Question 1
(i)
Arturo generally looked at the yield curve basing his argument on economic grounds. According to him, the slope of the curve tends to have a positive relationship with the real GDP of U.S. This points out that when the yield curve has a positive slope, the rate of economic growth should be strong over the next four to six quarters. The opposite also applies i.e. when the yield curve is negatively sloped, growth would be low. Arturo went further in his analysis of the yield curve to see how a given change would affect the economy based on the yield curve. He came to the finding that a small change tends to be more meaningful when the magnitude of the spread is smaller. A small change in the case where the slope of the curve is much flatter would tend to increase the probability of a recession. As such, the slope of the yield curve is seen to be an effective tool as an indicator of economic activities.
(ii)
The slope of the yield curve can be calculated through the use of the basic mathematical formula for obtaining the gradient. A tangent line is drawn at a point on the curve where we wish to obtain it slope and then calculate the changes that would be experienced at that point in time on both the x-axis and the y-axis and then obtain the gradient. Today, the slope is at 0.27 indicating a growth rate that is positive.
(iii)
The inversion of the yield curve generally portrays the fact that the economy is under a downfall. This means that the GDP of the country is no longer increasing but decreasing due to several factors. Monetary policies are often used in stabilizing the economy but to some extent they may result in the inversion of the yield curve. Contractionary monetary policies are meant to correct the problem of inflation and as such they may result to the inversion of the yield curve.
Question 2
Berner has solid reason for having his differences from Estrella’s evidence in regards to the yield curve. According to Barner, institutions’ newfound demand for long-duration bonds tend to squeeze the term premium. He also noted that there was increased demand for Treasury bonds on foreign governments’. This increased demand for the long-dated assets would result to the flattening of the yield curve. The flattening would end up having a stimulative effect since downward pressure on borrowing costs would be experienced.
Question 3
Currently, the curve is seen to be experiencing an upward trend with the slope increasing from the 0.19 experienced in January to the 0.27 experienced in February. This trend would continue but at a decreasing rate and would stabilize at some point and have constant rates of growth. The yield curve would therefore flatten over the next 12 months.
a) Modernization and expansion of the Mountain Pass facility. This was to be done in two phases. The first phase would modernize the facility and permit annual production of 19,000 tons. The second phase on the other hand would double annual production capacity. This approach is seen to be advantageous as it would increase production thereby increasing revenue earned. The disadvantage of this approach is that it would require capital to be generated from the organization.
b) Acquiring several firms. This is seen to be an advantageous aspect to the organization since the acquisitions would enhance its processing and manufacturing capabilities. The only disadvantage that arises is in regards to obtaining funds to acquire the firms and also to run them.
Question 4
Emgs factor deal is risky because of several factors. Risk factors such as competition from rival businesses change in the technology where the company has to invest more funds on the project. The company also faces the challenge of a hostile takeover. For instance, the company was acquired by Warburg in 2004 where the stakeholders were not willing to dispose of the company. Those various risks make the deal too risk because they will affect the performance of the company negatively.
Question 5
Emgs is ready to go to the public. The company plan to enlist its shares at the New York Security Exchange. Enlisting the sharers in the public security will have several advantages for the company. First the company will get the opportunity to sell its shares in the liquid market. It is easy to dispose of shares in a liquid market. Also, the company will have the opportunity to acquire additional funds that will assist the company in its expansion program. It could be advisable for the company to go public in the USA because the market is liquid in the USA and the market is usually large.
Question 6
The company can use forward contracts and future contracts to hedge its revenues against the inflation in the price. Molycorp can enter into a contract to deliver its products as a specific quantity at a specified price. Forward contact will assist the firm to evade future risks associated with the change in the price. The company can also use future contracts to evade the loss that may arise. The future contract will enable the firm to sell its products at a predetermined price ion the future, so if the prices fluctuate, Molycorp Company prices will not be affected. The advantages of forward contact are that fixes the future price of the commodity and it is also a straightforward for fixing the future prices. The advantages of future contact is that it removes uncertainty for the producers because the possible risks are limited
