Friday, February 6, 2009

Assessing Intellectual Property and Electronic Transactions

The impact of intellectual property law which includes intellectual property rights, intellectual property transfer or licensing is a huge concern for the large discount retail industry.  Of course, large discount retailers want the cheapest price for the product so that they can make a phenomenal profit but because of that fact, they are subject to counterfeit merchandise being sold to them. Sure, once the merchandise is found to be counterfeit, it can be pulled but that might mean hundreds of thousands of dollars down the toilet. Large discount retailers must also be on the lookout for intellectual property infringement for their own companies. Wal-mart was just recently in a battle over the “smiley-face” logo which it had patented in the U.S but not abroad. Someone in another country claimed that Wal-mart had infringed on intellectual property rights. Therefore, a legal battle ensued. As the business world becomes more global, intellectual property laws should be more global instead of left to individual countries to enforce.
One of the most remarkable characteristics of e-commerce is that it occurs globally. Intellectual property may be used and licensed in many countries simultaneously. The global characteristic of e-commerce businesses affects intellectual property in a number of ways. It makes it difficult to find the infringer and enforce intellectual property rights that are violated on the Internet. It is unclear what courts will have jurisdiction over disputes relating to e-commerce and intellectual property. Also, laws affecting intellectual property vary from country to country so levels of protection may be different.
Lawsuits can be brought against a large discount retailer or, conversely, a large discount retailer may seek redress in national courts, but various legal procedural issues will affect such cases. If the parties are in different countries, it will be difficult to determine which court can or should be used. The court may or may not take legal control over the case, depending on many factors, but especially the connection between the parties and the country. As a practical matter, in order for a lawsuit to succeed, the defendant has to reside in the country in which the lawsuit is brought. Another difficult issue is what law to apply, especially if the laws of the countries of the parties involved are different. Finally, even if the lawsuit succeeds, it could be difficult to enforce a judgment in another country. International arbitration is one way to deal with international e-commerce disputes, though generally participation is voluntary and cannot be forced.
In 2006, a Frenchman claimed to have invented the yellow smiley face that Wal-mart uses back in 1968. For some, the image is a reminder of 1970s counter-culture, for others, a useful shorthand when sending e-mails. But since 1996, Wal-Mart has used the image in the US on uniforms and promotional signs, and it wants sole rights to it in the US retail sector. Franklin Loufrani - just one of a number of people who profess to have invented the image - has marketed the sign since the early 1970s. He and his London-based company SmileyWorld today own the rights to the logo in more than 80 countries around the world. The US is not included in this list (“Wal-mart”, 2006).
In 2007, a federal district court judge issued two landmark decisions in a nationwide class action suit against Target charging that the retail giant has "failed and refused" to make its Web site accessible to the blind. Brought by the National Federation of the Blind, the suit charges that by failing to make its site accessible to blind users via vocalization software or other tools, Target has violated the Americans with Disabilities Act as well as two California civil rights statutes: the California Unruh Civil Rights Act and the California Disabled Persons Act. In the ruling, Judge Marilyn Hall Patel not only certified the case as a class action on behalf of blind Internet users nationwide under the ADA, she also held that web sites such as Target.com are required by California law to be accessible (“IP”, n.d.).
Intellectual property laws are complex and vary from country to country. Preparation must be taken to insure that a company's intellectual property rights are not violated and that the company does not violate any laws themselves.
References

(2006, May 8). Wal-Mart seeks smiley face rights . Retrieved January 22, 2009, from BBC: http://news.bbc.co.uk/2/hi/business/4984138.stm
(n.d.). Industry Overview: Discount Stores. Retrieved January 22, 2009, from Hoovers: http://www.hoovers.com/discount-stores-/--ID__300--/free-ind-fr-profile-basic.xhtml
(n.d.). IP Concerns About International Transactions in E-Commerce. Retrieved February 1, 2009, from World Intellectual Property Organization: http://www.wipo.int/sme/en/e_commerce/transactions.htm
Noyes, K. (2007, October 3). Commerce Times . Retrieved February 1, 2009, from Target.com Lawsuit Shines Light on Net Access for Blind: http://www.ecommercetimes.com/story/59634.html

