Running Head: RISK INVESTMENT 1

High Risk Invesments

[Name of the Writer]
[Name of the Institution]



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High Risk Investments
Abstract
High risk investments are those investments which provide higher returns but can also
prove to be a source of a great loss because of the trends and fluctuations in the market. Such
fluctuations can prove to be favourable for the investors.Contrary to the high risk investments,
low risk investments can provide favourable returns in the beginning but can they are too less as
compared to higher returns in high risk investments.
Introduction
The identification of risk is primary for investment purposes. The investors who have
entered in to the marketplace incorporates the procedure of finding out an essential cause of that
risk. This is further emulated by the differences among the several risk levels. In accordance with
the risk that is primary to the investments, many investors make an assumption regarding risk
being a quantifiable concept (Diacon, 2004). But this is not really the case. The central concept
of this paper lies in the concept high risk investments. It is that particular investment the chances
of the loss of capital is highly expected or that there might be a percentage of not a great
performance. The main reason for this particular paper is to carry out a research on US high risk
investment brokerage organizations that have an accusation of violations related to ethical
concerns so that more understanding should be obtained regarding this particular market
segment. In order to reach the main objective of this research, online research is to be conducted
in order to accomplish the task for the purpose of identifying the tagline of this research.
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The paper has six sections. With regards to the 1
st
section, it is explained as to why the
investors and shareholders should be attracted to investments that have high risks like global
funds, exchange trade derivatives and other investment vehicles that are truly complex. On the
other hand, the 2
nd
section is concerned with the risk analysis that is linked with the derivatives
like exchange traded derivatives like options and futures and that what option should be available
to the brokers in order to lessen the risk for investors. Apart from this, the 3
rd
section is related to
the challenges that are associated with the regulation of a financial firm that is a complex one on
global basis. This is further followed the next section that would make an analysis of the ethical
concerns or violations for the researched firm. After this, there will a discussion on the outcomes
relevant for management of the firm research on the basis of seniority followed by implications
to the brokers in accordance with the trade in high risk investments. In the end, there would be a
scenario in order to describe as to how the high risk investments should be used to benefit the
investor along with the provision of supporting the rationale.
Q1. . Explain why investors may be attracted to high-risk investments such as
exchange-traded derivatives, global funds, and other complex investment vehicles.
Global funds, derivatives like exchange traded derivatives and other vehicles of complex
investments have a commonness among them i.e. such investments have a very high risk. It
should not be said that the investors are really certain in avoiding such types of investments. But
most of the investors usually invest in such high risk investments. Their main purpose is to get a
high return on such investments. But it should be kept in mind that high returns are solely
dependent on the success of the company in gaining such high returns. According to the majority
of the investors, such investments are beneficial to for future uses. And, there could be a
possibility that the market would fluctuate and that prices would be higher for such investments
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(Tchankova, 2002). With the rise in value for such investments, there would be a benefit for
investors within a short period of time.
In order to determine whether or not there is a high or low risk in an investment we should
come up with an example. If there is an investor who bought the stock at a price of 125 dollars
but the price dropped to 105 dollars in the coming week due to the success of that product that
didnt reach its peak. And, the investor suffered a loss of 20%. If there had been an investment in
200 shares then the investments worth could have been 21,000 dollars and if that particular
investor could have sold the complete stock of 200 shares, there has been a good point for him to
do so and there could have been a loss of 4000 dollars along with the transaction fees. The
bottom line is that an investment where the risk is high, it should seem to be a bad investment in
the beginning but will provide high returns subsequently because of favourable fluctuations.
And, for low risk investments, the returns could be good but would not be as significant as they
could be for high risk investments.
Q2. Analyse the risk associated with exchange-traded derivatives, such as futures and
options, and what brokers might do to minimize the risk to investors.
Among various risks that are linked with exchange traded derivatives, there is a degree of
risk that is variable. The transactions that are conducted in an exchange traded derivatives carry
out a high degree of risk significantly. The person who purchases the exchange traded
derivatives should attempt to maintain a balance or opt for exercising the exchange traded
derivatives or even prefer the allowance of the derivative to reach the maturity. If the person
exercises the exchange traded derivatives, the outcome would be the cash settlement with the
buyer obtaining or providing the interest that is underlying. Moreover, if there is an expiration of
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the stock, it would indicate that the stock would expire and the buyer would have experience the
investment loss. The loss would incorporate the transactions costs further emulated by premium
on exchange traded derivatives.
Will the sale of exchange traded derivatives, there are some risks that are on a fair deal
(GONZLEZ & YUN, 2013). When there is a fixed premium, there is a high possibility for the
seller to suffer a loss above the amount. Therefore, the seller would have to become liable for an
extra margin so that the position could be maintained in case of an unfavourable shift or trend in
the market. More than that, the seller will be responsible for the cash settlement of exchange
traded derivative. The responsibility is further emulated by the acquiring of an interest that is
underlying that covers the exchange traded derivative.
Another scenario is related to the transaction driven by asset and liability management. The
broker is not required to make speculations on the basis of future forecasts. In this manner, the
brokers would be sell the investors with risk free derivatives.
Another way to make a reduction in risks is to follow the possible policy related with
derivatives. This requires the development of a policy related to derivatives. This is followed by
