Identifying Consolidation Area Call Put Strategy

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Marketing Strategies – Rivalry, Growth, Consolidation and Functional Strategies

Marketing Strategies – Rivalry, Growth, Consolidation and Functional Strategies!

Contents :

2. Types of Marketing Strategies

  1. Rivalry Strategies
  2. Growth Strategies
  3. Consolidation Strategies
  4. Functional Strategies

1. Meaning:

Strategy is a deliberate search for an action plan that will develop a firm’s competitive advantage and help augment it. It is the pattern of decision in a company that determines and reveals its objectives, purposes or goals, produces the principal policies and plans for achieving these goals and defines the ranges of business the company is to pursue, the kind of economic and human organization it intends to be and the nature of the economic and non-economic contribution it intends to make to its employees, customers and communities. Thus strategies are well thought out plans to handle future scenarios.

Essential Elements of Strategy

The Strategy has three essential elements:

(ii) Significant policies,

(iii) Major action sequences.

If the strategy does not possess any of these elements, it cannot enjoy the competitive advantage.

How to make strategies more effective?

Effective strategies are the ones that help strengthen the organizational fit with its external envi­ronment and also motivate people to deliver good performance. The long term viability of an organiza­tion is possible only through effective strategies.

The desired goals can be achieved through the follow­ing:

(i) Formulation of objective

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(ii) Maintaining the initiative

(iii)Concentration over resources

(iv) Flexibility in operation

(v) Proper co-ordination

(vi) Dedicated leadership

(vii) Technological competence

(viii) Consistency in behaviour

The marketing management is becoming more and more complex activity in the context of globalisation, liberalization and modernization policies of the government. The marketing manager should thrive fast to overcome the present situation. The challenges before the marketers are competition and capture of new markets. There is some urgent need for identifying new methods of art of managing.

The right option is strategic marketing. Marketing strategy comprises the broad principles by which marketing management expects to achieve its business and marketing objectives m a target market. It consists of basic decision on marketing expenditures, marketing mix and marketing allocation.

Marketing management should decide what level of marketing expenditure is essential to obtain its marketing objectives. Companies must establish their marketing budget at some conventional per­centage of the sales goal. Companies entering a market try to learn what the marketing budget to sales ratio is for competitors.

A particular company may spend more than the normal ratio in the hope of achieving a higher market share. The company also has to decide how to divide the total marketing budget among the various tools in the marketing mix. The fact is that there are always several com i- nations of marketing methods and policies which can be adopted by a marketing manager in arriving a marketing strategy.

The marketing mix concept proposes that once market forces are known mar­keting management can mix the element in proportions that will produce the most profitable marketing result .It assumes that the proportions of the mix will change as market conditions change or the company’s position in market changes.

All the elements of the marketing programme can be grouped under four heads as follows:

1. Product Planning

3. Physical Distribution

Finally, marketers must decide on the allocation of marketing amount to the various products, channels, promotion media and sales areas. To make these strategic allocations, marketing managers use the notion of sales response function.

2. Types of Marketing Strategies

There are four different types of marketing strategies:

1. Rivalry Strategies:

Rivalry strategies consist of differentiating strategy, product flanking strategy, confrontation strategy, defensive strategy, offensive strategy, de-marketing strategy and remarketing strategy. Present market is heterogeneous market which always requires product differentiation. e company should identify the most attractive market segments. Differentiation could be based on prod­uct and service qualities.

Product Flanking Strategy refers to the various combinations of goods at different prices to cover the maximum market segments. The main idea is to flank the core product by offering different combinations. Here the consumer finds a wide range of selection.

Confrontation Strategy takes the idea from military strategies. It involves making small, interim – tent attacks on different territories of the opponent. The attacker uses both conventional and non- conventional means. It involves an attempt to capture a wide slice of competitors market.

Defensive Strategy is adopted by companies which are strong in the market. Here while trying expand total market size the dominant firm must continuously defend its current business against rival attacks.