Policies, Regulations, and Trade Finance Considerations

In South Africa, the required documentation for a foreign goods transaction is a bill of entry.  Goods may not be imported into South Africa unless a bill of entry is submitted to and accepted by the local customs authorities.  A customs worksheet, a customs document which details rates of exchange and conversion of rates of the foreign currency amounts into South African Rands, must be presented to their customs agents with the bill of entry as well as relevant transport documents that requires stamping.  An import permit, if necessary, is required for certain goods and commodities only in terms of import control regulations.  Special import certificates or permits are needed by certain authorities prior to the goods being imported.  Transport documents such as the Bill of Lading (sea), the air waybill (air), the freight transit order (rail), and the road 'waybill', and the certificate of Origin which certain strategic commodities and goods facing anti-dumping charges requires (“Guide”, n.d.).
South Africa's major trading partners include the United Kingdom, the United States, Germany, Italy, Belgium, and Japan. South Africa's trade with other Sub-Saharan African countries, particularly those in the southern Africa region, has increased substantially. South Africa is a member of the Southern African Customs Union (SACU) and the Southern African Development Community (SADC). In August 1996, South Africa signed a regional trade protocol agreement with its SADC partners. The agreement was ratified in December 1999, and implementation began in September 2000. It aims to provide duty-free treatment for 85% of trade by 2008 and 100% by 2012. It has significantly reduced tariffs and export subsidies, loosened exchange controls, cut the secondary tax on corporate dividends, and improved enforcement of intellectual property laws. A competition law was passed and became effective on September 1, 1999. A U.S.-South Africa bilateral tax treaty went into effect on January 1, 1998, and a bilateral trade and investment framework agreement was signed in February 1999. South Africa is a member of the World Trade Organization (WTO). U.S. products qualify for South Africa's most-favored-nation tariff rates. As a result of a November 1993 bilateral agreement, the Overseas Private Investment Corporation (OPIC) can assist U.S. investors in the South African market with services such as political risk insurance and loans and loan guarantees (“South”, n.d.).
The United States is South Africa's biggest single trading partner. Total trade between the two countries has been increasing steadily in recent years, with South Africa holding an increasing trade surplus since 1999. This amounted to just under $1.5-billion in 2001, growing slightly in 2002. US exports to South Africa far exceed US exports to any other country from Sub-Saharan Africa (SSA), emphasizing the importance of access to the South African market. Trade with the US has been significantly boosted by the Africa Growth and Opportunity Act (Agoa) which allows duty-free access of exports – about 1 800 product lines - into the US. Exports falling under AGOA amounted to $1.3-billion in 2002, compared to $923-million in 2001(“SA”, n.d.).
South Africa's trade and investment with the rest of the world, and in particular the rest of Africa, has grown rapidly since South Africa emerged from international isolation in 1994. The country has positioned itself as a gateway into Africa and many international financial and other institutions have established regional offices, often as a platform for operations into the rest of the continent.
But cross-border transactions create complexities, including additional legal risks, when compared to domestic transactions. All cross-border transactions require input from local counsel and many key provisions of the governing agreements need to be considered in light of their detailed advice. If transactions require the taking of legal security over rights or assets, to name only one example where this matters, a lack of understanding of local features of the legal system can lead to unexpected difficulties: it may not be possible to take security in the manner, or over the kinds of asset classes, that one is accustomed to. The cost of taking security can also be surprising, or indeed a deal-breaker.
Many of the legal risk-mitigation options available in international contracts are the same, irrespective of the jurisdiction. In sale or purchase transactions, a thorough legal due diligence process almost always serves to flush out important risks. Negotiating a full set of warranties can also help serve to flush out issues and help to allocate risk appropriately between the parties. It is surprising how often this is overlooked. One of the most neglected aspects of international transactions is the choice of law and jurisdiction to govern the contract. In some African jurisdictions, public services, including public registries, law courts and enforcement agencies suffer from resourcing constraints and inefficiencies. Fortunately, many countries (including in Africa) have signed international treaties relating to the recognition of foreign arbitral awards, and have enacted arbitration-friendly legislation. However, where this is not the case, enforcement of an arbitral award may be difficult. Care also needs to be taken in selecting the procedural law that governs the arbitration. Too many lawyers are unaware that specifying in a contract that the legal place (or seat) of arbitration shall be in a particular country has the effect of incorporating that country's procedural rules relating to arbitration, irrespective of the applicable arbitral rules. Unless the selected country has an arbitration-friendly Arbitration Act, this could spell doom for a cost-effective possibility of enforcing contractual rights.
The legal risk profile of international transactions can be significantly influenced by lawyers with international experience, and no serious international retailer can afford to proceed without the advice of legal counsel. Larger institutions would do well to heed the often repeated cry from frustrated in-house lawyers, asking that lawyers be involved from the outset of the transaction and to help plan and structure it: it is time and money well spent (Jackson, 2009).
Overall, it seems as though South Africa is a good place for large discount retailers to spread their wings. Treaties are in effect to minimize costs and risks. Nevertheless, prior agreements cannot take the place of legal preparation. Before any retailer goes into a foreign country, steps must be taken to mitigate risks. If a large discount retailer wants to expand in South Africa, it can be done successfully with knowledge and preparation.



