The Uses And Misuses Of Derivatives Finance Essay - Free Essay Example

Sample details Pages: 22 Words: 6534 Downloads: 6 Date added: 2017/06/26 Category Finance Essay Type Compare and contrast essay Did you like this example? Hedge funds are pools of investment that invest in almost any opportunity in any market where they foresee impressive gains at reduced risk. Hedging refers to implementing strategies that manage or protect against an identified risk exposure. They take leveraged positions in publically traded equity, debt, foreign exchange and derivatives. Don’t waste time! Our writers will create an original "The Uses And Misuses Of Derivatives Finance Essay" essay for you Create order The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions (Friedland., 2008). Derivatives provide institutions the opportunity to break financial risks into smaller components and then to buy or sell those components to manage risk. Hedge funds hold a number of assets; they use derivatives to protect against the adverse price movement of these assets. Hedge funds play more of the role of speculators than of hedgers. They use derivatives when buying and selling assets and by putting long-short positions, they seek to hedge themselves against broad market moves while profiting from changes in the relative value of the instruments they go long or short. Hedge funds offer a variety of unique strategies to utilize when investing in hedge funds, these are called hedging techniques. These include Market Neutral Strategies, Event Drive / Special Situations Strategies, Long Short , Global Macro, Sector and Country, Dynamic Strategies, Funds of Funds, Funds of Funds of Funds etc. (https://www.global-derivatives.com) Market Neutral Strategies are used in Market Neutral Funds. They tend to take positions which offset each other through both a long and short position simultaneously to reduce their risk exposure. These strategies include Long Short and Convertible Arbitrage. Long-Short methodology attempts to reduce market risk by taking both long and short positions in the market. This can be done by taking a long position in undervalued assed and a short position in overvalued ones. In these funds, it is anticipated that the undervalued assets will increase in value than any losses incurred from the overvalued assets, or vice versa. Convertible arbitrage is a relatively more complex strategy. In this convertible securities such as convertible bonds which can be converted into normal shares or bonds are bought, to take advantage of any price discrepancies be tween the convertible security and that of the exchangeable underlying. A position can be taken for buying convertible security or selling the underlying asset to realise any difference in prices. (https://www.global-derivatives.com) Event Driven / Special Situations Strategies intend to make profit from events related to particular companies. Event Driven funds take a bet that something in the future will happen which will affect the company and its assets in a particular way. These funds include Distressed Securities and Merger/ Risk Arbitrage; these securities include debt and equity of companies undergoing reorganization or bankruptcy, it is hoped that companies will recover and increase in value. These securities have very low value and can be given to the management of a company during the restructuring process. Merger/Risk Arbitrage funds tend to analyze companies which are potential takeover or merger targets by taking two positions. An example of it would be to buy the s tocks of a company that is being acquired with hope that its prices will rise and to sell stocks of the company that is acquiring, in anticipation that its value might fall. (https://www.global-derivatives.com) Long Short is another strategy which includes buying and selling a security based on the sentiments in the market or of a company. It includes short selling, long, and growth fund. Short selling occurs when a person anticipates that the price will fall in future and sells a stock which it does not possess, through borrowing. If the price really falls in future, they buy the lot from the market at a lower price and return it to the one they borrowed from earlier at lower price, thus making a profit. Long is another strategy in hedge funds, it is a fixed income instrument that benefits from the rise in the price of the held asset. They often utilize leveraged positions to maximize returns. Global Macro is an economics based strategy which intends to benefit from shifts i n global economic conditions such as inflation, interest rates and other macro-economic factors; a common example of it is the use of interest rate derivatives for speculative purposes, they give profit from economic movements within particular countries. Sector and Country strategies include sector funds and emerging markets. Sector funds are hedge funds that specialize within a particular industry for example technology, textile etc. these investments consist of long or short positions in stock, debt, or even derivatives on the stocks. Emerging markets include funds that emphasize on emerging markets with less-developed economies and aim to profit from market growth which influence the securities positively. Securities in these hedge funds include sovereign debt or corporate securities with the anticipation that their prices will rise with economic growth. Dynamic strategies include elements such as market timings and opportunistic. Strategy of market timing involves the rig ht timing of the market. It includes making profit based on the correct timing of investments across markets by moving between various asset classes depending upon the view of the manager regarding the market environment. Opportunistic strategy involves switching across asset classes, they use a number of strategies mentioned above depending upon the managers discretion, and the reason for switching strategies is to make the most profit. (https://www.global-derivatives.com) Funds of funds is the strategy of hedge funds to invest in other hedge funds in order to diversify the risk and exposure. The success of these funds depends upon the managers way of handling the funds rather than the performance of the actual investments. Funds of funds of funds or F3s is a new concept to hedge the risk exposure in terms of investments by reducing