Question

(10 marks) b. Main Buyuk Bhd has developed a new product that can greatly improve its earning per share (EPS). Assuming market efficiency, explain whether the General Manager of the firm can get abnormal return from purchasing the firm's shares before the news on the new product is released. (5 marks) Textile manufacturer who wishes to hedge against movements in cotton prices could use cotton futures contracts or buy options on cotton. Compare the two approaches. c.

Answer 1

(b) The news of a new product launch with the capability of boosting EPS is a material non-public information which can be used to gain from the stock. Any expected increase in EPS on account of being a measure of the firm's earnings power should ideally boost the firm's stock price, In such a scenario, a manager with news of the product launch can earn abnormal (higher than usual) returns by purchasing the firm's shares prior to the news release. This is an example of trading based on insider information and is illegal in all major markets.

NOTE: Please raise a separate qeury for the solution to the second unrelated question.