References

Jackson, J. (2009, January 19). SA trade with North America. Retrieved January 30, 2009, from Mondaq: http://www.mondaq.com/article.asp?articleid=72586
(n.d.). Guide to Importing into South Africa. Retrieved January 30, 2009, from Mbendi: http://www.mbendi.com/import/sa/import_documentation.htm
(n.d.). Industry Overview: Discount Stores. Retrieved January 22, 2009, from Hoovers: http://www.hoovers.com/discount-stores-/--ID__300--/free-ind-fr-profile-basic.xhtml
(n.d.). SA trade with North America. Retrieved January 30, 2009, from SouthAfrica.info: http://www.southafrica.info/business/trade/relations/trade_northamerica.htm
(n.d.). South Africa. Retrieved January 30, 2009, from Bureau of African Affairs: http://www.state.gov/ r/pa/ei/bgn/2898.htm

Tuesday, January 27, 2009

Retail Industry Analysis

The large discount retail industry includes about 5,000 stores with combined annual
revenue of $130 billion. Major large discount retailers include Kohl's, Wal-Mart Stores, Target, and Kmart. The industry is highly concentrated: the top eight companies hold 100 percent of industry sales.
Population growth and consumer spending drive demand. The profitability of individual
companies depends on efficient supply chain management, effective merchandising, and
competitive pricing. Large companies dominate the industry, and enjoy advantages in purchasing,
distribution, and marketing. Average annual revenue per worker is $175,000. Large discount retailers carry a wide range of merchandise and compete with a diverse set of retailers, including department, drug, grocery, off-price, outlet, and specialty stores; warehouse clubs; and Internet and catalog retailers. Major products sold include apparel (20 percent of sales); personal care products (15 percent); electronics and groceries (7 percent each); and toys (6 percent). Apparel includes women's, men's, and children's. Personal care includes cosmetics and health and beauty products. Electronics include video and audio equipment (TVs, DVD players, stereo systems). Companies may also sell kitchenware, sporting goods, towels and sheets, and footwear. Large discount retailers may have in-store pharmacies, photo processing services, or restaurants.
Large chains dominate. Companies aim to provide "one-stop shopping" for price-conscious
consumers by providing a wide range of merchandise at low prices. By leveraging low operating
and purchasing costs, companies are generally able to offer everyday retail prices lower than those
in most other retailers. Some large discount retailers are open 24 hours a day. Centralized
checkout areas, typically in the front of stores, allow companies to process large numbers of
customers efficiently.
Large discount retailers occupy a big footprint and require large amounts of real estate:
average size is about 100,000 square feet. A typical discount retail store can generate between $40 and $50 million annually. Sales per square foot may range from $300 to $450.
Large volume purchases allow companies to buy most merchandise directly from
manufacturers and enjoy volume discounts. Because large discount retailers represent
significant volume opportunity for suppliers, companies negotiate hard and typically receive
favorable purchasing terms. Companies may forgo advertising allowances and vendor supplied
transportation in favor of lower purchase prices. Effective purchasing helps companies
offer retail discounts while maintaining margins.
The large discount retail industry has pioneered effective supply chain management.
Efficiencies within networks of warehouses and distribution centers reduce replenishment time
and shipping costs. Deliveries from suppliers come in large shipments in pallet quantities by
truckload. Within distribution centers, workers may manage sorting equipment to assemble
