Securities Markets 2 (Assignment) Assignment Example | Topics and Well Written Essays - 2500 words

Securities Markets 2 ( ) - Assignment Example The parent company of CAO is China National Aviation Fuel Group Corporation (CNAF), which is the largest state owned enterprise in PRC region (Prima Professional, n.d). The parent company is a well-known aviation transportation and logistics service provider in PRC. CNAF owns 51% of total shares that are issued by CAO. The year, 2005, was not at all good for CAO, since it had to face a loss of $550 million (China Daily Information Company, 2007). The situation led to the collapse of the institution, until it was revived by its parent company. The facts that are learnt from performance of CAO, regarding valuation of derivative, are elaborated in this section (Ernst & Young Global Limited, 2014). The CAO, in the initial period of their business, â€Å"traded in over-the-counter (OTC) swaps and exchange-traded futures† for protecting their business from risks associated with procurement of oils. The company purchased and sold risk free options on behalf of airline companies, who are their clients. So, there is a good source of income for CAO from the bid-ask spread, without exposing the company to vitality of the oil markets. During the third quarter of 2003, the company started to conduct options trades as speculators for earning profit from constructive market movements, which was observed in the oil-related commodities market. The company had started trade on the belief that oil prices will move upward. The trading strategy indicated purchase of call option and sale of put option simultaneously (Amato and Gyntelberg, 2005). Thus, it created a synthetic long position in the oil market, without purchasing the commodity outright. When price of the oil increased, the ca lls, which were purchased earlier, exercised at a profitable rate. The puts were not exercised and the company profited from premiums, which were collected from the options at the time of sale (IBS Case Development Centre, 2010). The put that were sold in the security market were not