Offensive Strategy is a strategy for the market leader and concerns attacking the competitors at the basic stance. By introducing new products which makes existing ones obsolete, the leadership position can be strengthened and competitors may always be left fighting to catch up.

Under Demarketing Strategy, a marketer withdraws a product that is enjoying a good demand and positioning. It de-markets the product through a conscious manipulation and suppression of de­mand. Here the marketer attempts to satisfy the demand by some other products.

Remarketing Strategy is one of the rivalry strategies. Here due to some reasons a product with losing demand is brought back to life and remarketed. Remarketing strategy is repositioning of the product or modification in the marketing mix.

2. Growth Strategies:

Growth strategies consist of growth strategies for existing markets, growth strategies for new markets and diversification for growth.

(a) Growth Strategies for Existing Markets:

These consist of market penetration, product development and vertical integration. Under market penetration strategy, the management looks for ways to increase the match share of its current products in their current markets.

There are three major ways:

(i) A company could try to encourage its current customers to buy more,

(ii) The company could try to attract the competitors’ customers to switch to its brand, and

(iii) The company could try to convince non-users to start using their products.

The scope of new product development is to meet changes in fashion or the new tastes of consumers, to provide for technological improvements, to introduce new processes and techniques both in production and marketing to keep up with the aforesaid changes and improvements, to extend the sale of existing products to new markets and to meet the onslaughts from the side of competitors.

The vertical marketing systems have emerged to challenge conventional marketing channels. A vertical marketing system comprises the producer, wholesaler and retailer acting as a unified system. Vertical integration makes a firm more efficient in serving existing markets. Vertical integration strate­gies are useful when the ultimate markets have high growth potential.

(b) Growth Strategies for New Markets:

Growth strategies for new markets consist of market development, market expansion and diver­sification. Under market development strategy, the management makes efforts to bring current products to new markets. For market development, the management must identify potential user groups in the current sales areas. They should seek additional distribution channels in the present location and finally, they should try to sell the products in new locations.

When the total market expands, the dominant firm normally gains the most. Generally, the dominant firm should look for new users, new uses and more usage of its products. The product has the potential of attracting new buyers. Then the markets can be expanded through discovering and promoting new uses for the product. Lastly, the firm has to convince people to use more of the product per use occasion. At present, companies are expanding their markets globally.

(c) Diversification Strategies:

Diversification growth makes sense when good opportunities can be found outside the present businesses.

There are three types of diversification:

(i) Concentric Diversification:

Under concentric diversification, the firm could seek new products that have technological or marketing synergies with the existing product line.

(ii) Horizontal Diversification:

Under horizontal diversification, the firm could add new prod­ucts to current consumers, though technologically unrelated to the current product line.

(iii) Conglomerate Diversification:

Under conglomerate diversification, the firm could add new products for new classes of customers either because such a move promises to offset some deficiency or because it represents a great environmental opportunity.

3. Consolidation Strategies:

The consolidation strategies consist of retrenchment, pruning and divestment:

When a firm reduces its commitment to its existing products by withdrawing from weaker markets, it is said to be indulging in retrenchment. Retrenchment may be done either internally or externally. Internal retrenchment lays emphasis on improving internal efficiency. External retrenchment leads to divestment and liquidation.

Pruning occurs when a firm reduces the number of products already in the market. Pruning is the negation of product development. There are two occasions for pruning. One is when the particular product fails to earn profit. The other occasion is when the firm is short of production capacity.

When the firm has decided to divest the business, it would have first looked for a buyer; then the firm sells off a part of its business to another organisation. Divestment is the negation of diversification. A divestment strategy may be adopted when a business proves to be a mismatch or the business is outside its core competencies.

4. Functional Strategies:

Functional strategies consist of product strategies, branding strategies, positioning strategies, pricing strategies, distribution strategies, media strategies and sales promotion strategies.

(a) Product Strategies:

Production is considered the heart of marketing strategy. Various factors need to be considered in evolving an effective product strategy. Here the most important question is the type of product strategy that is to be pursued. The decision cannot be made in isolation but it needs a detailed under­standing both of the concern’s present position and capabilities. The starting point should, therefore, be an assessment of the organisation’s current portfolio.