orders for individual stores. Dispatchers coordinate truck scheduling, and stores may receive
shipments several times a week. To reduce costs and transit time, companies occasionally use
cross-docking, allowing suppliers to ship products directly to stores. Companies may dedicate
distribution centers to certain categories, such as grocery products, apparel, online sales, or
imports.
Inventory includes many major consumer retail categories with a broad selection of products
within each category. Companies offer both brand name and private-label products. "Hard
goods" include tools, furniture, home accessories, and kitchenware; "soft goods" include
apparel, footwear, and bedding. Because many customers rely on large discount retailers for
household staples, such as toothpaste and soap, maintaining high in-stock levels are
important. To maximize product availability, Wal-Mart allows some suppliers to monitor their own
inventory levels and generate replenishment orders.
Technology, including point-of-sale (POS) systems, automated distribution centers, and
computerized inventory management systems, has been crucial in keeping operating costs low.
Companies use hand held scanners, bar codes, and radio frequency identification
(RFID) tags to track merchandise movement electronically (“Industry”, n.d.).
Globalization can lead to increased exposure to different countries and cultures. Unfortunately, rather than enjoy and embrace this diversity, today’s trade rules are paving the way for large chains and
box-store retail, leaving previously diverse communities across the world looking more and more alike.
At the core of today’s trade agreements are rules that allow corporations to maximize their profits with as little interference as possible. As a result, laws and regulations that aim to protect the environment
and public health have been considered "barriers to trade" and have been attacked under these trade rules. The language in trade agreements is very specific. For example there can be no "limitations on the number of service suppliers" so if one foreign big box store or hotel chain is allowed access, elected
officials could not deny others access or limit the number of operations (“Trade”, n.d.).
It seems as though large discount retailers are magnets for lawsuits that are not just limited to their home country but also abroad. Currently, Wal-Mart is in a legal dispute with a Canadian union for closing a store after workers there organized. Additionally, in 2006, a Frenchman claimed to have invented the yellow smiley face that Wal-mart uses back in 1968. For some, the image is a reminder of 1970s counter-culture, for others, a useful shorthand when sending e-mails. But since 1996, Wal-Mart has used the image in the US on uniforms and promotional signs, and it wants sole rights to it in the US retail sector. Franklin Loufrani - just one of a number of people who profess to have invented the image - has marketed the sign since the early 1970s. He and his London-based company SmileyWorld today own the rights to the logo in more than 80 countries around the world. The US is not included in this list (“Wal-mart”, 2006). All in all, the large discount retailers dominate. It seems as though they are not going anywhere because the trade laws are allowing for rapid global expansion.
References
(2006, May 8). Wal-Mart seeks smiley face rights . Retrieved January 22, 2009, from BBC: http://news.bbc.co.uk/2/hi/business/4984138.stm
(n.d.). Industry Overview: Discount Stores. Retrieved January 22, 2009, from Hoovers: http://www.hoovers.com/discount-stores-/--ID__300--/free-ind-fr-profile-basic.xhtml
(n.d.). Trade and Sprawl. Retrieved January 22, 2009, from Sierra Club: http://www.citizen.org/documents/Sierra_Club_Sprawl_Factsheet.pdf

