There has been a tremendous amount of change in the financial markets over the last decade according to the journal of world business in both the domestic and international markets.
UK US
Foreign Exchange Risk Derivatives Interest Rate Risk Derivatives Foreign Exchange Risk Derivatives Interest Rate Risk Derivatives
OTC Forwards 8 4 1
Futures 1 1 0 1
OTC Options 1 1 2
Exchange Options 0
Swaps 3 6 3 7
Caps 3
Floors 2
Collars 2
1.1. Research Objectives
As business becomes more global, more and more companies are finding themselves
Increasingly exposed to increased risks with Exchange rate fluctuations and interest rate fluctuations being just some of the financial risks they face, therefore the management of these risks has become paramount for UK corporations.
The main objective of this research paper is to analyse the affect which the fluctuation in currency has on the telecommunication industry in the United Kingdom.
This dissertation seeks to establish how companies in the UK telecommunications industry manage their financial risks in this era of increased financial environment volatility.
1.2 Significance of the study
1.3 The Research Question
What is the impact of the currency fluctuation on the economy of a country?
How does the fluctuation in currencies impact the telecommunication industries in the Greater Britain?
What is the use of a Risk management plan and how can it be helpful in such economical situation when the Sterling is performing so badly and under tremendous pressure from the Euro.
1.4 Limitations
The research will be limited to UK Telecommunication Industry only
The sources of data would be primarily Secondary and empirical study would be conducted on this available data provided by the companies .
1.5 Keywords
Financial risk, economic crisis, telecommunication, risk management
2.0 Literature Review
DEFINITION OF DERIVATIVES :
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
According to Securities Contracts (Regulation) Act, 1956 {SC(R)A}, derivatives is
? A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security.
? A contract which derives its value from the prices, or index of prices, of underlying securities.
Derivatives are securities under the Securities Contract (Regulation) Act and hence the trading of derivatives is governed by the regulatory framework under the Securities Contract (Regulation) Act.
HISTORY OF DERIVATIVES :
The history of derivatives is quite colourful and surprisingly a lot longer than most people think. Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place on a specified date, existed in ancient Greece and Rome. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain. These contracts were also undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices of grains. Thus, forward contracts have existed for centuries for hedging price risk.
The first organized commodity exchange came into existence in the early 1700�s in Japan. The first formal commodities exchange, the Chicago Board of Trade (CBOT), was formed in 1848 in the US to deal with the problem of �credit risk� and to provide centralised location to negotiate forward contracts. From �forward� trading in commodities emerged the commodity �futures�. The first type of futures contract was called �to arrive at�. Trading in futures began on the CBOT in the 1860�s. In 1865, CBOT listed the first �exchange traded� derivatives contract, known as the futures contracts. Futures trading grew out of the need for hedging the price risk involved in many commercial operations. The Chicago Mercantile Exchange (CME), a spin-off of CBOT, was formed in 1919, though it did exist before in 1874 under the names of �Chicago Produce Exchange� (CPE) and �Chicago Egg and Butter Board� (CEBB). The first financial futures to emerge were the currency in 1972 in the US. The first foreign currency futures were traded on May 16, 1972, on International Monetary Market (IMM), a division of CME. The currency futures traded on the IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc, the German Mark, the Australian Dollar, and the Euro dollar. Currency futures were followed soon by interest rate futures. Interest rate futures contracts were traded for the first time on the CBOT on October 20, 1975. Stock index futures and options emerged in 1982. The first stock index futures contracts were traded on Kansas City Board of Trade on February 24, 1982.
The first of the several networks, which offered a trading link between two exchanges, was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7, 1984.
Options are as old as futures. Their history also dates back to ancient Greece and Rome. Options are very popular with speculators in the tulip craze of seventeenth century Holland. Tulips, the brightly coloured flowers, were a symbol of affluence; owing to a high demand, tulip bulb prices shot up. Dutch growers and dealers traded in tulip bulb options. There was so much speculation that people even mortgaged their homes and businesses. These speculators were wiped out when the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the option terms.