(b) Branding Strategies:

Branding is an important strategy to differentiate the product from its competitors. It represents to the customer the source of the product which leads him to associate with the brand. It is the process of identifying the name of the producer with the product.

Brand strategies include brand image or brand building and brand equity. Brand image begins with consistent integrated vision. Its central concept is brand identity. It needs creative thoughts and sincere efforts. Brand equity is defined as a set of brand assets and liabilities linked with a particular brand, its name and symbol.

(c) Positioning Strategies:

The strategy to differentiate the brand or product is to place it in an appropriate cell of the human mind so that whenever the customer recalls the product, the firm’s brand is the first to be recalled. This strategy is called positioning. Positioning is the act of communicating company’s offer so that it occupies a distinct and valued place in the customer’s mind.

There are two types of positioning strategies:

(i) Head to head positioning, and

(ii) Differentiated positioning.

In head to head positioning, the firm offers basically the same benefits as the competitors and in differentiated positioning a firm is trying to distinguish itself by offering distinctive attributes.

(d) Price Strategies:

To evolve a price strategy, it is important to assess the loyalty of customers to the brand.

The choice of pricing strategy is dependent on:

(a) Corporate goals and objectives,

(b) Customer character­istics,

(c) Intensity of inter-firm rivalry, and

(d) Phase of the product life cycle.

The different pricing strategies are:

(i) Skimming Strategy:

This strategy refers to the firm’s desire to skim the market. In a way, it is a premium price strategy.

(ii) Penetration Pricing Strategy:

As opposed to the skimming strategy, the objective of penetration price strategy is to gain a foothold in a highly competitive market. The objective of this strategy is market share or market penetration.

(iii) Differential Pricing Strategy:

This is a strategy that involves a firm in differentiating its price across different market segments.

(iv) Geographic Pricing Strategy:

This is a strategy that seeks to exploit economies of scale by pricing the product below the competitors in one market and in the other adopting a penetration strategy.

(v) Product Line Pricing Strategies:

These are a set of price strategies which a multi-product firm can usefully adopt. An important fact to be noted is that these products have to be related, that is, belong to the same product family.

(e) Distribution Strategies:

Distribution is a key external resource. It involves two operations:

(i) Selection of the channel of distribution, and

(ii) Physical distribution.

Distribution strategies can be divided into three broad catego­ries:

(a) Intensive distribution,

(b) Exclusive distribution, and

(c) Selective distribution

(a) Intensive Distribution:

Intensive distribution is the policy of maximum exposure of the product for sale.

(b) Exclusive Distribution:

Exclusive distribution is the reverse of intensive distribution. It is the policy of limiting the number of intermediaries to a single individual or firm in each important region or in its extreme form to one single intermediary for the entire market.

(c) Selective Distribution:

Selective distribution is a via media between intensive and exclusive distribution. It refers to the policy of exposing the product for sale to a few areas of importance or to a few outlets in a particular area.

(f) Media Strategies:

Medium is a means through which the advertising message is conveyed to the consumers. Me­dia selection involves finding the most cost-effective media to deliver the desired number of exposures to the target audience. The effect of exposures on audience awareness depends on the exposures reach, frequency and impact. The media planner has to know the capacity of the major media types to deliver, reach, frequency and impact. The following factors which affect the media may be analysed.

The general character of the product has a great influence on the type of media. Media types have different potentials for demonstration, visualization, explanation, believability and colour.

(i) The potential market for a product also determines the media. Potential market is the set of consumers who have a sufficient level of interest in a market offer.

(ii) The type of media is linked with the nature of the campaign strategy, the character of the message and other related factors. Development of message is the most crucial part of Campaign Planning. It is the most creative element in marketing. The most important element in a message is the theme or content of the appeal.

(iii) The circulation of a medium would be an important factor in determining the choice. The medium which has a larger circulation will get an automatic preference.

(iv) Audience reached is also an important intention. Audience is the number of people exposed to the vehicle. Knowing the audience size, media persons can circulate.