Conceptualizing Globalization

According to a new article in Network World, titled “Three Global Risks to Business in 2009”, the three global risks are financial, scarcity, and kidnapping. While two of these three risks do not seem like traditional risks, they do have their place. Of course, when any corporation decides to do business globally, financial risks are inherent. The world is large and a lot of profit can be made. Inversely, a lot of money can be lost. With the economy like it is, there is just not enough to go around. There is a financial crisis so global slowdown has lifted a lot of the pressure on commodities. But basically the underlying fundamentals of scarcity are there. Scarcity will probably be one of the main strategic challenges for businesses going forward; not only in 2009 but beyond. It affects everything from the supply chain to the capacity to operate. If a business is operating in certain parts of the world, some countries in Africa or Latin America for instance, will experience electricity shortages. And that is a complete no-no. A business won't be able to operate what it needs to operate without power (Goodchild, 2008). Another risk is kidnapping. We Americans are not used to the idea of being kidnapped. We don't take out kidnapping insurance and most of us do not know anyone who has been kidnapped or who has had someone in their family kidnapped. But in certain parts in the world, kidnapping is as common as assault in the United States. We tended to associate kidnapping with Colombia awhile ago. For the last decade or so, it was associated mainly with Latin America. Suddenly it's not so much Latin American as it is a phenomenon elsewhere (Goodchild, 2008).
Transnational and multinational corporations have to realize that they are not detached completely from the foreign countries where they do business. In order to succeed monetarily, they must take into consideration the people to whom they are selling and from whom they are buying. As the old saying goes “While in Rome, do as the Romans do” which sums up what global companies have to do in order to succeed. Nevertheless, while these global companies are doing business they must conduct themselves in an ethical way. After all, being ethical can be good for business. It can increase the return on investment, increase rewards for communities and workers, can inform customers of the the corporation's intent, and can reduce the environmental impact. More businesses are recognizing the benefits of being ethical, from cost savings on energy and materials to direct benefits like enhanced reputation among customers and clients and indirect benefits like employee satisfaction. Companies are working to mitigate their impacts on community resources such as water through conservation and by promoting sustainable development that benefits communities and employees. Through CEO blogs, YouTube videos and other new media tools, smart companies are arming customers with more information about their efforts. More companies are gathering credible data about the carbon emissions in their global supply chain. Beyond reducing their climate impact through decreased carbon emissions, advanced companies are working to monetize and develop markets for environmental services like water, nutrients and biodiversity (Asmus, 2008).
The smart global companies realize that they have a responsibility that extends beyond making money. Even the Andean Community Member Countries realize that. The Andean Community is conscious that the growing global demand for illegal drugs is worsening the problem and recognizes that it shares the responsibility for fighting this scourge. They understand and agree, however, that the magnitude of this problem is such that it cannot be addressed individually and calls for a real and concrete application of the principle of shared responsibility in the hemisphere and worldwide (Ehlers, 2008). It would be beneficial for any company doing business with the Andean Community to share in the responsibility of helping to eradicate the global demand for illegal drugs coming out of those countries.
Failure to attend to corporate social responsibility and ethics requirements from the various stakeholders has often seriously impaired careers of individuals and the image of firms; whether it be through regulatory actions, market place sanctions, or consumer boycotts. It is in the own interest of business to give importance to corporate social responsibility and ethics, and more fundamentally it is the right thing to do. Good ethics is good business, and companies that do the right thing often do better as a result (“Corporate”, 2008).
It seems that nowadays news is not news unless it mentions the economy. A lot of experts are comparing the current state of the global economy to the Great Depression. In current events, the global company, Nortel, went bankrupt. According to the xchange article by Kelly M. Teal, North America’s largest telecom equipment maker is filing for Chapter 11 bankruptcy protection. Nortel has been trying to avoid bankruptcy by slashing jobs and reducing overhead. But it still couldn’t hold up against the forces of a failing global economy. The recession and fewer sales, combined with all of its other struggles, have pushed Nortel over the edge. What is astounding is that Nortel could be considered an unethical company. They have 2.4 billion in cash and refuse to pay the 107 million in bond interest payments. They instead chose to file bankruptcy. They gave up and took a lot of people down with them.
Because of the current scarcity of resources, some global companies are taking action. According to an article in The Australian, written by Paul Myers, food security was becoming a major issue for many countries. The president of the National Farmers' Federation and chairman of the Cairns Group of farm leaders proposed a plan to create a grain-growing business with enough scale and diversity to reliably produce big quantities of wheat, sorghum and other grain for what he was sure to be strong long-term demand. His philosophy struck a chord with institutional and private investors, which fully subscribed the $300 million initial public offering. This is an example of making money and solving a global problem at the same time.
Companies that have operations abroad, especially in the high-risk countries of Latin America, should be ready to deal with kidnap and extortion attempts when they arise. Past experience shows that most companies are not ready (Macko, 1997). In a recent BBC new article by Andrew Walker, Nigeria's oil profits are going up in smoke because oil company employees are being kidnapped. Companies need to decide how they will respond to ransom demands ahead of time. Options include refusing to negotiate or pay ransom, but this position is something that very few companies would take. Another option, of course, is paying the ransom in full, but this could increase the risk of future kidnappings (Macko, 1997).
Even though kidnappings are a risk that companies have to face, rarely are companies accused of it. According to the Narcosphere by Brenda Norell, the United States is one company that is accused of it. The United States emerged in truth as one of the worst violators of international human rights during the Bush regime, with torture, kidnappings and secret renditions in violation of the Geneva Conventions. The ethical issues are outside of the scope of this paper but the fact remains that companies should have in check of how they look to the world as well as how they affect it.
It is apparent that a growing and more mobile population and advances in economics and technology have exposed the inability of nationally-organized governments to respond to transnational challenges. A large number of international organizations, multinational corporations and non-governmental entities now exert significant influence over international affairs (“Research”, 2009).










