Most of us have heard about the controversial uses of derivatives, the debates between whether they should or should not be regulated, and the amount of oversight there should be on them. Derivatives are the complex financial instruments that contributed to not only the collapse of the giant insurer AIG but also 3 of the largest bankruptcies in American history – WorldCom, Enron, and Global Crossing. I will be discussing a little more in-depth about its debate in my next post.

So what exactly are derivatives?
Derivatives refer to a general class of investments, rather than a specific type of investment like stocks or bonds. As the name suggests, derivatives are investment vehicles that are derived from other types of investments. In other words, it is a security whose price is dependent upon or derived from one or more underlying assets.

They are contracts between 2 or more parties and its value is determined by the fluctuation of another underlying asset, such as a commodity, equities (stocks), loans (bonds), currencies and more. For example, the changing value of crude oil futures depends primarily on the movement and the fluctuation of oil prices.

The most common types of derivatives are futures contracts, forward contracts, options and swaps, which I will be discussing further in a later post.

How are derivatives different from stocks and bonds?
Stocks – represent shares of ownership in something tangible, such as a corporation
Bonds – also represents something tangible since they are promises of loan repayments, or IOUs from a borrower
Derivatives – hybrid investments based on these more basic investments. And because they are hybrids, investing in derivatives is more complex, and often far more risky than investing in stocks or bonds.

What’s the purpose of derivatives?
Derivatives are generally used as a financial instrument to hedge, or reduce, risk for one party but can also be used for speculative purposes. Investors sometimes purchase and sell derivatives to manage the risk associated with the underlying asset, to protect against fluctuations in value, or to profit from periods of inactivity or decline. Don’t forget that these techniques can be quite complicated and risky.

However, GM will continue to manufacture and sell cars. The U.S. government is hoping for a “surgical” process to build a new, smaller GM out of its remains. GM’s chairman, Kent Kresa, described this process as a “new beginning” for the company, saying that, “A court-^­supervised process and transfer of assets will enable a new GM to emerge as a stronger, healthier, more focused and nimbler company with a determination not to just survive but to excel.”

This massive reorganization of GM would leave the U.S. government holding 60% of the company’s equity but, nevertheless, this is an essential process in order for America to sustain a feasible US auto industry. Yet still, Obama had to reiterate that the government was still reluctant about becoming a shareholder in GM, but acknowledged that to go to with the alternative, which would be to extend more loads, would be worse.

Today, GM announced that they plan to sell their Hummer brand to Chinese equipment maker Sichuan Tengzhong Heavy Industrial Machinery Co. Ltd., in a transaction that would secure more than 3,000 U.S. jobs.

Yet another question lingers in our minds as we think to ourselves, “Will GM’s bankruptcy work?” Some people believe that GM has finally made the necessary changes to be competitive but still others hold their doubts about GM’s future prospect.

]]> http://www.dojitrading.com/2009/06/general-motor-bankruptcy/feed/ 0 http://www.dojitrading.com/2009/05/circuit-citys-resurrection/ http://www.dojitrading.com/2009/05/circuit-citys-resurrection/#comments Sat, 23 May 2009 14:11:24 +0000 Tim Huang http://www.dojitrading.com/?p=227 As many of you have probably noticed, the website Circuitcity.com was shut down after the company filed for bankruptcy in March this year. Now, Circuit City is under new ownership, Systemax Inc., which is leading multi-channel retailer of computers, electronics, and industrial products. The acquisition took place just last Tuesday, May 19, 2009 with  Systemax purchasing the Circuit city brand, trademark, website, customer records, among a few other assets. Systemax Inc. is a publicly traded company on the NYSE, using the symbol SYX. Systemax also owns CompUSA.com and TigerDirect.com , both which have been quite remarkably successful throughout these years. However, Systemax did not announce any plans for physical Circuit City stores, so therefore, purchases are to be made online.

Although Systemax has also acquired access to the previous Circuit City’s customer record, due to privacy issues, they have offered the earlier buyers the ‘opt-option’ right on its website, so that their personal information would not be transferred to the ‘new’ Circuit City.

The new Circuit City is offering new lower prices, new wider selection, and new faster shipping. Sounds quite attractive, right? BUT caution out folks because there is also a stricter return policy, in that the company reserves the right to reject specific returns, with some products not being accepted at all for returns.  These products include widely-known brand names — Compaq, IBM, Hewlett Packard, Toshiba, and Epson, etc. So before you get lured into consumerism, do your research!

Goodbye Lewis
Mr. Kenneth Lewis, who helped build Bank of America into the nation’s largest bank just a couple years ago now seems to be the center where criticisms are fired at. Shareholders have swiped his chairman position, though the vote was very close – 50.34% that had opted to remove Lewis as chairman. Investors attended the annual shareholders meeting, some even wearing shirts that expressed their feelings, with comments like “FIRE!!! KENNETH LEWIS.” In fact, 1/3 voted to remove him from the board altogether. However he remains chief executive, as its board of directors had unanimous support for him.

Why so angry? Angry investors held Mr. Lewis accountable for what was perceived as inept actions that he took, which had potentially forced the bank to accept two government bailouts. It wasn’t too long ago that Mr. Lewis was praised by many, even for his takeover of Merrill Lynch. Now, critics say that Mr. Lewis not only overpaid Merrill, but it seems like the takeover has done such detriments to the ex-largest bank. Merrill’s losses have prompted Bank of America to seek their second rescue from the government and this is where the criticisms start to roll in. Walter E. Massey, president of Morehouse College in Atlanta, will replace Lewis as chairman.