(v) The cost of advertisement is also yet another important factor. The expenditure on advertis­ing should be considered as an investment in the future of the enterprise. An advertiser will choose the medium which is least costly.

(g) Sales Promotion Strategies:

Sales promotion is defined as those marketing activities other than personal selling, advertising and publicity that stimulate consumer purchasing and dealer effectiveness such as displays, shows and expositions, demonstrations and various non-recurrent selling efforts, not in the ordinary routine. It serves as a bridge between personal selling and advertising.

Purpose of Sales Promotion:

(a) To increase the products use among the existing consumers.

(b) To attract new customers.

(c) To contend with a competitors sales activities.

(d) To reduce a seasonal decline in sales.

(e) To disseminate information to the potential customer.

Sales Promotion Measures:

Sales promotion measures can be divided into:

(a) Consumer sales promotion,

(b) Dealer sales promotion, and

(c) Sales force promotion

(a) Consumer Sales Promotion:

Activities aimed at reaching the consumer at his residence or work place may be called consumer sales promotion. It increases the use of product by consumers, attracts new customers and introduces new products.

The following are the various consumer sales promotion schemes:

Free samples are given to consumers to increase their interest in the product. Samples are used to convert a prospective buyer into a customer. It is a fast method of demand creation.

Coupons are supplied along with the product. Coupons are certificates offering a stated saving on the purchase of a specific product. They induce the consumer to buy one more product at a reduced price.

It is the instruction to educate consumers in the manner of using the product. It is a promotional tool to attract the attention of the consumers. When products are complex and of a technical nature, demonstration is necessary.

Contests are organised asking the consumers to state in a few words why they prefer a particular product. For entering the contest, the prospective buyers are required to collect a number of wrappers or labels of the product.

If the consumer is not satisfied with the product, he can return the product and the amount is refunded by the seller. It is stated on the package. It will create new users and strengthen the brand loyalty.

It is a temporary price reduction which increases the instinct of the buyers. Goods are offered free or at a reduced cost as an inducement for purchasing. There are different types of premium offers: direct premium, a reusable container, free in mail premium, a self liquidity premium and trading stamps.

The competing firms offer price rebates either to overcome the slump season or to attract more consumers during festive seasons.

(viii) Consumer Sweepstakes:

Consumers submit their names for inclusion in a list of prize winning contest. A ticket is given to the consumer of a specified brand. At specified time, lots are drawn. The prize winner gets the prize.

(ix) Buy Back Allowance:

Allowance is given following a previous trade deal. Trade deals offer a certain amount of money for new purchases based on the purchased quantity. It prevents decline in post-trade deal. Buyer’s motivation is also increased.

It consists of inviting prospective buyers to try the product without cost in the hope that they will buy the product.

(b) Dealer Sales Promotion:

It is otherwise known as trade promotion. Producers use many techniques to get the co-operation of wholesalers, commission agents, and retailers. The activities which increase the interest and enthusiasm of dealers and distributors are called dealer sales promotion.

The following are the dealer sales promotion devices:

(i) Dissemination of Market News:

The producer acquaints his dealers with facts relating to his product and its price. In return, dealers inform the producers of any change in consumer demand and forward complaints.

(ii) Merchandise Allowance:

An advertisement allowance is given to the dealers for advertis­ing the features of the firm’s product. A display allowance is given to them for arranging special displays of the product.

(iii) Conducting Sales Conferences:

Dealers are invited by producers to attend their sales conferences. This ensures better relations between producers and dealers.

(iv) Offering Reasonable Terms of Sale:

The producer offers the most reasonable terms of sale such as longer periods of credit, higher rates of discount and other concessions.

Apart from regular discount, special discounts are also allowed to the dealers for a specified quantity of purchase. This special discount is over and above the regular discount.

Sales contest is conducted at the wholesale or retail level. Contests may be as window display or internal store display or as large sales volume. Prizes are awarded to outstanding achievements.

(vii) Co-operative Advertising:

Dealers spend money in advertising manufacturer’s products with the consent of the manufacturers. The dealer can claim an allowance by giving the proof of the advertisement.