the volatility of the funds itself. They are good for high risk-averse investors willing to invest in the hedge funds industry. (https://www.glob al-derivatives.com) Amaranth Advisors LLC (Amaranth) Formation and Background Amaranth comprises of Amaranth LLC and Amaranth Advisors LLC. It was founded by Nick Maounis (Maounis) in 2000 as a multi-strategy hedge fund with a special focus on convertible arbitrage (selling (short) equity stocks and at the same time buying (long) convertibles of the same company creating a delta neutral portfolio), with its headquarter in Greenwich, Connecticut and with approximately $600 million in capital. Maounis experience was in managing a number of various arbitrage accounts in the US, Japan, Europe and Canada. The aim was to make profits from the small discrepancies in prices of stocks and bonds, through its structure of three principal funds Amaranth Partners LLC, Amaranth Capital Partners LLC, and Amaranth International Limited and the 27 investment professionals. It sought to employ a group of arbitrage trading strategies particularly featuring convertible bonds, stocks of merging companies and utilities. However, Over the years, the trading activity of Amaranth expanded into merger arbitrage (making a riskless profit by purchasing individual stocks of two merging companies and selling them together), leveraged loans (loans given/extended to individuals or companies that already have large debts on their books), blank-check companies (developing companies) ,volatility trading arbitrage (buying or selling an option on an underlying instrument and selling or buying a varying percentage of the underlying instrument this to gain from the difference between the implied volatility of an option and forecasted future probable volatility of the corresponding underlying instrument), long/short equity, and energy trading. (ICMR, 2010) Strategy As noted above, at the time of formations and throughout its term, the firm emphasized that it was a multi-strategy hedge fund, but as it could be noted in the aftermaths that most of the firms investments and losses were in natural gas derivatives. Amaranths basic strategy comprised of trading in the Natural Gas market; the firm took a long position in winters, with hope that the prices will rise, especially when the demand for natural gas exceeds the supply and storage capacity due to the cold season. Its winter months were November, December, January, February and March. Amaranth used to take a short position in summers when it anticipated that the prices will fall. Part of its strategy also included taking short position in April and long position in March. Moreover, another strategy was to purchase call options on winter months and put options on non-winter months. Amaranth used to bet that natural gas prices will rise, and the spreads in March and April prices will rise as well. Nature of Natural Gas Market By nature, the natural gas market is very risky and volatile. Majorly because there is a commercial need for the commodity. This situation creates a need for an institution to control its supply and storage. In America, there has been inadequate storage capacity of natural gas for peak the winter season demand. Therefore the price of natural gas is higher in winters; firstly due high demand and secondly due to increase the incentives to store natural gas. These factors raise the prices of winter natural gas contracts to an all time high level. Apart from that, the market of natural gas is also volatile because the natural gas production in America is lower than the rise in the demand for natural gas. U.S. Natural Gas markets are shielded from the global energy factors because a very small amount of US natural gas need are met by imports of Liquid Natural Gas (LNG). Commodities trades require less margin money (collateral) than other markets. On the main exchanges, trades p ost 10 percent of their positions value, whereas in the stock market, 50 percent is common. (Davis, Sender, Zuckerman, 2006). After gaining credit from banks, it is very easy for commodity hedge funds to get highly leveraged quickly. Traders of natural gas have a number of options. The largest exchange for trading natural gas is the NYMEX (New York Mercantile Exchange) which has standardized futures contracts up to few delivery months up to 5 years that are traded on the exchange. Traders can also use ICE (Intercontinental Exchange) which is an over-the-counter market for trading natural gas futures contracts. There has been a lot of debate if hedge funds have an impact on energy trading. According to Gary Gensler (a former Goldman Sachs banker and treasury department official and chairman of the Commodity Futures and Trading Commission (CFTC) the chief regulator for energy futures energy trading said I believe that excessive speculation in commodity futures can cause sudde n or unreasonable fluctuations or unwarranted changes in commodity prices,. He also expressed his opinion that the rapid growth of commodity index funds and increased hedge fund allocation to commodity assets contributed to the bubble in commodity prices. (Delamaide, Jan 11, 2010) Performance The founders original expertise was in convertible bonds (Till, 2006). The firm later specialized in leveraged loans, blank-check companies and in energy trading. Till June 30th 2006, energy trades accounted for about half of the funds capital and generated about 75% of their profits. (Till, 2006) In 2002 Amaranth started trading with JP Morgan Chase, in energy commodity trading. The winters of 2003 were exceptionally cold and lasted till February, this raised the prices of natural gas manifolds, and this in turn gave huge profits to Amaranth due to its long position in winters. By 2004-5 Amaranth shifted most of its investments into energy trading. The company used to make huge profits from placing spread trades and placing bullish bets on energy in 2005. In the same year America was severely hit by Hurricane Katrina, which adversely impacted it natural gas and oil production and refining capacity. This raised the price of natural gas and Amaranth reaped huge profits out of it. The accounts of Amaranth LLC showed robust performance by the company since its inception. The compound annual return for the period September 2000-November 2005 according to media reports was 14.72 net of all