References
(2008). Corporate Social Responsibility & Ethics . Retrieved January 16, 2009, from INSEAD: http://www.bsr.org/resources/BW_2008CSRSection.pdf
(2009). Research Focus. Retrieved January 16, 2009, from Center for Strategic and International Studies: http://www.csis.org/researchfocus/#GlobalChallenges/
Asmus, P. (2008). Three Global Risks to Business in 2009. Retrieved January 16, 2009, from FVG LLC: http://www.bsr.org/resources/BW_2008CSRSection.pdf
Ehlers , F. (2008, February 22). THE ANDEAN TRADE PROMOTION AND DRUG ERADICATION ACT: IMPACT ON THE U.S. AND ANDEAN ECONOMIES.
Goodchild , J. (2008, December 23). Three Global Risks to Business in 2009. Retrieved January 16, 2009, from NetworkWorld: http://www.networkworld.com/news/ 2008/122308-three-global-risks-to-business.html?page=1
Macko, S. (1997). COMPANIES SHOULD PREPARE FOR KIDNAPPING SITUATIONS. Retrieved January 16, 2009, from Emergency Response and Research Institute: http://www.emergency.com/co-kdnap.htm

Wednesday, September 24, 2008

Mergers

Mergers are very sensible not only in life-such as marriage-but also in the business world. It is a common saying that two heads are better than one. Fortunately, this is not just a saying. The efficiency of a merger is not something that comes automatically but instead has the ability to disperse a tolerable amount of hard work between both parties to make the business successful. When two companies merge, a synergy exists which is the result of the whole being greater than the sum of it's parts. Synergies may result from the firms' combined ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise, and raise larger amounts of capital (Ravenscraft and Scherer 1987). The economies of scale-the increase in efficiency of production as the number of goods being produced increases-, solely, can be a great reason for a merger (“Economies”, n.d.). One merger that showed the benefit of economies of scale was Texaco Chevron in October of 2001. This merger produced a company with $104 billion in annual revenue and created cost-cutting opportunities through economies of scale which resulted in a hovering stock price of $90 the first year. "Being midsize helps nothing. The old companies were not big enough to take on the big guys...”(Worthen, 2002). Another benefit of a merger is the ability to eliminate the duplication of functions. A combined firm may avoid or reduce over-lapping functions and consolidate its management functions such as manufacturing, marketing, and research and development. Thus, reducing operating costs (“Growing, n.d.). Mergers are great for business when they are exercised properly. In addition to the obvious advantages of economies of scale and the elimination of duplicate functions, the real gem of a merger is having more experts at hand. Economies of scale, elimination of the duplication of functions, and vast amounts of human capital added to being able to raise larger amounts of capital equals a profitable business.


