Emirates Airline: A Billion-Dollar Sukuk-Bond Issue Harvard Case Solution & Analysis

Emirates Airline: A Billion-Dollar Sukuk-Bond Issue The case solution  

In relation to risk, the Sukuks and the conventional bonds has same risks especially in the rate of return risk. For instance, the market interest rate has increased but the fixed returns on Sukuks are unable to rise, which would lead towards less earnings on Sukuks. However, such rate of return can also be available in the conventional bonds. In addition, the credit risk arises both in the conventional and the Sukuks. According to Shariah principle, the credit risk management instruments will not be available under the Sukuks issuance. This is because, Sukuks are usually issued in the emerging markets, whereby the counterparties with a low risk management mechanism are more likely to default on the commitments. The only risk faced by the issuer is the compliance of the Shariah standards, whereby the underlying asset can’t be changed and if changed, will make the Sukuk certificate rendered as null and void.

From the price perspective, there is a negative relationship between the bond’s price and the bond yields. If the interest rate increase, it will lead to decrease in the bond’s price as the bonds will be sold at discounted price in order to attract more investors. On the other hand, if the demand for bonds increases, it will lead to increase in the price of bonds and ultimately a decrease in the bond yield. After the global crisis of 2008, people started seeking alternative modes of financing based on the Shariah Standards, as a result of which the demand for Islamic financing grew rapidly, resulting in Sukuks being reported as lower yielding in comparison toto conventional bonds.

In addition, the 12 year conventional bonds had a longer maturity period as compared to Sukuks, which led to increased risk and yield over the conventional bonds. The maturity period has affected the yields of the Sukuks and the conventional bonds, as it might come up with different risk levels, ultimately, impacting the price and yield of the bond.

Question 2

The investor clientele effect theory explains the fluctuation in the stock price of the company in relation with the investors ‘demand and goals. It means that if the investors are attracted towards the company’s policy, they will invest in the company. However, if the company changes its policy, which do not benefit the investors, it will lead to adjustments in the stick holdings of the investors, ultimately leading to fluctuation in the company’s stock price.

According to analysis, it is observed that the investor clienteles creates an opportunity, which can be exploited by the hedge fund managers. It’s because though different strategies are opted by the hedge fund managers, it is argued that a common value proposition is sharedby all the hedge fund managers i.e. they search mispriced marketable securities in order to earn arbitrage profit. During this process, the hedge fund manager who has a comparative advantage or technical information will use different types of analysis (qualitative and quantitative), in order to identify the stock’s fair price. It would help them successful and specialized in the market. The role of hedge fund managers is very important, as they are bale to speculate the prices, where the participants do not understand the valuation. For instance, a hedge fund manager speculates the stock prices and played his strategy by purchasing a stock, perceived to be undervalued and selling the stock, perceived to be overvalued.....................

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