costs. (Gupta Kazemi) The chart below shows Amaranths returns till May 2005. The chart compares the Amaranths returns against CISDM Equal Weighted Hedge Fund Index and CISDM Convertible Arbitrage Index. Amaranth had gained a noteworthy position in May 2005, in CISDM Equal Weighted Hedge Fund Index. The chart show the volatility Amaranth was facing in May 2005, this volatility had brought high returns in the past but things then started taking the turn towards the wrong side. Amaranths returns; source: (Gupta Kazemi) NYMEX (New York Mercantile Exchange) noticed Amaranths considerable open interest of 51% in Aug 2006 in September natural gas futures contract, which would expire at the end of the month. NYMEX (New York Mercantile Exchange) brought its concerns i nto notice to Amaranth. Amaranth not only reduced their September but also Octobers positions, as per the directions of NYMEX (New York Mercantile Exchange). Alongside Amaranth increased their positions in October and September positions under ICE contracts, thus escalating their overall positions in natural gas. (Gupta Kazemi) According to US Securities and Exchange Commission filings, investors in Amaranths funds included a number of Wall Street banks including Morgan Stanley, Credit Suisse Group and Deutsche Bank AG. (Burton Leising, 2006) Amaranth was marketing energy and commodities fund to open in December 2006 of about $5 billion. The fund was to be managed by Hunter and Jeff Baired, co-head of Amaranths Global energy and commodities business. But unfortunately the events that followed didnt allow it to happen. (Burton Leising, 2006) Collapse and Beyond Amaranth used to bet that natural gas prices will rise, and the spreads in March and April prices will rise as well. However in 2006, so did not happen and gas prices began to decline due to rising inventories leaving Amaranth on the wrong side of the market trend and consequently reducing its portfolio value of $9.2 billion by less than half. Headed by Brian Hunter, it seemed that Amaranth had not anticipated the rise in the natural gas storage capacity, and the weather pattern bringing a warmer winter. It was in a weeks time that Amaranth lost 65% of its $9.2 billion assets. On September 14 alone, the fund lost $681 million from its natural gas exposure. On September 20th 2006, Amaranth sold its entire energy trading portfolio in a flurry to J.P. Morgan Chase and Citadel Investment Group. It did so at significant discounts to the portfolios then mark-to-market value. (Till, 2006) At the time of liquidation of Amaranth, the spread on gas future declined. The spread on positions held by Amaranth were $2.85 in late August, but after the liquidation had reached below $0.75. (MORGENSON ANDERSON, September 20, 2006). This indicates the lower price expectations in both the bid and ask price for every $1 invested in Amaranths holdings. When Amaranth Advisors LLC announced that it had suffered losses just as big as LTCMs, markets did not respond for Amaranth the way as they did for LTCM (Long Term Capital Management). New York Fed did not hold summit meeting for a bailout plan; but JP. Morgan Co. and Merrill Lynch Co started selling off Amaranths portfolio of natural gas futures. The co-founder of Energy Hedge Fund Centre (which tracks 520 energy funds) said, There is not systematic risk. The market can absorb this. (Mufson, 2006). The reasons for such a reaction were that, firstly Amaranth (although was doing rash trading) but borrowed less heavily and had less leverage than LTCM (Long Term Capital Management); secondly its positions were small er and focused in natural gas futures. LTCM s failure threatened the stability of banks, whereas Amaranths failure only hurt imprudent investors in the natural gas market who hadnt done any research before investing. Amaranths co-founder and chief executive, Nicholas Maounis, said in his letter to investors that the fund was aggressively reducing our natural gas exposure to meet payments to creditors. The said that there was large scale fluctuations in the value of the fund, which was up sharply in August, would be down 35 percent for the year after the sell-off. Later Maounis said that the conditions in the natural gas market deteriorated and market liquidity dried up so quickly that the fund was unable to unwind its energy positions. He said it became clear that we couldnt trade out of it. Amaranth had no choice but to sell its positions at a huge loss because the fund was faced with margin calls and couldnt borrow anymore because of the liquidity problem that emerged once news of its losses hit the market. Maounis apologized to the institutional investors, pension funds and wealthy individuals who lost money as a result of the bad trades. He said We feel bad about losing our money. We feel even worse about losing your money. (CBC-News, 2006) Officially at Amaranth desperately tried to sell the fund to Citigroup. But despite the extensive talks and negotiations, Citigroup decided to walk away from making any deal. (Taulli, Sep 29th 2006 ) On July 25, 2007, the Commodity Futures Trading Commission (CFTC) charged Amaranth and head energy trader Brian Hunter with Attempted Manipulation of the Price of Natural Gas Futures including making false statements to the New York Mercantile Exchange (NYMEX). The Federal Energy Regulatory Commission has also charged Amaranth and its traders with market manipulation. Amaranth filed a lawsuit against JP Morgan claiming US$ 1 billion in damages, on the grounds that the bank interfered in the companys work to make a deal with Goldman Sachs and Citadel Investments. The Federal Energy Regulatory Commission (FERC) later announced a settlement with Amaranths defendants. However Commodity Futures Trading Commission (CFTC) did not withdraw its charges on Amaranth and on August 12, 2009, the federal court ordered Amaranth to pay a $7.5 million civil monetary penalty. The court also enjoins Amaranth from violating the anti-manipulation provisions of the Commodity Exchange Act. (Release, 2009) Amaranth then sued Touradji and his employees (Touradji Capital Management LP), by filing a complaint on September 18, 2006 in New York Supreme court in Manhattan, seeking at least $350 million for claims including breach of contract and misappropriation of trade secrets. Amaranth says that Touradji Capital Management LP breached two