13. A national chain of hotels utilizes a centralized authority structure. What is the most likely reason
why top management favors centralized authority?
a. They want to maintain a uniform image and high quality service.
b. They want to improve customer service response time.
c. They intend to empower its first-line employees.
d. They want to utilize a cross-functional organization.
14. Which of the following terms describes the set of values, beliefs, rules, language, and institutions
held by a specific group of people?
a. Culture
b. Ethnocentricity
c. Social beliefs
d. Institutional society
15. To implement a policy of empowerment, sometimes an organization has to restructure itself so
that
a. workers agree to work overtime without extra pay
b. an entire level of management is removed from the organization
c. managers have more responsibility and employees learn to follow directions
d. managers have less authority and employees have more responsibility
A global technology company has an overseas subsidiary which develops the batteries for its laptops and smartphones. The batteries require the use of the metal lithium. There are currently no futures traded for this commodity, so the company has put in place a trade agreement with one of the lithium suppliers, which is subject to frequent renegotiations. (1) (a) Define a consumption asset, the cost of carry and the convenience yield. (b) Explain why the convenience yield exists. (c) Write down an expression for the futures price for a consumption asset, defining all terms used. [6] Due to the volatility of the current trade agreement with the lithium supplier (and lithium prices in general), the technology company is considering cross hedging its lithium position. The company has identified oil futures as a possible hedge, due to a high correlation between changes in the prices of oil and lithium in recent years. In order to determine the optimal number of oil futures to buy, the company is considering using the Sharpe ratio for the portfolio instead of the more common minimum variance hedge ratio (Var(R,)). where R,, is defined below. The Sharpe ratio is defined as: E(R )-r Var(R,)where R, is the return on the hedged portfolio, E(R,) is the expected return on the hedged portfolio, Var(R ) is the variance of return on the hedged portfolio and r is the constant risk-free rate. (ii) (a) Explain what the Sharpe ratio shows and how it differs from the minimum variance hedge ratio. (b) Outline the disadvantages of using the Sharpe ratio. (c) State the condition that should be imposed on the Sharpe ratio in order to determine the optimal number of futures to buy.(iii) Define the term optimal hedge ratio. [1] It can be shown that the optimal hedge ratio for the Sharpe ratio is: G(R.) E(R) .P G(R,) G(R) [E(R,)-r] G(Rf ) 1-(R ) E(R) G(R) [E(R,)-] where o(R ) is the standard deviation of the return on the underlying asset, G( R,) is the standard deviation of the return on the future, E(R,) is the expected return on the underlying asset, E(R) is the expected return on the future and p is the correlation coefficient between R, and Rf- The optimal hedge ratio for the minimum variance hedge ratio is po(R )/G(R/). (iv) (a) State the condition under which the two optimal hedge ratios are equal. (b) Comment on this condition. [2] The company has the following information relating to the spot price of lithium: E(R) = 3% p.a. and G(R.) = 13% p.a. For the oil future: E(R,) = 2.7% p.a. and G(R/) = 15% p.a. The relevant correlation coefficient is 0.8 and the risk-free return is 2% p.a. (v) (a) Calculate the optimal hedge ratio for the Sharpe ratio and for the minimum variance hedge ratio. (b) Comment on these results. [2] (vi) Suggest other methods that the company could implement to mitigate the risks associated with purchasing lithium. [3]