References
(n.d.). Economies of Scale. Retrieved September 22, 2008, from Investopedia: http://www.investopedia.com/terms/e/economiesofscale.asp
(n.d.). Growing a Business. Retrieved September 22, 2008, from Business.gov.in: http://business.gov.in/growing_business/mergers_acq.php
Ravenscraft, David J. & Scherer, F.M. (1987), Mergers, Sell-offs and Economic Efficiency. Washington, DC: The Brookings Institution.
Worthen , B. (2002, June 1). Economies of Scale. Retrieved September 22, 2008, from CIO: http://www.cio.com/article/31102/Economies_of_Scale_The_Texaco_Chevron_Merger? contentId=31102&slug=

Saturday, September 20, 2008

Futures

Futures Trading is a form of investment which involves speculating on the price of a commodity going up or down in the future. Commodities are traded between hundreds-of-thousands of investors, every day, all over the world. They are all trying to make a profit by buying a commodity at a low price and selling at a higher price. Futures trading is mainly speculative 'paper' investing, and it is rare for the investors to actually hold the physical commodity, but instead, just a piece of paper known as a futures contract (Riou, n.d.).
A futures contract is a forward contract traded on the exchange-same contract but different label (Brealey, 2008). A forward contract—or forward—is an OTC derivative. In its simplest form, it is a trade that is agreed to at one point in time but will take place at some later time. For example, two parties might agree today to exchange 500,000 barrels of crude oil for USD 42.08 a barrel three months from today. A forward contract is specified with four variables: the underlier, the notional amount, the delivery price, and the settlement date on which the underlier and payment will be exchanged. Oil is the underlier. The notional amount is 500,000 barrels. The delivery price is USD 42 per barrel. The settlement date is the actual date three months from now when the oil will be delivered in exchange for a total payment of USD 21.04MM. The party who receives the underlier is said to be long the forward. The other party is short (“Forward Contract”, 2005).
A futures exchange is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future (Futures Exchange, 2008). An exchange itself does not trade futures. Instead, it provides and maintains the facilities where buyers and sellers meet, ranging from traditional “trading pits” to global electronic trading networks, researches, develops and offers futures contracts to be traded, oversees the trading of its products and enforces trading-related rules and regulations, monitors and enforces financial and ethical standards, and provides daily and historical data on the contracts traded under its auspices (“What is a Futures”, n.d.). A forward exchange is a type of foreign exchange transaction whereby a contract is made to exchange one currency for another at a fixed date in the future at a specified exchange rate. By buying or selling forward exchange, businesses protect themselves against a decrease in the value of a currency they plan to sell at a future date (Irons, n.d.). Forward exchange rates are different from the spot exchange rates. A forward rate is composed of a spot rate plus or minus forward points. It is otherwise called Premium or Discount. Its level depends on the interest margin of the currencies sold and bought and on the time limit of the forward transaction of foreign exchange. Currencies with high interest rates show discount, which means the forward rates are lower than the spot rates; while currencies with low interest rates show premium, which means the forward rates are higher than the spot rates (“Forward Transaction”, n.d.).
A commodity futures market (or exchange) is, in simple terms, nothing more or less than a public marketplace where commodities are contracted for purchase or sale at an agreed price for delivery at a specified date. These purchases and sales, which must be made through a broker who is a member of an organized exchange, are made under the terms and conditions of a standardized futures contract. The primary distinction between a futures market and a market in which actual commodities are bought and sold, either for immediate or later delivery, is that in the futures market deals in standardized contractual agreements only. These agreements (more formally called futures contracts) provide for delivery of a specified amount of a particular commodity during a specified future month, but involve no immediate transfer of ownership of the commodity involved. In other words, one can buy and sell commodities in a futures market regardless of whether or not one has, or owns, the particular commodity involved. When one deals in futures one need not be concerned about having to receive delivery (for the buyer) or having to make delivery (for the seller) of the actual commodity, providing of course that one does not buy or sell a future during its delivery month. One may at any time cancel out a previous sale by an equal offsetting purchase, or a previous purchase by an equal offsetting sale. If done prior to the delivery month the trades cancel out and thus there is no receipt or delivery of the commodity. Actually, only a very small percentage, usually less than two percent, of the total futures contracts that are entered into are ever settled through deliveries. For the most part they are canceled out prior to the delivery month in the manner just described (Lerner, 2000).