contracts agreed to in September 2006 regarding the transfer and purchase of Amaranths base-metals portfolio. According to the official documents, Touradji Capital Managem ent LP used the information to recover profits obtained by defendants through improper trading practices and misuse of plaintiffs propriety and confidential information. Maounis, through a spokesman, refused to comment on the Touradji Capital Management LP suit (Chanjaroen, 2006). However in September 2009, Amaranth withdrew the summon it filed against Touradji Capital Management. Neither of the parties made a payment of any kind due to the withdrawal of notice. After the fall of Amaranth, Goldman Sachs was quick to come into action, and struck a deal to take over hedge fund manager of Amaranth Advisor LLCs lease at Greenwich America. Goldman occupied about 124,000 square feet at the property, which had served at Amaranths headquarters before the company was wound up in September. Amaranths lease was to expire in at the end of 2015 and had a rate of about $35 per square foot. (Ambroz, April 10, 2007) Internal control or Management of Amaranth Maouniss original expertise was in convertible bonds. In mid 2004 Maounis hired Brian Hunter (Hunter) an energy trader who was working for Deutshe Bank energy trading desk. Calgary-based Hunter was Amaranths head energy trader, who was given a free hand to trade the commodity market, due to his past experience of taking huge positions and making huge profits in the natural gas market. Maounis was impressed that Hunters made hundreds of millions of dollars (around 1 billion) for the firm in 2005 after Hurricane Katrina sent natural gas prices soaring, made the 32-year-old Canadian a co-head of commodities trading. Maounis let Hunter increase the size of his natural gas positions so that they became more than half of the entire firms exposure. This was against Amaranths claim of maintaining a multi-strategy fund. Before Hunters arrival, all commodities positions made up about 20 percent of Amaranths portfolio with natural gas having roughly 7 percent share. Amaranths partners h ad a confidence built on past success and they thought that they had a fool-proof strategy (taking long position in winters and short in summers); the company had reaped huge profits in 2002-2005 from this strategy. Amaranths website said moving nimbly and effectively within an ever-changing investment landscape and said that its employees possess fearlessness with respect to complexity, learning, as well as invention, and continuously strive for perfection. Maounis, said he had chosen the companys name, which means unfading in Greek. According to the wall street journal, Brian Hunters had so much success in trading natural gas futures, or bets, on the future prices of the commodity, that Amaranth allowed him to work from his home in Calgary, where he drove a Ferrari in summer and a Bentley in winters. (Hedge fund: a gamble too far, 2006, September 20). Analysts estimate that in order to fund his positions, Hunter was borrowing $8 for every $1 of Amaranths own funds. When the bet went in his favour, he could pay back the debt and keep the rest of the profit for Amaranth. As the bets started to go against him September 2006, his borrowing amplified his losses. (Hedge fund: a gamble too far, 2006, September 20). It is commonly believed that hedge funds improve the efficiency of the financial markets by introducing liquidity and innovation (Hedge fund: a gamble too far, 2006, September 20). However Amaranths collapse shows that the hedge fund managers earn for their lavish salaries only and not for the investors who have put up their earnings and savings in their funds. Operational risk is the risk associated with the internal management of the company and the probability of making wrong decisions that might harm the performance of the firm. Amaranth seemed to be suffering highly from operational risk. Hunters had a target of making $2 billion for the year at the end of August 2006. Analysts comment of such a target that Hunters must have had an unconsci ously large position for this market, One of the biggest players in the energy markets, such as Goldman Sachs Group, would take up positions less than a tenth as big as Hunters, traders said. Hunter was involved in rash trading in the market as his positions were often twice as big as the next biggest. It is also said that in Amaranth, there was an exclusive risk manager for every trading book, who sat with the risk takers on the trading desk. (https://www.icmrindia.org/casestudies/catalogue/Finance/Collapse-Amaranth%20Advisors-Case%20Studies.htm#Risk_Management)The risk managers were well qualified and had advance degrees. Paul Touradji, founder and managing partner of Touradji Capital Management, said was obvious about risk control and not about commodities. Touradji admitted that he exited the natural gas market for a year because Amaranth had entered the market, comparing its presence with that of well-financed poker player sitting down with poorer players and making big b ets. I cant think of a right counterstrategy other than to say, I am going to be at the bar until youre done, Touradji said. (https://www.hedgefundintelligence.com/Event.aspx?ProductID=7035ElementID=4983, 2006) Problems Diversification is the key element of all investment portfolios. It reduces the unsystematic risk of instability in any part of the economy. Amaranth specialized in the natural gas industry so much that it failed to realise that if it took any incorrect venture at any point in time, it would not have to face severe consequences. This is counted as a factor of poor risk management. One of the biggest issues with hedge funds is that there is lack of transparency for investors and they have no idea as to what the fund is doing with their money. Most hedge funds make money with the performance fees that are generated when the fund achieves larger gains; the bigger the gains the larger the fees for the hedge funds. If the funds stays still or falls, the performance fee is exactly the same. This type of fee structure can force hedge fund traders to implement exceedingly risky strategies. Much of the blame for what happened to Amaranth is being put on Brian Hunters, although he had a strategy, experience and understanding in the natural gas market; which worked well with various