Unit 9

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Unit 9 Options trading

Discuss these questions.


1 We generally assume that a company's success depends on what it does in its core
business.
market. Can you think of any other activities which can make money for a company?
Certainly! Apart from its core business market, there are several other activities that can generate
profit for a company. Some examples include: expanding into new geographic markets, investing
in research and development to create innovative products, Providing training or educational
programs, licensing its intellectual property, etc.
2 Explain what you know about the Porsche brand and its business history.
Porsche is a renowned German automotive manufacturer known for producing high-performance
sports cars, SUVs, and sedans. Porsche's business history is characterized by a commitment to
excellence, innovation, and a passion for driving that has solidified its position as one of the
world's most prestigious automotive brands.
3 The title of the article is a pun. Which famous personality's name does it refer to?
Remove three letters from the first word to get that name. Why do you think the author
associated this personality with the Porsche brand?

READING
Understanding the main points
Read the article on the opposite page and say whether these statements are true (T) or false
(F). Correct the false ones. Identify the part of the article that gives this information.
At the time this performance report was written (February 2009), ...
1 the luxury car market was doing very well. T
2 Porsche's financial trading strategies were not at all risky. F
3 The gradual takeover of Volkswagen by Porsche had helped to make Porsche a lot of money. T
4 Porsche was making more money from financial operations than it was from selling cars. T
(€6.8bn profit from options trades)
5 Porsche would have no difficulty buying up the rest of the VW shares. F
6 there was a clear risk that VW's share price could fall in the future. T
7 HSBC agreed with Porsche's valuation of its VW shares. F
B. Understanding details
Read the article again and answer these questions.
1 Which other German groups were in danger due to share trading activities?
YES, German groups Schaeffter and Merckle risk losing control of their business empires due to
the fact that they made some highly leveraged share acquisitions and then saw a collapse in the
value of shares, which had been used as collateral against the loans for these shares.
2 How much profit did Porsche make in 2008 from trading options?
Yes, Porsche made a profit of 6.8 billion euros from trading options in 2008.
3 How much profit did Porsche make from its core activities in that year?
Porsche made only 1 billion euros from selling cars in that year.
4 What percentage of VW shares did Porsche hope to have acquired in the near future?
Porsche hoped to have acquired close to 75% of VW shares in the near future
5 Who was standing in the way of a full takeover? How large was their stake in VW?
The State of Lower Saxony was standing in the way of a full takeover. They held a 20-per-cent
stake in VW.
6 How was Porsche trying to solve that problem?
Porsche was trying to solve the problem by challenging the existing German law that allowed the
State of Lower Saxony to exercise a blocking minority through its 20-per-cent stake in VW.
7 How much cash did VW hold, and how could Porsche use this if it was successful in
taking over VW?
Volkswagen (VW) held a cash pile of €10 billion. If Porsche was successful in taking over VW, it
could potentially use this cash pile to finance part of the acquisition.

A. Word search .
Find words or phrases in the article which fit these meanings.
1 the use of various mathematical tools to maximise profits from financial investments
(paragraph A) financial engineering.
2 when the major part of an investment is funded by borrowed money (paragraph B)
highly leveraged
3 assets which are promised by a borrower to a lender if the borrower cannot repay a loan
(also known as security) (paragraph B) collateral.
4 when (for example) shares that are bought on a financial market are paid for with real
money (paragraph C) cash- settled.
5 the number of shares in a company needed to veto certain decisions at the Annual
General Meeting of shareholders (paragraph D) blocking minority.
6 the amount of money an investor risks losing if the investment does badly, for example
on the stock market (paragraph F) exposure.
7 when there are not enough shares available on the market to supply the demand for
them a) short squeeze (paragraph C) b) share shortage (paragraph F)
8 when the number of shares in supply exceed the number which are in demand, this
amount of shares are said to be the company's free float of shares. (paragraph G)

B. Vocabulary development
Match these words and phrases (1-6) with their meanings (a-f).
1 derivatives
2 option
3 option trade
4 call option
5 put option
6 to close an option position
a) the right to buy or sell shares, bonds, currencies or commodities at a particular price
within a particular period of time or on a particular date in the future
b) the right to sell shares at a specific price in the future, which you buy because you
think prices will fall below that price
c) the buying or selling of an option
d) sell an option back at the current market price, or let it expire in order to reverse the
original transaction or to exit the trade
e) options or futures belong to this group of instruments which often offer investors an
easy way to make bets in markets that would otherwise be difficult to get access to
f) the right to buy shares at a specific price in the future because you think that the market
price will rise above that price

1 e
2 a
3 c
4 f
5 b
6 d

C. Word partnerships
Match the verbs (1-6) with the phrases (a-f)
1e i
2 a v
3 c ii
4 f iii
5 b vi
6 d iv

D. Sentence completion Use words and phrases from Exercises A-C to complete these
sentences.
1 Porsche had been making a larger profit out of financial trading than it has out of selling cars.
2 Little by little, it had bought up a large percentage of VW share ownership.
3 The outcome of Porsche's European Commission challenge to the State of Lower Saxony's
stakeholding of 20% would decide whether they continued to do this.
4 Up to now, the demand for VW shares had been higher than supply. This short squeeze (or
share shortage) had kept their price very high.
5 However, if Porsche did not win its European court case, it would probably decide not to take
its stake to 75%, and would close its options position on the remaining VW shares. If it didn't
continue buying the shares, their free float would increase significantly.
6 If this happened, the share price would go down and Porsche would have to sell them at a loss.
7 In this case, Porsche might wish that it had focused only on its core skills and had not entered
into the world of financial trading.

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