Burberry is a British brand, and most of the stock is traded on the London Stock Exchange. Considering the financial performance of Burberry, one can conclude that the best alternative scenario for using financial derivatives is futures. The current position of the company’s shares is steadily increasing after a long decline (Investing, 2022). This happened due to the coronavirus pandemic when Burberry shares were halving in price, but the company remains financially stable. After the fall, a moderate recovery follows, and the dividend policy is somewhat corrected. Capitalization is in the billions of dollars, and the business is well diversified, so nothing threatens Burberry. Fats are suitable for trading with such conditions because they fix the rate. Since when concluding a futures contract, there are always two parties – a seller and a buyer, then when the price moves in any direction, one will always incur a loss, and the other will receive an equal profit. The sum of profits and losses of all trading participants is equal to zero up to the clearing fees paid to the exchange.
If the loss on the positions of any losing participant exceeds the amount of his free cash, then he is at risk of defaulting on his obligations. This is the downside of the Burberry futures trading strategy. However, the chance of this is slight since the company’s shares are constantly in motion. In addition, their positions are reasonably low, which confirms the possibility of successful futures trading.
If the settlement firm has many such clients and its funds are not enough to pay off its obligations, then reserve funds formed by the exchange itself and its authorized fund are used. Such a multi-level system, with a high degree of probability, guarantees the participants the execution of concluded transactions. In addition to the funds formed by the exchange, there are other principles of organizing trading aimed at reducing risks. Given the above analysis of the company’s shares and futures trading, we can conclude that this is the best alternative scenario for using derivatives.
Reference
Investing. (2022). Burberry Group PLC (BRBY). Web.