weather shocks, but the fund manager failed to take into account the rise in storage capacity of natural gas. The arrival of a relatively warm winter did not raise the demand of natural gas as much as in the previous years. These factors did not increase the price of natural gas as much, thus creating problems for Amaranth which has a long position. Amaranth was operating on a high leverage. As told earlier, Amaranth was operating on an 8:1 of debt to equity ratio. This amplified the credit problems for Amaranth because once it started facing liquidity problems; it ran out of cash to maintain its cash flows. After its collapse but before liquidating, Amaranth placed restrictions on its investors to withdraw holdings of cash. That is, they were allowed to withdraw for certain number of days but were required to submit the amount before the end of the term because inability to do s o resulted in a penalty. Investors were not allowed their savings beyond 7.5% of their savings. (MORGENSON ANDERSON, September 20, 2006). The bankruptcy of funds causes damage to a number of individuals and companies that have their stake with them. In the Case of Amaranth, Morgan Stanley, invested $126 million, or about 5 percent, of its $2.3 billion funds of hedge funds in Amaranth. Even New York Fed Governor Timothy F. Geithner warned that hedge fund failures could hurt market participants other than those investors and lenders who have chosen to do business directly with those funds. (Mufson, 2006). This is because the instability created in the market (because of the bankruptcy of the company and the loss of a lot of people) can result in a systemic risk, which influences other sectors as well. It is commonly said that Amaranths systems did not measure risks correctly and did not take steps that would reduce the risk. The risk models that were employed by hedge funds use historic data, but the natural gas markets in 2006 were more volatile than any other year since 2001, making models less useful. A managing director of Lyster Watson Co, an advisory firm that invests in hedge funds for clients but not with Amaranth said, It was a total failure of risk control to put your entire business at risk and not seem to know it. They were more leveraged than they realised. (Davis, Sender, Zuckerman, 2006). Lessons to be learnt Derivatives as we know are risky sources of investments, and there a number of lessons that one can learn from the incident of Amaranth. Before making an investment (esp. in sector fund) it is important to analyze the performance of the sector relating to the profits and losses, during the past few years. A monthly sector analysis reveals that a -24% monthly loss is normal and the monthly volatility of the energy strategies was around 12% (Till, 2006), therefore due consideration should be made by investors before investing in such an industry. The second factor that fund managers should consider is of marketability or liquidity, which is the ease with which the contracts can be sold into the market again. The exchange traded futures market of natural gas contracts is way smaller than the over-the-counter natural gas positions. This should put the question in investors minds that in case the market of natural gas declines so how will they sell their contracts and liquidate their position. The strategy of Amaranth did not include an exit strategy. The following case of MotherRock also proves this point. Before the fall of Amaranth, on August 2, 2006 MotherRock, a natural-gas-oriented hedge fund had announced that it was shutting down, its losses had reached up to $300 million; it had made a wrong short position and was therefore forced to liquidate due to mounting losses. This should have sent alarming bell to the investors in Amaranth to secure their position in the market and they make sure that the dont face liquidity risk in near future (liquidity risk explained later). All successful investors have an exit strategy as part of their main strategy; liquidity is one of the four core factors to consider when investing in the market, these factors are risk, return, liquidity and maturity. Liquidity risk includes the risk that liabilities cannot be met when they fall due and can only be met at an uneconomic price. This risk can be accounted for by wide ning the bid/offer spread. An institution might lose liquidity if its credit ratings fall, it experiences sudden unexpected cash outflows or some other event that causes the counterparties to avoid trading with or lending to the institution. A firm can also be exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different parties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to make its payment, it will default too. Here liquidity risk is compounding credit risk. A position can be hedged against market risk, through diversification of the portfolio by including assets with different unsystemic risks, but still has liquidity risk. Amaranths investments were high-risk funds that lacked liquidity due to the nature of the natural gas futures market. They did not have any counter party to take their position under a week, when they needed it most. One reason that can explain this liquidity problem is that the counter parties had already locked their position in the forward contracts relating to production or storage. It seemed that due to their past experience, of success in assuming long position in winters and short position in summers, Amaranth failed to anticipate the liquidity risk they were getting into by being unable to find a counter party. (Till, 2006). This was the job of the funds risks managers to employ scenario analysis based on this past events. Taking all the factors mentioned above proves that Amaranth was taking immense risk with respect to liquidity. Amaranth was giving the natural gas comodity market a service by providing liquidity to the participants who could lock in the value of future production or storage contracts. However the scale of its services was way larger than its capital base; that is, Amaranth was operating on very high leverage. One of the most important lessons to be learnt from this incident is that risk management can look good and sound well yet still be very weak. After the collapse of Amaranth, Nicholas Maounis, told his investors that Amaranths risk management gurus thought it was highly remote that