Free «Financial Essay» Essay
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The finance, as a set of economic relations that arise in the process of formation, distribution, and use of centralized and decentralized monetary funds, is extremely complex and broad sphere of knowledge. Its impetuous development and precipitously changing issues lead to the necessity to revise attainments and skills permanently. One of the most useful ways to be up-to-date with the scientific achievements is to read and analyze the articles written by recognized scientists. In this essay the two of such papers are reviewed. The first one was written by Zeidan and Rodrigues; it is called “The failure of risk management for nonfinancial companies in the context of the financial crisis: lessons from Aracruz Celulose and hedging with derivatives”. The article was published in Applied Financial Economics Journal. The second one was done by Gomes, Angwin, Weber, and Tarba. The article “Critical success factors through the mergers and acquisitions process: revealing pre- and post-M&A connections for improved performance” was published in Thunderbird International Business Review. Both of the articles are recent, e.g. published in 2013.
The topic's significance
The role of secondary securities has increased significantly, while the level of derivatives’ applicability is very high. Nevertheless, there are several threats and mistakes, which should be avoided in order to make effective investment decisions. The aforementioned scholars show how to conduct an effective risk management and not to fall into irresolvable situations. That is why the chosen article is topical and deserves attention.
It is obvious that currently mergers and acquisition issues are of genuine interest, and the appropriate knowledge in this sphere always has to be latter-day. Thus, practicing financier should also be aware of the new trends and issues in this sphere. The revised article discusses the factors of critical success in mergers and acquisition processes, which are extremely important, and their features have to be known by both scholars and practitioners.
Zeidan, R. & Rodrigues, B. (2013). The failure of risk management for nonfinancial companies in the context of the financial crisis: lessons from Aracruz Celulose and hedging with derivatives. Applied Financial Economics, 23(3), 241-250.
The main aim of this study is to show the significance of the hedging strategies and to analyze the way the speculation with the derivatives results in a set of behavioral and agency problems. The case of The Aracruz Celulose is a good example of failure to establish the proper hedge position, which has led to the situation, when the company lost 2.1 billion of dollars in currency derivatives.
Primarily, the authors focused on the issue concerning the applicability of the derivatives and tried to give an extended definition of this type of security. Thus, the derivative is an agreement for the implementation of the rights of its parties, and the performance of the obligations related to the price of the underlying asset, which is the basic instrument, and is leading to a positive or negative financial result for each side. In addition, revealing the basic provisions, the authors define a list of underlying assets for such contract. They may be: securities, commodities, currencies, iterest rates, inflation, the official statistics, the indicators of the environment, etc.
Having researched the problem, it was ultimately found out that the speculation with the basic types of derivatives, for example, currency swap, credit default swap, option, interest rate swaps (IRS), swap, or swaption, can lead to the unexpected consequences. Having thoroughly conducted a comparative study, it was found that the undigested financial policy may result in the significant losses. The scholars tried to draw a parallel between the total economic crisis and hedging policy of the non-financial companies during the period of 2008-2009. To show the exact impact, it was decided to focus on the activities of the Brazilian company The Aracruz Celulose, which is the world largest supplier of bleached eucalyptus pulp.
It was ascertained that the usage of “innovative derivatives” helped the company to deviate in the optimal ledge, but through the indirect effect of the financial crisis this management policy became unsuccessful and led to the great pecuniary losses. This example, of the way a company can speculate on derivatives, describes the potential result of such actions, and can be applicable in order to prevent the same negative results in future.
Having evaluated the scientific and practical significance of the article, it shall be stated that the title of the article is entirely consistent with the contents; thereto, the researchers have profoundly and methodically explored the researched issues and applied all empirical and theoretical evidence in a correct and logical manner. Although the connection between the ideas and the evidences appears to be questioned, the conclusions are relatively logical and only further exploration of the research questions may help to identify the alleged flaws of the study.
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Gomes, E., Angwin, D. N., Weber, Y., & Tarba, S.Y. (2013). Critical success factors through the mergers and acquisitions processes: revealing pre- and post-M&A connections for improved performance. Thunderbird International Business Review, 55 (1), 13–35.
There are many disputable assumptions concerning the mergers and acquisition processes, which are very popular today. The authors mentioned the connectedness of the information concerning this issue and made an assumption concerning the fragmented nature of the previous researches. While the process itself is well-described by the recognized scholars, the writers strengthen the importance of the pre-acquisition and post-acquisition factors, as of the essential parts of the whole operation.
Having researched the problem, it was ultimately found out that there were several concepts that affected the price formation and M&A performance significantly, such as the “strategic fit” and “organizational fit” concepts. These two elements were described by the scholars as the basic grounds for the formation of relationships between a target company and a purchaser. The study affirmed the assumption that there was the straight connection between the pre- and post- merger stages and the process in general. The resolution of the problems connected with the cultural differences of the two companies and the establishment of the synergy potential simplify the completion of the main steps of mergers and acquisition procedures.
The article’s aim is to make a review of the important variables, which are promoted by the different issues connected with M&A. The authors had the purpose to make certain that there are specific success factors within each element of the whole process, as well as between pre- and post-merger stages. In order to better explain mergers and acquisition processes it was decided to outline the method used for the selection of the key articles, which identify the advancement factors. In addition, the scientists describe these issues by analyzing them on the each stage of the mergers and acquisition procedures and articulate their interconnections. In the final section the previous described connectedness was discussed in light of its significance and ability to reduce the risks of transaction’s failure.
The topicality of this article is very difficult to overestimate, due to its applicability in every particular merger and acquisition process. It is easy to agree with the statement concerning the importance of pre- and post-acquisition stages, because the success of the whole procedure depends on the establishment of the strong relationships between the parties, based on trust and fair cooperation.
With regard to the conformity between the title and the course of the research, the authors did not perpetrate any deviations from the outlined course of the research. The authors have shown their proficiency and the material was outlined in an accurate and comprehensive manner, , while the empirical substantiation lacks evidences (the theoretical background is flawless). Relating the implementation and interpretation of the ideas, it is justified to speculate that the ideas and evidences are concordant, with the conclusions being entirely substantiated and completely based on the thesis statement, the ascertained evidence, and the combination of theories.
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The purpose of the article was to review the two relevant scientific works on a financial topic and analyze their importance and topicality. Based on the afore mentioned, there is a necessity to mention that the contents of both articles completely meet the objectives of their titles, the reports provide the target audience with a detailed overview of the declared topic, the application of the evidences and ideas has been done in a coherent and consecutive manner, and the summary of the articles are consistent with the content.
The operation with the derivatives is extremely complex issue, which requires the high level of skills and knowledge. The analyzed article showed that even the team of professionals can fail to establish the right company’s hedge position, which can lead to huge financial losses. Thus, the importance of the chosen scientific work is in the necessity to understand the key mistakes in securities’ management and prevent the similar problems. Consequently, the purpose of the article, its main points and their significance was described.
The second reviewed work dealt with mergers and acquisition features. The reason of choosing exactly this article was dictated by the need to expand the researched topic and to make sure that there are additional factors that can affect the whole procedure. Hence, the pre- and post-acquisition stages are also very important and help to lower the risks of failure of the transaction. According to this, the main ideas of authors were described and discussed.
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