BACHELOR OF BUSINESS
FINANCIAL RISK MANAGEMENT (INV 551)
DEBT CAPITAL MARKET AND ALTERNATIVE
SIR FERRI BIN NASRUL
NUR AMILIA BINTI ABD MUTALIB
MUHAMMAD ASYRAFF BIN MOHD
BM 251 4B
Table of Contents
1.0 Commodities Investment
2.0 Business Venture Capital
3.0 Bibliography 11
1.0 COMMODITIES INVESTMENT
Commodities are those tangible assets, that are
basic or raw materials, often used as the inputs in the production of some
other goods or services. In general, commodities usually categorized into four
main groups and those may include;
1) Metals that are including silver, platinum,
copper and gold, etc.
2) Meat and livestock that are including
chicken, meat, pork bellies, etc.
3) Energy that are including natural gas,
gasoline, crude palm oil (CPO), etc.
4) Agricultural that are including coffee,
sugar, corn, soybeans, etc.
In some ways, commodities investment has a lot
of differences to be compared with stocks and other types of investment.
Commodities investment requiring the investors to deal with a physical good as
well as needing the investor to manage the physical good.
Main reason of why people do commodities
investment is because of the growing concern of when price of commodities has
always known to keep on rising constantly, or in the specific term, inflated. Besides,
stock market volatility has made the commodities to seem like a very good
investment. Commodities investment also provides true diversification in
financial portfolio, as well as it acts as hedge against risks involved in
Some of factors that may drive the prices of
commodities include global economy that we can see generally prices will be pushed
up by strong demand, complying the rule of economy. Nonetheless, commodities
defer from other assets as the prices will be affected by those news and
short-term expectations on the economy directions. Next, storability.
Commodities that can be stored will be positively correlated with inflation,
meanwhile those that cannot be stored will be negatively correlated with
inflation. This can be implied that when the commodities are positively
correlated with inflation, it is actually a good sign that prices will tend to
risen up with growing inflation. Third factor is the components of economic
equilibrium, the supply and demand. General rule of equilibrium states that
price will be pushed up when there is a continuous strong demand from the buyer
but at the same time the supply of commodities is very limited. Notwithstanding
that, we know that when supply exceeds demand, the prices of commodities will
OF THE ARTICLE
The article that has been chosen entitled How
to Invest in Commodities the Right Way written by Dan Caplinger. In this
article, the author wrote on several ways that can be taken out to get into the
investment in commodities market. As stated in the above introduction part,
commodities investment requiring the investors to deal with physical good as
well as managing the commodities. Therefore, this will require some extra
efforts from the investor as compared with some other type of investment such
as stock market investment. Nevertheless, as there are benefits of this type of
investment, investors do not have to be worried about dealing with the
The author has provided and explained on
several ways that can be taken to invest or trade in commodities, including
first, by owning the physical commodity.
Second, is by associating in futures contracts
that will be explained further in this report, in which briefly, this contract
gives the right to the investors to take future ownership of the physical
Third, is by investing in exchange-traded funds
or the ETF and last but not least, by investing in companies that manufacture
or produce the commodity that is being traded.
Those four ways that has been written by the
author in that article will be explained further in the next chapter.
We believe that by looking down through this
article will help the readers to at least have some information and knowledge
on getting into the markets of commodities as the application of this type of
investment is differ from the application of stock market investment and some
other type of investment that are available to be joined by investors all
around the world.
1) Owning the physical commodity itself.
Going through the first method given by the
author, is by owning the physical commodity or good itself. Obviously when you
own whatever good it is, it is now your own, and hence, the decision will be
right in your hand, that you will automatically have the direct exposure on
increasing or decreasing the value of the good or commodity that you are
currently owning. As an owner, you can always decide when and to whom that you
want to sell the commodity that you own as well as at whatever the selling
price that you decide, based on the current market price when you feel like
converting the good to cash.
This will in further help you as an owner of
the holdings to have the benefit and advantage of liquidity in which you can
convert those goods to cash to perform or meet your commitment or daily or
Simply by applying the factor that may drive
the price of goods, seller may gain the return and also enjoying the profit
from the goods or commodities by taking the advantage by selling the holdings
at higher price than the buying price. Nevertheless, it is needed to be
considered that price that is too high may cause that the holding will not be
sold as buyers can own the commodity at lower price from the other seller that
intend to sell the same commodity at better price. It can be concluded that
selling price of goods or commodities or services price should always be around
the market price.