(viii) Taking the Returns Back:

The manufacturer is ready to take back things when defects are pointed out or when they go unsought.

(ix) Furnishing Sales Literature and Display Material:

Sales literature supplies information about products, their special features, constituent parts, methods of using them and so on.

(x) Supplying Suitable Packages:

The packages must be so designed that a maximum number of goods can be accommodated within the limited space available.

(c) Sales Force Promotion:

The idea of sales force promotion is to make the salesman’s effort more effective.

The tools for sales force promotions are:

The manufacturer sets a target of sale for a year. If the sales force sells the products above the targeted sales, bonus is offered to them. This is an encouragement. Monetary incentive is given to the sellers of the product.

A sales contest aims at inducing the sales force or dealers to increase sales over a stated period with prizes going to those who succeed. Incentives work best when they are tied to measurable and achievable sales objectives for which employees feel they have an equal chance.

Sales rallies offer a chance to purchase the product. It stimulates the buyers to purchase the particular product instantly.

Put-Call Parity | Formula | Example | Dividends | Arbitrage

Put-Call Parity – As the name suggests, put-call parity establishes a relationship between put options and call options price.

It is defined as a relationship between the prices of European put options and calls options having the same strike prices, expiry and underlying or we can define it as an equivalence relationship between the Put and Call options of a common underlying carrying the same strike price and expiry.

In this article, we look at the concept of Put-Call Parity in detail –

Put Call Parity Theorem

The theory was first identified by Hans Stoll in 1969.

Put-Call parity theorem says that premium (price) of a call option implies a certain fair price for corresponding put options provided the put options have the same strike price, underlying and expiry and vice versa. It also shows the three-sided relationship between a call, a put, and underlying security.

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Call Options and Put Options

Before going further into the in-depth study of put-call parity, first, get an insight view of certain terminologies and definitions related to options.

  • Call Option: Call option is a derivative contract that gives the owner the right but not the obligation to buy an underlying asset at a predetermined price (strike price) and time till the expiration of the contract. The call options are generally exercised by the holder only if the stock price is more than the strike price or the options are in the money (ITM). It is logical not to exercise if the option is out of the money (OTM). And hence, the pay-off for a call option is max(ST-X,0).
  • Put Option: Put option gives the owner the right but not the obligation to sell an underlying asset at a predetermined price and time till the expiration of the contract. The put options are generally exercised by the holder only if the stock price is less than the strike price. And hence, the pay-off for a put option is max(X- ST,0).

Important Terminologies in Options

S0 = Stock price today,

X = Strike price

C0 = European call option premium

P0 = European put option premium

T = Time to expiration

Let’s back at our prime topic now.

Put-Call Parity Example

The above-mentioned theorem can be elaborated with the below example.

Let’s take a look at two portfolios of an investor:

Portfolio A: A European call options for a strike price of $500/- which has a premium or price of $80/- and pays no dividend (impact of dividend is discussed later in the paper) and A zero-coupon bond (which pays only principal at the time of maturity) which pays Rs.500/- (or the strike price of call options) at maturity and,

Portfolio B: Underlying stock on which call options are written and a European put options having an identical strike price of $500/- which has a premium of $80/- and an identical expiry.

In order to calculate pay-offs from both the portfolios, let’s consider two scenarios:

  1. Stock price goes up and closes at $600/- at the time of maturity of an options contract,
  2. The stock price has fallen and closes at $400/- at the time of maturity of an options contract.

Impact on Portfolio A in Scenario 1: Portfolio A will be worth the zero-coupon bond i.e.$500/- plus $100/- from call options pay-off i.e. max(ST-X,0). Therefore, portfolio A will be worth the stock price (ST) at time T.

Impact on Portfolio A in Scenario 2: Portfolio A will be worth the share price i.e. $500/- since the stock price is less than the strike price (it is out of the money), the options will not be exercised. Hence, portfolio A will be worth stock price (ST) at time T.

Likewise, for portfolio B, we will analyze the impact of both scenarios.