the focus on cost management in accordance with the maintenance of minimum consideration on
forecasting. Accordingly, there should be a cut down of expenses and costs by the broker.
3. Discuss the challenges related to regulating a complex global financial firm and
make suggestions for regulatory improvements.
In accordance with the financial crisis of 2007, the international regulatory policies are
followed by a significant failings. There has been an assumption that the international regulatory
authority does not have a great understanding regarding the operations of the firms in different
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countries emulated by the practical conceptions of the companies. This signifies that such
regulations are not able to resolve any issue faced by the company where one of the issues could
pertain to corporate governance.
The other challenge could be related to the elimination of the risks. It is possible that all of
the underlying assets could have risks. It is therefore critical that the risks be removed.
Thereafter, there could be an occurrence of the situations which could be closely related to
vanilla products (Tse, 2000). These are the forms of assets which dont offer any benefits related
to a viable investment as desired by the investor. The international policy regulators should
understand that every country has distinct level of risks in relation to the products. The risks
could also be eliminated by the initializing of industry stakeholders, user groups and other
trading bodies. There is a complexity of global scenario the understandings of every member of
different countries would not lapse at all. That is why, there could not be another way to set a
regulatory and an effective framework.
Q4. Analyse the ethical violations of the company you researched.
The company researched is named as Paine Webber and Company that provided us a great
information on brokerage firms that have a high risk of investment. It was accused of breaching
the ethical code of conduct. It violated the scheme related to kickback with its investor. When the
issue was raised in the court, it was concluded that it was in accordance with the public interest
to withdraw a person from getting linked with the brokerage firm, investment advisers, other
security dealers or other members related to national securities. The judge of the court made a
conclusion that brokerage firm wanted to get barred from getting linked with any investor or a
broker ( Ferreira & Sherris, 2008). It was also found to get involved in such business activities
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that were found to be deceptive or fraudulent. The company also did not fulfil its duty to get the
best prices for its investors. More than that, the company reached a decision for the investors to
purchase a bond that provides a high yield. The main objective was the maximization of a gained
commission. The brokerage firm also did not fulfil its responsibility to provide the customer with
a necessary support. However, the investor could have approached the firm for a best piece of
advice, it should consider that the investor could not make an entry in to the market with the
absence of any awareness and there could be many offerings offered by the brokerage firm to the
customer with the absence of deception.
Q5. Discuss the consequences that you believe to be appropriate for the senior
management of the firm you researched and the implications for brokers trading in high-
risk investments.
The consequences that are needed to be appropriate for the higher management of the firm
are discussed in this part of the paper. The top management suspension for engaging in the form
of investment brokerage activities either for the company or for an individual. Such suspension
was for a considerable period of time i.e. 5 years. More than that, the higher management should
have been assigned the responsibility to pay for the damages incurred by the investor because of
an unreasonable advice. The investor had to suffer huge losses and this is what encouraged him
to make a legal action against the brokerage firm. If there has not been any offering of any
advice by the company and that it had engaged itself in the ethical code of conduct, the investor
could not have been through such choice.
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In accordance with the firms implications for proceeding its trading in investments of high
risk, the investors could be in fear of being put in the same situation and that this implies a great
concern since the company was already the most popular brokerage company.
Q6. Create a scenario where you believe the use of high-risk investments would be
beneficial for the investor. Provide support for your rationale.
A scenario where the high risk investments could be advantageous for the investors is
possible when he has a great surplus and that he utilizes his money for viable purposes that are
economic. The investor desires to invest in such investments that provide maximizing returns.
And, that is why, the investor opts for that brokerage firm that provides him with the best
possible company to invest in. In order to approve the brokers choice, the investor explores the
information that would create an impact on his decisions. He would monitor the trends in the
stock market or he would search for any better information from the companys financial
statements in order to know the rate of interest paid to the investors. Afterwards, the investor
evaluate the market conditions emulated by the assessment of the projects and predictions with
regards to the future of such market. Subsequently, when the investor gets satisfied with the
possibility of the price increase regarding the derivatives of the selected company, the investor is
in a better position to select the best company for his investment. In this particular scenario, the
investor will be able to attain a gain from the investment.

Conclusion
Getting involved in the investments which are basically high risk investments is
particularly advantageous. But an investor should carefully think about an investment in a
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concise manner. And, he should be careful about the activities of the brokerage firms he deals
with for getting a piece of advice or suggestion and that he should select the company that has
not been through the breach of ethical concerns.

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Bibliography
Ferreira, L. A., & Sherris, M. (2008). Corporate interest rate risk management with derivatives in
Australia: empirical results. Journal: Accountancy & Business, 21-28.
Diacon, S. (2004). Investment risk perceptions: Do consumers and advisers agree? International Journal
of Bank Marketing, 180-199.
GONZLEZ , F. P., & YUN, H. (2013). Risk Management and Firm Value: Evidence from Weather
Derivatives. The journal of Finance, 2143-2176.
Tchankova, L. (2002). Risk identification basic stage in risk management. Environmental Management
and Health, 290-297.
Tse, C. B. (2000). A New Role for Financial Derivatives in Risk Management. Journal of Risk Management,
39-48.