However, it can be said that most physical
commodities have always involved with major logical challenges such as storage
and exchanging challenge. For instance, it is always easy to find a seller who
wants to sell commodity of bulks of gold in the shape of bars or coins although
at a selling price that has been markup a little slight. In a meantime, we can
also say that it is way harder to deal with say one metric ton of platinum or
maybe 5,000 barrels of crude oil. Well this has caused owning physical
commodities or goods will only work in very few and limited situation with only
particular type of commodities.
2) Futures contracts.
Often when people talk about commodity
investment, it will associate with contracts, futures contracts. Futures
contracts allowing the delivery of commodities to be taken in place at specific
period of time that has been stipulated in the agreement between the buyer or
the investor and the seller or the owner. Futures contracts also allow the
buyer and seller to lock the price of commodities as has been arrived to the
agreement between the two parties so that the holdings change hands.
It is so important for investors who are new to
the futures or derivatives instruments to help themselves to get equipped with
sufficient information and knowledge regarding the investment right before they
get started in this futures or derivatives trading as the risk associated is
In Malaysia, two commodities futures that are
mostly traded on Bursa Malaysia Derivatives are the FCPO or Crude Palm Oil
Futures and also the FPKO or Crude Palm Oil Futures. In FCPO, the underlying
asset that associates with the contract is crude palm oil in which originally
sourced from palm that can produce cooking oil, vegetable gee and also soap. On
the other hand, the underlying asset in FPKO is crude palm kernel oil that it
associate with the kernel of the palm itself. Usually, the pressed kernel oil is
used for the manufacturing of detergents.
Therefore, we can say that normally, those who
are investing in futures contracts are the farmers that only with this
contract, the investor can be safe from the fluctuation of commodity prices as
they are able to do the transaction of the commodity at agreed price today
while the delivery of the commodity will take place at a later date.
As the price of commodity often fluctuate, here
is how the two parties of buyer and seller make profit. Say at stipulated later
date, the commodity price goes up, then the buyer in the contract will gain
profit, vice versa if the price falls.
This is therefore it can be said that the investors
who want to invest in futures contracts will always need sufficient information
and knowledge that they might be gaining no profits at all by investing in this
exchange-traded funds, ETF.
An ETF consists of a collection of securities
that comprises of asset-backed contract. Therefore, when an investor buys a
commodity ETF, he will own that collection of asset-backed contract of
commodity instead of owning the physical commodity itself.
There are so many types of commodity ETF
available in the market which include the four-main type of commodities
investment. It can be said that the most popular ETFs in the market is the gold
and silver. This is because that underlying asset will never go spoil. Besides,
the other type of commodity ETF that is also popular is the oil and the natural
In the article, the author states that the
commodity do have mixed performance. Therefore, since an ETF is actually a set
or sort of portfolio of securities, hence with ETF, investor may diversify the
risk that they might need to bear. This has been one of the reason and
attraction of why investors invest with ETF.
One of the advantages of investing in commodity
ETF is the ease of the trades. With one trade, you will immediately have
instant exposure to the price as the commodity ETF has been bundled ahead of
Next, taxes from capital gained from commodity
ETF investment will not be incurred until the sale of ETF. Besides, lower
commissions fees will benefit the commodity ETF investment too.
After all, the most important part in ETF
investment is always the strategies planning part. As the ETF associates with a
collection or sort of portfolio of stocks, therefore, investors need to plan to
decide the best commodities to invest in.
4) Investing in companies that produce or
manufacture the commodity
This part of method would be the best tips that
when you invest with commodity investment. Investing in commodity from the
company that is the producer or manufacturer, would be the best decision. This
is because, those company will tend to do great when the asset of commodity are
performing great too.
As we consider that commodity investment
usually associates with high risk because commodity have to have a very big
swing in prices, therefore, this will create a chance for the investors to
generate more income or profit. This makes sense since the higher the risk of
an investment, the higher the return that can be generated.
Bad side that we can say that company that deal
with commodities might always get hit with a big loss.
From the article, the individual stocks will
have the risk of the behavior of the commodity price. Nevertheless, a lot of
shares would offer return in term of for example dividends to the rest of the
shareholders. This has made commodities to be added with incentive that has
already made a big difference from the ownership of physical good that cannot
even produce any income.
Back to basic that this can always be done only
with plenty of researches because as has been mentioned in the above, commodity
investment is a high-risk type of investment.