Impact on Portfolio B in Scenario 1: Portfolio B will be worth the stock price or share price i.e. $600/- since the share price is lower than the strike price (X) and are worthless to exercise. Therefore, portfolio B will be worth the stock price (ST) at time T.

Impact on Portfolio B in Scenario 2: Portfolio B will be worth the difference between the strike price and stock price i.e. $100/- and underlying share price i.e. $400/-. Hence, portfolio B will be worth a strike price (X) at time T.

The above pay-offs are summarized below in Table 1.

Table: 1

When ST > X When ST * 0
Total 600 500
Portfolio B Underlying Stock (Share) 600 400
Put option 0 100 #
Total 600 500

*The pay-off of a call option = max(ST-X,0)

#The pay-off of a put option = max(X- ST,0)

In the above table we can summarize our findings that when the stock price is more than the strike price (X), the portfolios are worth the stock or share price (ST) and when the stock price is lower than the strike price, the portfolios are worth the strike price (X). In other words, both the portfolios are worth max(ST, X).

Portfolio A: When, ST > X, it is worth ST,

Arbitrage Opportunity through Put-Call Parity

Let’s take an example to understand the arbitrage opportunity through put-call parity.

Suppose, the share price of a company is $80/-, the strike price is $100/-, the premium (price) of a six-month call option is $5/- and that of a put option is $3.5/-. The risk-free rate in the economy is 8% per annum.

Now, as per the above equation of put-call parity, the value of the combination of the call option price and the present value of strike would be,

C0+X*e -r*t = 5+100*e -0.08*0.5

And the value of the combination of put option and share price is

P0+S0 = 3.5+80

Here, we can see that the first portfolio is overpriced and can be sold (an arbitrageur can create a short position in this portfolio) and the second portfolio is relatively cheaper and can be bought (arbitrageur can create a long position) by the investor in order to exploit arbitrage opportunity.

This arbitrage opportunity involves buying a put option and a share of the company and selling a call option.

Let’s take this further, by shorting the call option and creating a long position in put option along with share would require below calculated funds to be borrowed by an arbitrageur at risk-free rate i.e.

Hence, an amount of $78.5 would be borrowed by the arbitrageur and after six months this needs to be repaid. Hence, the repayment amount would be

Also, after six months either the put or call option would be in the money and will be exercised and arbitrageur would get $100/- from this. The short call and long call put option position would, therefore, leads to the stock being sold for $100/-. Hence, the net profit generated by the arbitrageur is

The above cash flows are summarized in Table 2:

Table: 2

Steps involved in arbitrage position Cost involved
Borrow $78.5 for six months and create a position by selling one call option for $5/- and buying one put option for $3.5/- along with a share for $80/-

i.e. (80+3.5-5)

-81.7
After six months, if the share price is more than the strike price, the call option would be exercised and if it is below the strike price then put option would be exercised 100
Net Profit (+) / Net Loss (-) 18.3

The Other side of Put-Call parity

Put-Call parity theorem only holds true for European style options as American style options can be exercised at any time prior to its expiry.

The equation which we have studied so far is

C0+X*e -r*t = P0+S0

This equation is also called as Fiduciary Call is equal to Protective Put.

Here, the left side of the equation is called Fiduciary Call because, in fiduciary call strategy, an investor limits its cost associated with exercising the call option (as to the fee for subsequently selling an underlying which has been physically delivered if the call is exercised).

The right side of the equation is called Protective Put because in a protective put strategy an investor is purchasing put option along with a share (P0+S0). In case, share prices go up the investor can still minimize their financial risk by selling shares of the company and protects their portfolio and in case the share prices go down he can close his position by exercising the put option.

For example:-

Suppose strike price is $70/-, Stock price is $50/-, Premium for Put Option is $5/- and that of Call Option is $15/-. And suppose that stock price goes up to $77/-.

In this case, the investor will not exercise its put option as the same is out of the money but will sell its share at the current market price (CMP) and earn the difference between CMP and the initial price of stock i.e. Rs.7/-. Had the investor not been purchased sock along with the put option, he would have been ended up incurring the loss of his premium towards option purchase.

