Investing and Trading Strategy: How to pick a stock and trade effectively? Case study: BHP

Investing BHP will make an expected return of 9.58% to 16.97%. First, it is a sound economic decision because BHP is the leader of the Base Metals industry whose growth is driven by China in the long run. Second, this choice is optimized by investing the equity and options in ASX over NYSE, singled out by implicit cost as the only key differentiating factor. At the same time, USD/AUD future is used to hedge the currency risk in CME because CME is the best choice for FX trade. Third, BHP is currently trading below its expected price. To effectively implement this investment decision, a covered call position will be done to cap the risk and return to meet the client’s need at 13-25% return with a risk of 5%. This position will be executed by performing special crossing over period of high liquidity with 3 brokerage firms with occasional limit order to reduce opportunity cost. Dynamic hedging, Percentage Drawdown and FX hedge using futures are measures to safeguard return at maturity. The average price measure and the implementation shortfall will be used to evaluate trade performance.

Perspective on the Bank of America and Merrill Lynch Deal

Being a victim of its own success for developing CDO, ML faced not only rapid mounting losses but also difficulty in raising capital prior to the merger. Unravelling the unprecedented significant losses after the deal was initiated in Sep’08; BoA faced a ‘velvet glove and iron fist’ treatment by the regulators to seal the deal in Jan’09. After exhausting all available options, ML chose merger as the last way out and quickly marry to BoA over other suitors at that time. The ‘threat and help’ by the government, the approval by the shareholder, and the initial Ken Lewis’s biased delusion that ML was a great bargain for its standalone valuation and greatest perceived synergies over other potential deals sealed the deal. Valuing the deal was especially challenging. Triangulation analysis indicated $30.14 per share that comes from a suite of valuation tools: Discount Cash Flow Equity, Multiple Valuation, Real Options and Synergy. Total Present Value of the synergies worth $1.64 per share comes from Universal Banking Network Externalities, Operational efficiencies- I.T & HR & Financial synergy. BoA’s track record on M&A indicates that synergies are likely to be realized, considering both are distinctive firms in culture and market horizon. In addition to that, the market seems poised for an upturn and the new entity is likely to rise up to new rivals like Cititgroup Inc and the in new world its has created for itself. Considering everything at hand, the deal is a great bargain. Holding the stock reckon returns in the long run while merger arbitrage also reap return at time of announcement!