Venture Capital (VC) is the
money or capital provided to a young company by an individual or a firm.
But knowing that money does
not a successful business make. So, just as importantly, the venture capitalist
(the entity providing the capital) should value-add in other ways, from
providing business know-how to technical guidance, or even just a pat on the
back or a shoe in the rear when required.
Of course, venture capitalists
undertake higher risks by investing their money into relative unknowns. So, in
return, they receive preference shares and have a say in the important
decisions to safeguard their investments. The real returns usually occur when
the venture capitalist eventually liquidates its shares through an IPO, trade
sale, sell-back, and others.
For young, viable companies
which have difficulty raising capital, partnering with a venture capitalist
could be an appealing and highly beneficial option.
Some example venture capital in Malaysia including Malaysia Venture Capital Management
Bhd or known as MAVCAP. The ICT sector in Malaysia has been growing and growing;
it is no secret that the government had a hand in it. In 2001, the Malaysian
government formed MAVCAP to help nurture infant ICT companies into big thriving
It’s not easy for a small or
new company to make itself known in the market, or even to just survive.
Oftentimes, its product or service is astoundingly innovative and utterly
practical, but even great innovations do not come to light because the company
lacks resources and support.
Thus, as a seasoned venture
capitalist company, MAVCAP go to great lengths to discover and invest in
companies with the potential to succeed.
2.2 SUMMARY OF THE ARTICLE
In Harvard Business Review,
an article entitled How Venture Capital Works by Bob Zider has explained well
on the basic understanding of business venture capital.
How the business venture capital work? Venture capital is simply can be
said as the financing that investors provide to support a new business or small
business which is believed to have a good potential to growth in future. It
also can be done in term of managerial or technical expertise, not only in term
of monetary form.
Venture capital can be said is a middle party between investor and
entrepreneur. Business venture will raise money through the issuance of initial
public offering to the banker institutions. Banker institution have their money
through the public markets and corporation such as issuance of stocks Then, all
the money raised will be invested at any small company which are believed to
grow and have potential in future.
How can the immature company to gain money from the venture capital?
Primary step for any business that looking for business venture firm is to
submit an excellent business proposal or an idea. If the idea seemed to have a
good potential, the firm must then perform due diligence, which includes a
detailed investigation of the company’s business including the management,
products, operations and among another thing.
Due diligence simply means
that an investigation or audit of a potential investment or product to confirm all facts,
such as reviewing all financial records, plus anything else deemed material. Taken from the chosen article, the way
business venture capital work can be seen as image below,
In explaining how business
venture capital works, the article also points out four advantages of venture
capital which are venture capital fills a void, sufficient return at acceptable
risk, attractive return of venture capital and the upside for entrepreneur.
1) Venture capital fills
How does this entity fill a
void? Based on our reading, the entity fills the void between the sources of
funds for the entrepreneur to going concern. In order to fill the void
successfully, it requires the venture to provide a good and sufficient return
to the investors. For example, give the investors a superior return on
Usually, lot of people can come
out with a brilliant idea to run a business. However, lack of capital become a
problem for them to pursue the business. They have the idea but no institution
to turn the idea become reality. Hence, the existence of venture capital can
fill the void or emptiness.
2) Sufficient returns at
Venture capital could
provide sufficient return to the investors with reasonable returns although the
money being invested are mostly on the high-risk profile company. Off course,
high risk investment could provide high return to the investors.
Although the investment will
be exposed with a very high risk, venture capital can be a middle party to
assure the investors to keep their faith since venture capital usually back up
by the government.
3) Attractive return of venture capital.
It is a good return to the venture capital if their investment doing
well. All the company under the venture capital firm will have lost some of the
ownership status. That is means when the company doing well, venture capital
can enjoy a good return as they also have the ownership in the company.
It also a good return to the venture capital firm as they also earn the
returns same like the investors although might be the amount a little bit lower
because investor will get more.
4) Upside for entrepreneur.
One of the benefits to the entrepreneur is they can be guided by the
business expertise. Other than financial back up, the entrepreneur can enjoy
with a valuable guidance and consultation. Thus, all the financial management,
business decisions so that better decisions can be made as it is vital for the
Other than that, additional resources can be gained by the investors. A
venture capital firm could provide active support which is good for good and
young company. This can cause a faster growth and greater success for the
Entrepreneur can have a wider connection. This is due the venture
capital firm is well connected in the business community. Hence, the
entrepreneur can have tremendous benefits from the connections which is
benefits the company.