finance question
This case was prepared by Kathleen Hevert, Associate Professor of Finance at Babson College, based on published sources. It was developed as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. It is not intended to serve as an endorsement, source of primary data or illustration of effective or ineffective management. Copyright © 2012 Babson College and licensed for publication to Harvard Publishing, Inc. All rights reserved. No part of this publication can be reproduced, stored or transmitted in any form or by any means without prior written permission of Babson College.
BAB711 FEBRUARY 2012
Blue Heron Capital Partners, LLC
Blue Heron Capital Partners, LLC was a socially responsible investment management
firm offering investment vehicles ranging from low volatility traditional benchmark products to
aggressive growth funds. Blue Heron recently had launched a hedge fund, one of a rare but
growing breed of socially responsible investment (SRI) vehicles. A hedge fund uses leverage,
derivatives and long and short equity positions to satisfy its risk and return objectives. Blue
Heron’s fund managers screened companies for social responsibility and then selected
instruments and positions based on performance. A recent opportunity scan had identified two
companies – AstraZeneca plc and Medco Health Solutions, Inc. – satisfying Blue Heron’s strict
selection criteria. Blue Heron’s hedge fund manager was considering incorporating options on
AstraZeneca and Medco into her portfolio.
AstraZeneca plc1
AstraZeneca [LSE: AZN] was engaged in research, manufacture, and sale of
pharmaceuticals and biopharmaceuticals. The company was committed to sustainable
development of its business and the delivery of medicines, with the goals of making a difference
in the lives of patients and creating value for shareholders and society. It concentrated its
efforts in six therapy areas – cancer, cardiovascular, gastrointestinal, infection, neuroscience
and respiratory & inflammation – which together accounted for the world’s most serious
diseases. The company addressed the environmental impacts of the drugs it designed in a top-
down approach that included manufacture and use. AstraZeneca performed life cycle
assessments on the most important solvents used in its manufacturing processes and provided
its development chemists and engineers with guidance on selecting solvents and choosing raw
materials to minimize environmental impact. AstraZeneca also adhered to a comprehensive
climate change strategy that highlighted manufacturing, building design, and transport. Its
1 Source: AstraZeneca corporate website (www.astrazeneca.com)
Babson Classic Collection
For the exclusive use of Y. Zhang, 2020.
This document is authorized for use only by Yue Zhang in Derivatives 2020 taught by CATALIN STEFANESCU, American University from Apr 2020 to May 2020.
BAB711 February 2012
Blue Heron Capital Partners, LLC
2
brand names included Arimidex, Crestor, Nexium, Seroquel and Symbicort. AstraZeneca
operated 26 manufacturing facilities in 18 countries. Headquartered in London, it employed
over 65,000 people.
Medco Health Solutions, Inc.2
Medco [NYSE3: MHS] was the nation's leading pharmacy benefit manager. Covering one
in five Americans, its prescription drug benefit programs were designed to reduce pharmacy
health costs for private and public employers, health plans, labor unions, government agencies,
and individuals served by the Medicare Part D Prescription Drug Program. Medco served the
unique needs of patients with chronic and complex conditions including diabetes, arthritis,
high blood pressure, and high cholesterol. In 2008, it was honored with the top spot in
Fortune magazine’s “America’s Most Admired Companies” in the “Health Care: Pharmacy and
Other Services” sector. It was ranked number one in the Social Responsibility category within
that sector.4 Medco consolidated all corporate social responsibility undertakings into its Medco
Foundation, where activities were organized into four main areas: community capacity
building, community economic development, environmental sustainability program, and
disaster aid. Medco employed almost 21,000 and was headquartered in Franklin Lakes, New
Jersey.
The Analysis
On Monday morning, July 21, 2008, an analyst in Blue Heron’s hedge fund group was
preparing an analysis of the value of select options so that she could determine whether these
options were fairly valued in the marketplace. She began by collecting data for selected calls
and puts shown in Exhibit 1 for the most recent trading day, Friday, July 18. She also had
collected the data on current interest rates shown in Exhibit 2. She knew that, in order to
estimate the value of an option, she needed to come up with an estimate of the volatility of the
underlying instrument. She also knew that dividends expected to be paid before an option’s
expiration date affected the value of the option, but she could not recall why or how. Medco
shares did not pay dividends, but AstraZeneca shares historically had paid dividends twice a
year, in March and September. The next AstraZeneca dividend was expected to be paid on
September 15, 2008 to holders of record on August 8. In 2007, the September dividend was
$0.52 per share, but the amount of the September 2008 dividend would not be announced
until July 31.
On July 18, shares of AstraZeneca and Medco closed at $45.24 and $45.18, respectively.
As the analyst began her valuation task on the morning of July 21, she noted that shares of both
firms were identically priced at $45.20.
2 Source: Medco Health Solutions corporate website (www.medco.com), except where otherwise noted. 3 Also trades on London (LSE) and Stockholm (OMX) stock exchanges. 4 Fisher, Anne. “America’s Most Admired Companies,” Fortune, 157 No. 5, March 17, 2008.
For the exclusive use of Y. Zhang, 2020.
This document is authorized for use only by Yue Zhang in Derivatives 2020 taught by CATALIN STEFANESCU, American University from Apr 2020 to May 2020.
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For the exclusive use of Y. Zhang, 2020.
This document is authorized for use only by Yue Zhang in Derivatives 2020 taught by CATALIN STEFANESCU, American University from Apr 2020 to May 2020.
BAB1012C February 2012
Blue Heron Capital Partners, LLC
4
Exhibit 2: Annualized Yield to Maturity on U.S. Treasury Securities as of July 18, 2008
Maturity Yield
1 month 1.28%
3 month 1.48%
6 month 1.91%
1 year 2.26%
2 year 2.66%
3 year 2.97%
5 year 3.42%
7 year 3.71%
10 year 4.11%
20 year 4.71%
30 year 4.66%
Data obtained from U.S. Department of the Treasury, Daily Treasury Yield Curve Rates, http://www.treasury.gov/resource-center/data-chart-center/interest- rates/Pages/TextView.aspx?data=yieldYear&year=2008, accessed 8/16/2009
For the exclusive use of Y. Zhang, 2020.
This document is authorized for use only by Yue Zhang in Derivatives 2020 taught by CATALIN STEFANESCU, American University from Apr 2020 to May 2020.