In June 2023, Prerna Mathews, vice president of Exchange-Traded Fund (ETF) Product Strategy at Mackenzie Investments (Mackenzie), was considering what ETFs to launch for the remainder of the year. As Mathews deliberated over the potential launch of a covered call ETF at Mackenzie, she had many things to consider. How would this product compare to existing investment solutions offered by Mackenzie? What should the underlying portfolio that the calls were written on be, and what percentage of the portfolio should be covered? What should be the expiration date and strike price on the written calls? Mathews knew that these critical product decisions would have significant consequences on how such an ETF would perform under various market conditions, as well as the costs Mackenzie would incur in managing the ETF.
On February 20, 2020, the executive vice-president and chief financial officer of Input Capital Corporation, the first agricultural commodity streaming company in Canada, was reviewing a capital stream contract that one of his associates had prepared for Sustainable Farms Inc. and submitted for his approval. One important consideration was the rate of return expected from the contract and the risks involved. The executive called a co-op student to his office and assigned her the task of calculating the internal rate of return, or effective yield, on this capital stream contract. He also hinted at an alternative way to assess the profitability of the contract, which was to estimate the contract’s mark-to-market value.
On March 29, 2012, the chief executive officer of London Mining, an iron ore mining firm based in the United Kingdom, was considering an innovative financing offer from BlackRock World Mining Trust, an investment firm owned by asset manager BlackRock. The offer was a royalty agreement that would see BlackRock pay US$110 million to London Mining in exchange for 2 per cent of iron ore revenues from the Marampa mine in Sierra Leone. The company was looking at raising $250 million in debt and funding the remainder through a combination of free cash flow, convertible debt, or an equity issue. The opportunity to sell a portion of the revenues as part of a royalty agreement seemed appealing. The chief executive officer’s challenge was to evaluate the advantages and disadvantages of agreeing to the royalty arrangement.
The University Club at the University of Regina was in financial distress. The club had been losing money for several years and was being subsidized by the University of Regina. However, due to budget cuts by the Saskatchewan government, the university was no longer in a position to subsidize the operations of the club. The board of the club had to make some tough decisions at this time. Could the club exist without university subsidy? Should the board increase membership fees, increase the number of members, or simply close the club? To make an informed decision they needed to perform a detailed analysis of the financial statements. An accounting professor, who had recently joined the club’s board, suggested performing ratio analysis to assess the problem areas.
On December 19, 2002, the board of directors of the Saskatchewan Power Corporation (SaskPower) was contemplating the approval of the company’s 2003 foreign exchange strategy to manage long-term currency risk exposure in the utility’s U.S. dollar debt. SaskPower had borrowed extensively in the early 1990s, with maturities ranging from 10 to 30 years. The U.S. dollar exchange rate against the Canadian dollar had since increased, thereby increasing the effective burden of the debt and reducing the utility’s net income. A change in accounting practices implemented in 2001 required SaskPower to recognize as a gain or a loss in the current year any translation differences in the value of its outstanding U.S. dollar debt resulting from fluctuations in the exchange rate during the year. This policy change led to a significant reduction in net income in 2001, followed by a significant increase during the first eight months of 2002. The volatility in earnings had complicated the task of setting rates for electricity and had proved politically difficult to justify. In late 2002, SaskPower had to decide whether and how to hedge its currency exposure in outstanding U.S. dollar debt.
On February 25, 2013, the chief investment officer at University of Regina Investing (URI) was reviewing the draft copy of the annual report for 2012 that was to be submitted to the client, the University of Regina. One investment that stood out was Poseidon Concepts Corporation, which the fund had bought at $14.02 per share in April 2012, had reached a high of CA$16.02 in September 2012, and had eventually lost all stock value. The chief investment officer decided to review the transaction to identify any warning signs or red flags indicating that Poseidon Concepts Corporation’s management was involved in earnings manipulation. If there were signs, and if they had been identified earlier, could URI have avoided incurred losses?