Determining Call options & Put options premium

We can rewrite the above equation in two different ways as mentioned below.

  • P0=C0+X*e-r*t-S and
  • C0= P0+S0-X*e-r*t

In this way, we can determine the price of a call option and put option.

For example, let’s assume the price of an XYZ company is trading at Rs.750/- six months call option premium is Rs.15/- for the strike price of Rs.800/-. What would be the premium for put option assuming risk-free rate as 10%?

As per the equation mentioned above in point no 1,

P0 = C0+X*e -r*t -S

= 15+800*e -0.10*0.05 -750

Likewise, suppose that in the above example put option premium is given as $50 instead of call option premium and we have to determine call option premium.

C0 = P0+S0-X*e -r*t

Impact of dividends on put-call parity

So far in our studies, we have assumed that there is no dividend paid on the stock. Therefore, the very next thing which we have to take into consideration is the impact of dividend on put-call parity.

Since interest is a cost to an investor who borrows funds to purchase stock and benefit to the investor who shorts the stock or securities by investing the funds.

Here we will examine how the Put-Call parity equation would be adjusted if the stock pays a dividend. Also, we assume that dividend which is paid during the life of the option is known.

Here, the equation would be adjusted with the present value of the dividend. And along with the call option premium, the total amount to be invested by the investor is cash equivalent to the present value of a zero-coupon bond (which is equivalent to the strike price) and the present value of the dividend. Here, we are making an adjustment in the fiduciary call strategy. The adjusted equation would be

C0+(D+X*e -r*t ) = P0+ S0 where,

D = Present value of dividends during the life of

Let’s adjust the equation for both the scenarios.

For example, suppose the stock pays $50/- as dividend then, adjusted put option premium would be

P0 = C0+(D+X*e -r*t ) – S0

= 15+(50*e -0.10*0.5 +800*e -0.10*0.5 )-750

We can adjust the dividends in another way also which will yield the same value. The only basic difference between these two ways is while in the first one we have added the amount of the dividend in strike price, in the other one we have adjusted the dividends amount directly from the stock.

P0 = C0+X*e -r*t – S0-(S0*e -r*t ),

In the above formula, we have deducted the amount of the dividend (PV of dividends) directly from the stock price. Let’s look at the calculation through this formula

= 15+800*e -0.10*0.5 -750-(50*e -0.10*0.5 )

Data centre consolidation: Developing an on-going strategy

Data centre consolidation is an on-going process as businesses and technology constantly evolve. A strategy focused on considered and phased approach will be crucial for success.

Data centres develop and grow over time just like any business effort. And like any business, a data centre needs.

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periodic pruning, reorganisation and consolidation to optimise efficiency and provide the greatest value to the company. In so doing, IT teams need to develop a clear strategy for keeping data centre consolidation efforts on track.

In this tip, expert Hamish Macarthur explains what drives data centre consolidation and offers advice on how IT professionals should embark on an on-going data centre strategy.

Consolidation offers potential worth considering

The excitement of new applications, emerging technologies and green field site development is quickly replaced with the need to maintain, update and upgrade systems to keep the business operational, competitive and servicing customers.

The result of data centre growth is that different practices develop to support different sites, different business units and applications. Technologies were selected for good reasons in the past, with new developments offering a new richness of options. But, over time, growth can show a dark side. Changing business and technological needs, personnel turnover, regulatory changes and other external and internal factors can fragment the data centre. The best response is to consolidate processes, technologies, locations and suppliers in order to improve manageability and have more flexibility going ahead.

There are clear financial gains to be achieved in a data centre consolidation process, and gains can be measured in different ways, depending on what the consolidation programme is. For example:

  • Consolidating physical locations can reduce overhead and operational costs associated with multiple data centre locations or reduce data centre energy costs.
  • Consolidating software onto fewer hardware platforms can reduce hardware maintenance costs and software licencing fees.
  • Consolidation can reduce the number of server, storage and network (hardware) units to be purchased, leading to lower acquisition and finance costs.