Amaranth would lose the natural gas bet. He defended the full-time, well-credentialed and experienced risk professionals who were modelling and monitoring the energy portfolios risks. Sometimes, even the highly improbable happens. That is what happened in September. (ANDERSON, 2006) On the other hand, a number of analysts thought that Amaranth failed to notice the changes in weather and the less likelihood of a natural disaster in the near future. Kent Bayazitoglu, head quantitative analyst wit h Gelber Associates, an energy consulting firm said, Given the bearish conditions, there was a more than 50 percent likelihood this would happen. The question was when. (ANDERSON, 2006). The Amaranth Advisors outcome is a classic case that demonstrates the pitfall of a quantitative approach to risk management. Companies that use quantitative approach to risk management, based on analysing data to control risk is an out dated and useless method. In the world of today, there is a need to adopt a more forward looking approach ERM Enterprise Risk Management includes the best practices and scenario based approach for a more balanced and comprehensive view of risk. According to Steven Minsky, who is the CEO of LogicManager, ERM is a process comprised of a series of iterative and sequential steps to enable continuous improvement in decision making and performance with regards to the reduction of uncertainty within an organization. ERM formalizes risk tolerance to acceptable levels. This approach addresses the root cause of potential future problems rather than monitor transactions for historic symptoms. He tells that the Amaranth Advisors acted in a very brash manner and took steps being over confident on their quantitative and historic methods of calculating risk, which eventually proved outdated. (Minsky) The episode of Amarant halso shows that mutual funds in comparison, are actually a good investement. They provide diversification and low cost (hedge funds have high fee structures). Mutual funds are more transparent and provide investors with more information about the number, type and trade in stocks. Timeline of Amaranths collapse Source: (Chincarini, 2006) Regulatory control during that time In hearing about Amaranth before various House and Senate committees as well as at the CFTC itself, it became clear, at least to many lawmakers, that contracts on unregulated trading venues can influence prices. This case was so straightforward that the Federal Energy Regulatory Commission to flex its new post-Enron mandate to stop manipulation of energy prices by pursuing disciplinary action against Amaranth. (Delamaide, Jan 11, 2010) Amaranth was registered as a commodity pool operator with the Commodity Futures Trading Commission (CFTC), is a member of the National Futures Association and counted among the its affiliates two SEC-registered broker dealers who are members of the National Association of Securities Dealers and one investment counsel and portfolio manager registered with the Ontario Securities Commission. And at least on paper, Amaranth did devote significant resources to regulatory compliance and was subject to many compliance obligations. (Amaranth, Hedge Fund R isk Management and Pensions, 2006) The trading of natural gas derivatives on hedge funds provides a level of predictability in the natural gas market. Traders can access these markets through New York Mercantile Exchange (NYMEX), for exchange-traded contracts; and Intercontinental Exchange (ICE) for over-the-counter contracts. As told earlier that when NYMEX (New York Mercantile Exchange) noticed Amaranths open interest of 51% in Aug 2006 in September natural gas futures contract, which would expire at the end of the month. NYMEX brought its concerns into notice to Amaranth. As a result Amaranth reduced their September and Octobers positions, as per the directions of NYMEX; but increased its positions in October and September positions under ICE contracts, thus escalating overall positions in natural gas. The collapse of Amaranth could have been avoided if ICE (Intercontinental Exchange) had the same authority as NYMEX (New York Mercantile Exchange) to limit Amaranths open interest. NYMEX (New York Mercantile Exchange) had the authority to direct Amaranth or any other company to reduce its open interest in NYMEX (New York Mercantile Exchange). However ICE did not have the authority to do so. The agency that regulates commodities market is called Commodity Futures Trading Commission (CFTC). This commission collects daily information on trades and positions from the clearing firms that operate on NYMEX (New York Mercantile Exchange). It demands traders with large positions to report their holdings and can demand disclosure if it finds an anomaly during surveillance. Amaranth started trading on ICE, which is an over-the-counter market; as a result Commodity Futures Trading Commission (C.F.T.C.) got limited information about the hedge funds trading and holdings. Traders with large positions on NYMEX (New York Mercantile Exchange) and other large futures exchanges only are required to disclose their position to the regulators. According to the Commod ity Futures Modernization Act 2000, the authority of regulators to collect information on over-the-counter markets is limited. (MORGENSON ANDERSON, September 20, 2006) After the collapse of Amaranth Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC) had filed the lawsuit Amaranth and two of its traders- Matthew Donhoe (Donhoe) and Brian Hunters (Hunters) , alleging that they had manipulated natural gas market prices through their trading activities in February and April 2006. Commodity Futures Trading Commission (CFTC) had originally charged US $20 million and FERC (Federal Energy Regulatory Commission) had sought US $ 291 million in fines from Amaranth and its traders. These charges were later settled at a total of $7.5 million. Moreover it was found that Amaranth was exploiting the gap between the regulatory regimes of Federal Energy Regulatory Commission (FERC) and Commodity Futures Trading Commission (CFTC). FERC (Federal Energy Re gulatory Commission) alleged the following in their case order: Amaranth and its traders intentionally manipulated the settlement price of the NG Futures Contract knowing that the NG Futures Contract settlement price is explicitly used to price a substantial