The first call and put options were invented by an American financier, Russell Sage, in 1872. These options were traded over the counter. Agricultural commodities options were traded in the nineteenth century in England and the US. Options on shares were available in the US on the over the counter (OTC) market only until 1973 without much knowledge of valuation. A group of firms known as Put and Call brokers and Dealer�s Association was set up in early 1900�s to provide a mechanism for bringing buyers and sellers together.
On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up at CBOT for the purpose of trading stock options. It was in 1973 again that black, Merton, and Scholes invented the famous Black-Scholes Option Formula. This model helped in assessing the fair price of an option which led to an increased interest in trading of options. With the options markets becoming increasingly popular, the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975.
The market for futures and options grew at a rapid pace in the eighties and nineties. The collapse of the Bretton Woods regime of fixed parties and the introduction of floating rates for currencies in the international financial markets paved the way for development of a number of financial derivatives which served as effective risk management tools to cope with market uncertainties.
The CBOT and the CME are two largest financial exchanges in the world on which futures contracts are traded. The CBOT now offers 48 futures and option contracts (with the annual volume at more than 211 million in 2001).The CBOE is the largest exchange for trading stock options. The CBOE trades options on the S&P 100 and the S&P 500 stock indices. The Philadelphia Stock Exchange is the premier exchange for trading foreign options.
3.0 The Research Design
Research Design is the most important part of any research the collection of data is very important. In this research the secondary sources of data will be used widely Many empirical frameworks based on management of Financial risks with the derivatives have been done by numerous methods by means of postal surveys and so on which is very expensive Collier & Davis (1985), Cazairli (1988), Bodnar et al(1995), Mallin et al (2000) , but now all these data is available online so it becomes easier to collect this information from the company statements both from the US and UK and makes the task easier
The research method employed in this study will however involve the collation of data through the analysis of the annual reports of 10 companies in the UK telecommunications industry and 10 companies in the US telecommunications industry. The use of this research method, eliminates the risk of non response from companies. Also as, American companies are used in the analysis; this method proves cheaper than sending out postal surveys or conducting telephone interviews. In order to reduce the reliance on the annual reports as the source of all data used in the analysis, secondary sources are used as a supplement. Database such as Data Stream is used to gather some independent variables such as the amount of foreign sales, and industry classification. Websites such as Hoovers Online and Yahoo Finance provided information on the financial markets of the companies.
UK COMPANIES US COMPANIES
BT Group plc Verizon Communications Inc.
Vodafone Group plc France Telecom SA
Cable & Wireless plc AT & T Corp.
Easynet Group plc Crown Castle International
THUS group plc SBC Communications Inc
MM02 plc America Movil S.A. de. C.V.
Kingston Communication plc American Tower Corporation
Fibernet Group plc Nippon Telegraph and Telephone Corporation
Colt Telecom Group plc New Skies Satellite N.V
Telewest Communications plc Callnet
The research into these companies, covers a wide range of areas. The key areas being:
(i) Whether derivatives are used or not;
(ii) Which derivatives are used, and the exposures which these derivatives seek to manage;
(iii) Organization of risk management in the company
(iv) Disclosure of financial instruments
4.0. Analysis of Results
4.1. Descriptive features of companies
All UK companies used in the research were listed on the London Stock Exchange. All but 2 of the companies operated mainly in the UK with large international dimension. Only one of the companies operated solely in the UK. The annual group turnovers of the companies ranged between �1million to �25billion. With the American companies, all were listed on the New York Stock exchange however 3 of the companies were non-American companies but operated in the US and in other parts of the world. The annual group turnover of the US companies ranged from US$200 million toUS$90 billion.
Spss software will be made use of for this the analysis of data and further an empirical study will also be carried on based on the information which is provided and the results can also be validated.
Conclusion