References
(2005). Forward Contract. Retrieved September 18, 2008, from RiskGlossary.com: http://www.riskglossary.com/link/forward.htm
Brealey, R. A., Myers, S. C., & Allen, F. (2008). Principles of Corporate Finance. New York: Mc-Graw Hill Irwin.
Lerner , R. L. (2000, June). The Mechanics of the Commodity Futures Markets. Retrieved September 18, 2008, from Mount Lucas Management Corp. :http://209.85.173.104/searchq=cache:
VQXuC1I1ijYJ:www.turtletrader.com/beginners_report.pdf+what+are+Commodity+Futures&hl =en&ct=clnk&cd=6&gl=us
(n.d.). Forward Transaction of Foreign Exchange. Retrieved September 18, 2008, from Bank of China: http://www.boc.cn/en/common/third.jsp?category=1099368378100
(n.d.). What is a Futures Exchange. Retrieved September 18, 2008, from Chicago Mercantile Exchange: http://www.cme.com/edu/res/intro/trading/index.html
Riou, P. (n.d.). Futures Trading Introduction. Retrieved September 18, 2008, from Futures- Investor.Co.UK: http://www.futures-investor.co.uk/futures_trading_introduction.htm

Saturday, September 13, 2008

Efficient Market?

The concept of an efficient market is a theory that is based on the assumption that stock movements are purely random, act within the dynamics of buyers and sellers who have considered all the available information about an individual stock. Investors seeking profits must consider what information (or lack thereof) is presented at any given moment. Thus, a stock's current market price represents its true value based on the information known and available (“Some”, n.d.). In my opinion, this theory does not take into account that the information that is known and available differs between investors. It is true that an investor closer to a certain company whether professionally or personally has an advantage is determining the true value of a stock than the average investor. Enron is a prime example. This theory of efficient markets is a myth because of two simple yet relevant facts: Everything in the world always goes toward chaos and nothing is ever what it seems. The theory of the efficient market takes for granted that the “system” for buying and selling stocks is based on value and is the only system. Sure, every investor wants to make a profit but does the market become more efficient if it has not taken into account people that lose stocks in a poker game, give away their stocks to their children, or get their stocks stolen? Overall, the theory of an efficient market is not efficient in it's definition. Therefore, the concept of it all is not as efficient as it could be. This theory, on one hand, states that the value of a stock at the current point is the true value. Then, on the other, states that market efficiency does not require that market price is equal to the true value (Veneeva, 2006). In my opinion, this theory of an efficient market is a horrible attempt to oversimplify and cover-up the chaotic environment of the valuation of corporations.

References
(n.d.). Some of the terms often used on this site. Retrieved September 12, 2008, from Beat the Dart: http://www.beatthedart.com/terms_dict.htm
Veneeva, V. (2006, July 17). Efficient Market Hypothesis: Myth of Reality?. Retrieved September 12, 2008, from Amazines: http://www.amazines.com/article_detail.cfm/132852?articleid=132852