In April 2014, a research analyst for UR Investing, an investment group from the University of Regina, in Saskatchewan, Canada, was contemplating the decision of investing in a real estate investment trust (REIT). The decision had strategic implications because it would affect the risk profile of the student-managed fund. The analyst was given the task of evaluating the H&R REIT in particular and estimating a target price for H&R’s units. He had to carefully weigh the benefits in terms of returns generated against the risk of taking a position in the REIT. He had to analyze the strategic value of investing in REITs and decide whether to recommend that UR Investing should buy H&R units.
In April 2016, a large U.S. proprietary trading group in New York, with a significant fixed-income portfolio, was debating what discount rate to use to value the group’s interest-rate swap portfolio. The counterparties to these swaps were major banks, and the deals were collateralized. Criticisms about the use of the London interbank offered rate (LIBOR) as a benchmark for valuing these swaps were circulating, and there were reports that LIBOR was being manipulated. There was talk about an alternative, nearly “risk-free” reference rate that could potentially be launched during 2016. Was it time for the trading group to substitute some of its maturing LIBOR-based interest-rate swaps with overnight index swaps?
Transfer pricing used by multinational corporations to lower its tax burden, thereby increasing its consolidated income, can have far-reaching implications for the stakeholders, as a fund manager for Saskhedge fund found out the hard way. A stock investment the manager had made in Cameco Corporation has dropped its value by 20 per cent. In addition, Canada Revenue Agency has initiated a law suit against the firm for alleged tax avoidance in relation to the company's transfer pricing practices with its Swiss subsidiary. The suit could result in an additional tax liability of $800 million to $850 million. The manager needs to explain to the investment board the implications of the lawsuit on the stock price and advise the board on whether the projected $800 to $850 million is a fair estimate.
The board of directors of Symantec Corporation asked a consultant for an independent opinion on an important financing decision. Symantec had been working with several investment banks on a plan to raise debt to repurchase common shares. The consultant found it to be an interesting financing plan; whereas repurchasing shares immediately would increase Symantec's financial leverage, converting the notes in the future would reduce leverage at a potentially significant dilutive cost to the firm's equity. More interestingly, the company negotiated with the investment banks to buy a call spread on its own stock, covering the same number of shares as would be issued to noteholders upon conversion. After reviewing the proposal, the consultant tried to understand the motivation behind the structure of the transaction. Why would Symantec choose to issue convertible bonds, and why would it intend to buy the call spread?
Crown Investment Corporation (CIC) of Saskatchewan and its partners, Mosaic Corporation and CIBC, have decided to sell a fertilizer plant that they jointly own. Now, CIC and its associates have to come up with a value assessment and mode of sale. Using different valuation methodologies, students are to determine the plant's value.
In December 2009, about a year after it suffered a crisis when clients walked away from massive derivative losses, Gulf Bank’s new CEO is trying to change the governance and operation of Gulf Bank. This case focuses on a turnaround situation and provides students with insight into evolving corporate governance standards in Kuwait. After assessing the situation that the CEO faces, students have to decide what change he should pursue and how he should carry it out. From a broad industry governance perspective, students can examine the state of banking regulation and oversight in Kuwait and suggest ways that corporate governance can be strengthened.
The executive director of an independent charitable foundation is thinking about whether to hedge his foundation's U.S. dollar exposure given the large swings in the Canadian dollar-U.S. dollar exchange rate. For the past four years, the weakening U.S. dollar has contributed to underperformance in the foundation's portfolio relative to its peers.
Credit Default Swaps (CDS) are derivative instruments that allow investors protection against credit events such as downgrades of or defaults by single-name or a basket of obligors. Estimated by the Band of International Settlements to be at $32.6 trillion in December 2009, these instruments represent one of the largest and fastest growing financial product markets globally. This note is intended to introduce students to CDS, the pricing basics as well as the role in the 2008 subprime crisis.
The Canada Pension Plan Investment Board (CPPIB) has put in place a strong governance structure to ensure that excess contributions (by Canadians) can be invested with a singular mandate - to maximize the rate of return without undue risk of loss. In September 2009, a private member's bill seeks to regulate Canadian government agencies' dealings with Canadian mining companies operating in developing countries. A senior manager at the CPPIB has been asked to help craft the CPPIB's response to the bill.