volume of Commission-jurisdictional natural gas transactions (namely, physical basis transactions, described below, and the various monthly indices that are calculated using physical basis transactions). Accordingly, the Respondents intentionally or recklessly manipulated prices in connection with Commission-jurisdictional transactions, and thus violated the Commissions Anti-Manipulation Rule (https://www.dykema.com/publications/docs/EnergyLaw360.pdf) Mr. Hunter is still not exempted from the charges on him. According to an analysis, it was found that the price movements of Amaranth were consistent with the manipulative scheme alleged by FERC. Mr. Hunter has claimed that there was no abnormal price fluctuation; however, t here is significant evidence that prices were driven downward and subsequently recovered, consistent with the alleged manipulation. There are also evidences that Amaranths trading behaviour during the issue time periods of contracts was unusual when compared with the behaviour of other market participants and Amaranths own historical records. Nine of ten Amaranths defendants agreed to pay $7.5 million. The case then proceeded against the sole remaining defendant, Mr. Hunter. (Dr.King). On the other hand Hunters attorney Michael Kim of Krobe Kim LLP told Reuters Friday, When the case is fully examined, we are confident that Brian Hunter will be vindicated. (Levin, May 27, 2008) Legislation brings more visibility to the market and strengthening the hands of regulators will ensure that hedge fund activity in the energy markets will be more closely monitored and limited. These are some of the most relevant information from news papers and other sources. 1 By September 22, 2 006 the NAV of the fund has decreased 65% month-to-date and 55% year to date.  [1] 2 On September 14, 2006 the funds experience roughly $560 million in trading losses on natural gas positions.  [2] 3 By February 28, 2006 approximately 39% of the funds capital was allocated to energy and commodities portfolio.  [3] 4 Amaranth sometimes held positions to buy or sell tens of billions of dollars of commodities.  [4] 5 Amaranths overall fund gained around 6% in June, was roughly flat in July, and rose 6% in August according to investors.  [5] 6 It had $9 billion at the start of September  [6] 7 Spreads and options are of their very nature instruments allow the user to capture upside with a much clearer understanding with respect to downside exposure.  [7] 8 Mr. Hunter sometimes held 100,000 positions in a single contract  [8] 9 People familiar with the trades say he bet prices for near-by month contract would fall and winter contracts would rise.  [9] 10 Some of Amaranths trades wagered that prices for natural gas futures contracts for March 2007 would be much higher than those for April 2007  [10] 11 UBP officials said 80% of Amaranths performance last year and most of its performance this year was driven by energy investments suggesting there might not be much else  [11] 12 The New York Mercantile Exchange told Amaranth LLC that the natural gas bets were too big a month before the trades led to a $6 billion loss  [12] Source: (Chincarini, 2006)

Essay on Ernest Hemingways A Farewell to Arms - No Happy...

No Happy Ending in A Farewell to Arms Hemingways A Farewell to Arms is a tragic story of love and war. There has been a great deal of controversy over the ending of the novel in which Catherine Barkley died from massive hemorrhaging following an unsuccessful Caesarean operation. While such a horrific event to end a novel may not be popular, it is the soundest ending that Hemingway could have written. A Farewell to Arms is a war novel and Catherines death brings a conclusion that is consistent with the theme and context of the novel. The novel was written with a war wrought cynicism that is reflected in the attitude of Lieutenant Frederick Henry as the war changes the way he looks at life. As the war continued at the end of the†¦show more content†¦One passage in particular captures much of the theme of the novel and greatly foreshadows Catherine death: If people bring so much courage to this world the world has to kill them to break them, so of course it kills them. The world breaks every one and afterward many are strong at the broken places. But those that will not break it kills. It kills the very good and the very gentle and the very brave impartially. If you are none of these you can be sure it will kill you too but there will be no special hurry (249). This passage reflects the cynicism that the death and destruction of the war evoked in Frederick. He saw no reason for the deaths he witnessed of good, gentle and brave individuals. Catherine is, in Fredericks eyes, the epitome of the very good, the very gentle, the very brave. Frederick even referred to Catherine as `a good brave girl (313). In the end she was indeed killed impartially, but not without the world trying to break her first. The world had tried to break Catherine even before the novel began with the death of her fiancà ©, but she remained strong. She was cheerful, optimistic and giving no matter what trouble she was faced with. Even while unmarried and pregnant, traveling in a rowboat during a storm with her on the run lover, Catherine remained cheerful and generous and even took over rowing toShow MoreRelatedA Farewell To Arms And The Lottery By Shirley Jackson1392 Words   |  6 PagesKelly Warner 29 September 2017 EN 234 – Introduction to Fiction Setting and Symbolism In the novel â€Å"A Farewell to Arms† by Ernest Hemingway and the short story â€Å"The Lottery† by Shirley Jackson, there are distinct similarities and differences in the setting and symbolism used throughout. In order to see what the authors are trying to say, from time to time, you have to look deeper into the facts in the writing and analyze. Both of these stories are extremely stimulating, while still being heartbreakingRead MoreA Farewell to Arms: Love Story1181 Words   |  5 PagesA Farewell to Arms, by Ernest Hemingway, is somewhat of a Romeo and Juliet love story, with a tragic ending. In this novel, Romeo is Frederick Henry and Juliet is Catherine Barkley. Their love affair must survive the everything that is around them during World War I. The setting of this novel is war-torn Italy. The love between Catherine and Frederick must outlast long separations, life-threatening war situations, and the uncertainty of each others whereabouts or condition. This is a loveRead MoreA Farewell to Arms by Ernest Hemingway Essay525 Words   |  3 Pages In A Farewell to Arms, by Ernest Hemingway, the novel concerns itself primarily with Hemingways philosophy of life: unordered and random. There is no God to watch over man, to dictate codes of morality, or to ensure justice. Hemingway’s hero must accept his place as something insignificant, yet continue to fight endlessly against the meaninglessness of life. The universe is indifferent to mans plight. 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Thus Spilka arrives at the position that in naming the abiding earth as the hero of

