Choose a real organization and assume that the organization has recently received a large cash infusion and that your end goal is to maximize wealth. The "cash infusion" should be equal to 10% of your organizations net worth.
Create a portfolio strategy that details executive-level strategic financial decision making. Create a portfolio of assets that reflect an executive-level financial strategy for next year. Some decisions require planning beyond a year; however, current practice recommends yearly revisions to the strategy. The strategic decisions you make should be supported by globally acknowledged, peer-reviewed research.© BrainMass Inc. brainmass.com October 25, 2018, 7:33 am ad1c9bdddf
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Toyota Motors is selected to do this post in an effective manner. It is assumed that the company has recently received a large cash infusion and the end goal of management is to maximize the wealth. In this guideline creates a portfolio strategy that details executive-level strategic financial decision making. In addition to this, it also develops a portfolio of assets which reflect an executive-level strategy for the next year.
Cash Infusion Amount
The "cash infusion" should be equal to 10% of organization's net worth. Net worth or shareholders' equity of Toyota is $128,201,000 (Yahoo Finance, 2012). Thus, the amount of cash infusion can be calculated as below:
Cash Infusion = $128,201,000*10%
Following is the description of portfolio strategy and a portfolio of assets in relation to the investment of $12,820,100 that will be used by Toyota to maximize wealth:
To analyze different issues such as introduction of an independent growth path to a high-risk business, capture of the portfolio strategic risk in an appropriate manner and measurement of value and risk at portfolio level, it is necessary to develop a structured approach which is helpful for senior managers to better understand the impact of portfolio decisions on risk and values of corporate level portfolios (Jenner, Office of Government Commerce & Kilford, 2011).
An active portfolio strategy will be used by Toyota to attain the goal of wealth maximization. Under this strategy, mangers will use available information and forecasting techniques to ensure better performance as compared to a portfolio that is simply classified. For example, active common stock strategies include forecasts of future earnings, dividends or price/earnings ratio (Fabozzi, 2002). Similarly, bond portfolio, which are actively ...
The solution discusses the portfolio strategy for Toyota.
1) Consider a portfolio consisting of a long TM stock and a long put (K = $70). a. Graph the profits to the position as a function of stock price. b. How might you create a similar payoff structure using a call option? Based on a comparison of these two positions, are the options priced correctly?
Answer questions 1 - 3 based on the information below. Assume r = 4% and no dividends.
Toyota Motor Corporation (TM) - Stock Price 77.70
Options expiring in one year
K Call Put
70 12.2 5.8
80 7.2 10.5
90 3.7 17.6
1) Consider a portfolio consisting of a long TM stock and a long put (K = $70).
a. Graph the profits to the position as a function of stock price.
b. How might you create a similar payoff structure using a call option? Based on a comparison of these two positions, are the options priced correctly?
2 Charles Schwab has been recommending a naked strangle to some clients. This is a short positioning both the $70 put and $80 call.
a. Draw a diagram showing profit as a function of stock price.
b. Compute maximum gain, loss and breakeven point(s).
3) Assume you own $1.5 million of Toyota stock in your retirement account and would like to protect your position. Toyota's beta is .66. Six-month S&P futures (250x the index) list for 1090. What position (long/short, number of contracts) would you take if you decided to hedge Toyota price risk with S&P forwards? How effective do you anticipate this strategy to be? Briefly explain.
Answer questions 4 - 7 based on the information below. Assume interest rates are 2% and no dividends.
Mylan Inc. (MYLAN) - Stock Price 17.42
Options Prices (6-months until expiration)
K Call Put
14 4 0.45
17 1.9 1.45
20 0.7 3.3
4 Graph the profits to the following position at expiration as a function of stock price. Compute the maximum profit, loss and breakeven points and show these distinctly in your excel file along with the formulas for computing each. A covered call (K = 20)
a) A long stock purchase.
b) A protective put (K = 17)
c) A covered call (K = 20)
5) Compute percentage gain or loss for each of the positions in #4 if the stock price in 6 months is $25. Repeat for a price of $10.
6) Graph the profits to a butterfly spread using the Mylan options. Compute break-even points.
7) Use the put and the call (K = 17) to create a synthetic forward. Graph the profit to this position.
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