But data centre consolidation doesn’t stop with systems and software. When processes or applications are consolidated, a data centre can ensure more consistent service across the business. For example:

  • Consolidating core business applications such as order processing, inventory management, invoicing or management reports makes support and upgrades easier. So rather than having multiple email or database platforms for various departments, pick one and make it serve the entire organisation.
  • Consolidation can simplify and reduce errors in system processes such as data protection services, security, network services, system discovery and management.
  • Consolidation should also examine the business processes themselves and redefine roles and procedures to best utilise computing resources and IT staffing talent.

Consolidation allows rapid and valuable growth

Changes in the business often drive data centre consolidation. These changes can include reorganisation, acquisition of new businesses that need to be integrated, introduction of new business units, new ways of transacting business, interfacing with customers and suppliers and complying with new industry or legal guidelines.

The reality is that chief information officers and data centre managers must have a clear strategy as to how the system infrastructure can and will be consolidated. Without such a plan in place, the inevitable system silos will continue and system sprawl will become a real challenge.

The IT strategy must be in line with the business goals and the course along which the business is being directed. One of the key goals of IT evolution is to stop being a line item cost to the business, and start emerging as a partner that can add value and create opportunities for the business.

Let’s look at an example. Consider a business establishing itself in a new geography. The IT systems would need to be replicated for the data centre located in the new area. Yet, the business imperative was to be fully operational within a three-month time frame. Without any spare space within the existing data centres, constructing a new data centre, which would take 9 to 12 months, would not be possible in that time frame. The way forward would be to consolidate existing resources in order to support the additional resources needed.

Consolidating servers and storage arrays can release floor space. A company could complete that whole task in a much shorter period, enabling the new business to develop without any drag from IT — a positive boost to all concerned within the business units and the IT department.

Build in flexibility to better utilise resources

When consolidating resources or processes, there should be no surprises. Use system discovery tools to map the system infrastructure and identify the hardware and software elements. Then, IT will have to illustrate where and what data is being stored. Above all, the plan must ensure that changes in the system infrastructure will not cause a loss or degradation of current services.

Virtualisation is a key element of a data centre consolidation strategy. Many organisations have been consolidating their system infrastructure and data centres over the last ten years. When properly implemented, infrastructure consolidation can reduce server inventories by factors of three to five, but even more consolidation is possible when virtualisation is also considered.

Consider implementing a converged network architecture, installing Fibre Channel or iSCSI networks to connect servers and storage. This approach simplifies and accelerates the consolidation of server and storage resources and delivers better utilisation of all physical assets. It also sets the framework for virtualisation to take system consolidation one step further.

Data centre consolidation strategies for the long haul

Taking a considered and phased approach to consolidation is key to success. This must tie in with the business requirements and changes that are known as well as unknown. Flexibility is required to enable IT to respond to evolving business demands.

The stages of establishing and reviewing the consolidation strategy will include all elements of the infrastructure, applications and service delivery. For example, introducing video services will have implications, not only on the network but also on the storage, security and the servers supporting them within the data centre.

It is advisable to identify all the elements that must be consolidated at any given time. This enables better phasing and reduces risk as systems are upgraded and deployed. For continuous and long-term improvement, users must perform the following tasks:

  • Migrate the infrastructure to a set of shared, networked and virtualised platforms.
  • Identify specific infrastructure support applications such as security, data protection, office services and email.
  • Review alternative approaches to ensure that implementations are future-ready.
  • Study information management platforms such as databases, file systems and archival requirements to ensure they are sustainable and deliver the required access of information resources securely.
  • Build these platforms with a view to de-risking the consolidation of business critical applications often viewed as the last or more complex environments to consolidate.
  • Evaluate vendors to simplify the acquisition, support and maintenance requirements, with a view to reducing the number of suppliers to a manageable level.

Data centre consolidation delivers real returns. Embarking along this route ensures systems are aligned to the business and enables new technologies such as virtualisation and cloud services to be evaluated and implemented effectively.

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