, in this regard, by taking into consideration the derivative instruments, investor canhedge the risk to a large extent. Present report is based on the case scenario of ocean cuisine plcwhich offers seafood dishes to customers. Here, report will describe the factors which businessorganization need to consider in relation to the option. Further, it will also shed light on the benefitsand drawbacks associated with hedging strategy.PART 11. Stating the important determinants of decision making in relation to exercising of an optionOn the basis of cited case situation, Ocean cuisines plc undertakes employee stockownership plan to offer high level of benefits to them. In this regard, individual will get 1000 sharesof a company stock with strike price of £65 at the time of signing a contract. Hence, in accordancewith the case situation, stock options have vesting period of three years. Further, the expirationperiod of such option is 10 years. In addition to this, Ocean Cuisines currently trading the stock @£40 per share. In addition to this, the cited case presents that company's stock is trading @ £55during the period of three years. In this, Ocean cuisine restaurant can take following decision aboutthe keeping or exercising options which are:First:Personnel of Ocean Cuisine have no right in relation to exercise the option becausevesting period is 3 years. On the basis of vesting period, employees cannot exercise options whichare offered by business organization. Moreover, vesting time entails that employees must wait forspecified time period in order to exercise the option. Hence, before this period, employees are not incondition to exercise the option. Thus, employees need to make focus on keeping the option withthemselves.Second:Employees of Ocean Cuisine do not exercise the options. Moreover, if they exercisesuch option then it may result into loss. Moreover, the strike price of option is £65, whereas tradingprice is £55. This aspect shows that loss of £10 will be suffered by the personnel if they exerciseoption. Thus, by considering such aspect, employees need to avoid the action in relation to exercisethe ESOP option.2. Assessing the minimum and maximum value of optionFirst condition:Underlying price = £65exercise price = £553
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