How Fashion Is Seen as a Performative Art - 1084 Words

| The Idea of Fashion as a Performance | Yashika Makan | This essay refers to certain articles and talks about fashion and how it can be a performance art, and how certain components relate to it to enhance and back up the idea that fashion is a performative art. | Can fashion be considered as a performative art or not? In my essay I will be referring to two main sources that indicate that it can be a performative art, showing a connection between fashion and music, how fashion/ style to communicate a meaning, how artists and designers whose work reflects the idea of fashion as performance. As stated in the encyclopedia (1992, pg31): Fashion is a term commonly used to†¦show more content†¦Gindt(2011, pg 427amp;428) talks about an Icelandic singer-songwriter, actress, and fashion icon Bjà ¶rk, as she makes use of clothing and fashion as a communicative medium to send a message out on a political or social problem, and â€Å"her style helps her articulate the tension between national Icelandic concerns and the globalized context and industry in which she works† as Gindt (2011, pg 428) states, and add on to her visuals, whether it be a music video or a performance. She collaborates with fashion designers and fashion photographers to create her own distinctive style that is located at the intersection of the popular and the avant-garde. Bjà ¶rk uses McQueen’s creations and Knight’s photos and videos not as statements of fashion, that is, as a temporary manifestation of the ephemeral moment, but rather as creative means to craft a unique vision and identity that is particular to her pe rson and her art (Gindt 2011, pg 428), in comparison to Preston’s (2012) article about how current artists use fashion styles influenced by previous times and icons. Preston (2012) says that Rihanna channels everyone from 1960s fashion icon and Andy Warhol muse Twiggy to Clockwork Orange character Alex DeLarge. Her looks range from a platinum cropped wig and suspenders to bowler hats and body-hugging cat suits, while her make-up is a palette of soft white lips and eyes, accentuated with black. 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American Renaissance free essay sample

Also known as the New England Renaissance, the American Renaissance refers to a period of American literature from the 1830s to the end of the Civil War. The movement developed out of efforts by various American writers to formulate a distinctly American literature influenced by great works of European literature. Yet these novels, poems, and short stories utilized native dialect, history, landscape, and characters in order to explore uniquely American issues of the time, such as abolitionism, temperance, religious tolerance, scientific progress, the expanding western frontier, and the Native American situation. Short fiction of the American Renaissance encompassed a broad range of subjects, settings, and styles—including Gothic romance, detective and horror stories, sea tales, historical fiction of colonial America, and progressive social problem tales, among others—all of which contributed to the first generation of great American literature. Critics consider the shorter work of Herman Melville, Nathaniel Hawthorne, Edgar Allan Poe, and Lydia Maria Child, as well as the posthumously published sensational thrillers of Louisa May Alcott, as representative of American Renaissance short fiction. We will write a custom essay sample on American Renaissance or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page These authors viewed the short story or novella as a viable form in which to produce parables that explored literary and political concerns. Critics regard some of the short fiction produced during the American Renaissance as some of the best American fiction ever written. The American Renaissance was closely associated with an intellectual movement known as Transcendentalism, which is a philosophy or system of thought based on the idea that humans are essentially good, that humanitys deepest truths may be formulated through insight rather than logic, and that there is an essential unity to all of creation. Transcendentalism in the United States became popular among scholars, ministers, and intellectuals in and around Concord, Massachusetts. The American Transcendentalists advocated the development of a national culture and efforts at humanitarian social reform, as well as debate on such issues as the abolition of slavery, womens suffrage, workers’ rights, educational innovation, and freedom of religion. The magazine The Dial, founded in 1840 y Margaret Fuller and Ralph Waldo Emerson, served as a forum for the publication of fiction, poetry, and essays by leading American Transcendentalists and writers of the American Renaissance, such as the poet Walt Whitman and the essayists Henry David Thoreau, Bronson Alcott, George Ripley, Fuller, and Emerson. American Renaissance Introduction. Short Story Criticism. Ed. Janet Witalec Project Editor. Vol. 64. Gale Cengage, 2004. eNotes. com. 2006. 13 Aug, 2010 Note: When citing an online source, it is important to include all necessary da tes. The citation above will include either 2 or 3 dates. †¢ If there are three dates, the first date is the date of the original publication in traditional print. The second is the date of publication online or last modification online. The last date is todays date — the date you are citing the material. †¢ If there are two dates, the date of publication and appearance online is the same, and will be the first date in the citation. The second date is todays date — the date you are citing the material.