fifth class summer 2009

8/14/2019 Fifth Class Summer 2009

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World currenciesWorld currencies

Writing about the yen,

dollar, euro and the worldof foreign exchange.


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Who is in the currencyWho is in the currencymarket?market?

CompaniesCompaniesBanksBanks

Traders TradersGovernments (central banks)Governments (central banks)Investment fundsInvestment funds


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What moves the currencyWhat moves the currencymarket?market?

Economic newsEconomic newsInterest rates/monetary policyInterest rates/monetary policy

Political newsPolitical news Technicals TechnicalsSpecial itemsSpecial items


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Currencies basicsCurrencies basics

It's a dollar world, for nowIt's a dollar world, for nowCommodities trade in dollarsCommodities trade in dollars

Bonds-currencies-interest ratesBonds-currencies-interest ratesVolatilityVolatilityHedgingHedging

Global trade expandingGlobal trade expanding


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Currency termsCurrency termsOptionOptionPut/CallPut/CallVolatilityVolatility

LIBORLIBORInterest rate swapsInterest rate swapsRepatriation flowRepatriation flowCurrency PegCurrency Peg

ForwardForwardFloating\ Free FloatingFloating\ Free FloatingCarry tradeCarry trade


7/43

Sony, a listed Japanese consumer electronics conglomerate, recorded a huge lossSony, a listed Japanese consumer electronics conglomerate, recorded a huge lossand analyst said a partial divestiture of financial division would be considered.and analyst said a partial divestiture of financial division would be considered. Sony posted group net deficit of about JPY 98bn, a down 126% from a year earlier, forSony posted group net deficit of about JPY 98bn, a down 126% from a year earlier, forthe year ended in March 2009. A dividend for this year is about JPY 40, which is 50%the year ended in March 2009. A dividend for this year is about JPY 40, which is 50%higher than the previous year. An analyst doubts if Sony would be able to pay higherhigher than the previous year. An analyst doubts if Sony would be able to pay higherdividends in next year if the company keeps forecasting a minus on net anddividends in next year if the company keeps forecasting a minus on net andoperating profit; JPY 120bn and JPY 110bn, respectively.operating profit; JPY 120bn and JPY 110bn, respectively. Sony already announced a job cut of about 20,000 employees out of its total 200,000Sony already announced a job cut of about 20,000 employees out of its total 200,000with a downsizing of sales and production sites on its electronics division, a corewith a downsizing of sales and production sites on its electronics division, a corebusiness of Sony, to save about JPY 500bn by the end of fiscal 2009 year.business of Sony, to save about JPY 500bn by the end of fiscal 2009 year. A partial divestiture of its financial sector would be among the possible options forA partial divestiture of its financial sector would be among the possible options forSony more to improve its financial condition and to focus on its core businesses suchSony more to improve its financial condition and to focus on its core businesses suchas electronics and games for the eyes of shareholders if the company keepsas electronics and games for the eyes of shareholders if the company keepsforecasting a loss, the analyst said. A full sale of Sony Financial Holdings would beforecasting a loss, the analyst said. A full sale of Sony Financial Holdings would bedifficult if looking for relevant buyers, given its current high market cap of aboutdifficult if looking for relevant buyers, given its current high market cap of about

JPY 700bn, the analyst said. Thus, a partial sale of its businesses such as nonlife JPY 700bn, the analyst said. Thus, a partial sale of its businesses such as nonlifeinsurance, life insurance, or banking division would be possible, the analyst said,insurance, life insurance, or banking division would be possible, the analyst said,adding that Japanese or foreign financial group might be interested in its stableadding that Japanese or foreign financial group might be interested in its stablefinancial assets.financial assets. Sony reported group operating loss of about JPY 227bn, a down 147% from a yearSony reported group operating loss of about JPY 227bn, a down 147% from a yearearlier on top of its group sales of about JPY 772bn, a down 12% from a year earlier,earlier on top of its group sales of about JPY 772bn, a down 12% from a year earlier,for the year ended in March 2009.for the year ended in March 2009.


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Sony recorded a huge loss;Sony recorded a huge loss;financial division would befinancial division would beseriously reviewedseriously reviewed

Sony, a listed Japanese consumer electronicsSony, a listed Japanese consumer electronicsconglomerate, recorded a huge loss and analystconglomerate, recorded a huge loss and analyst

said a partial divestiture of financial divisionsaid a partial divestiture of financial divisionwould be considered.would be considered. Time

Size of loss

Active verb structure


9/43

Sony Corp., Japans second-Sony Corp., Japans second-largest consumer electronics group,largest consumer electronics group,posted a record loss, promptingposted a record loss, promptingspeculation the company will sellspeculation the company will sellpart of its insurance and bankingpart of its insurance and bankingunit.unit.

Sony Corp., Japans second-Sony Corp., Japans second-largest consumer electronics group,largest consumer electronics group,may sell parts of its insurance,may sell parts of its insurance,banking and financial servicesbanking and financial servicesbusiness after posting a record lossbusiness after posting a record loss

for the year.for the year.


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Sony posted group net deficit of Sony posted group net deficit of about JPY 98bn, a down 126% from aabout JPY 98bn, a down 126% from a

year earlier, for the year ended inyear earlier, for the year ended inMarch 2009. A dividend for this yearMarch 2009. A dividend for this yearis about JPY 40, which is 50% higheris about JPY 40, which is 50% higherthan the previous year. An analystthan the previous year. An analystdoubts if Sony would be able to paydoubts if Sony would be able to payhigher dividends in next year if thehigher dividends in next year if thecompany keeps forecasting a minuscompany keeps forecasting a minuson net and operating profit; JPYon net and operating profit; JPY120bn and JPY 110bn, respectively.120bn and JPY 110bn, respectively.


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Time TimeActive verb structureActive verb structure

Important numbers firstImportant numbers first


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Net loss more than doubled to JPYNet loss more than doubled to JPY

98bn for the year ended in March98bn for the year ended in March2009 from the previous year and the2009 from the previous year and thecompany said it expects the deficit tocompany said it expects the deficit to

widen to 120 billion yen in thewiden to 120 billion yen in thecurrent year. The dividend for thiscurrent year. The dividend for thisyear will climb 50 percent to JPY 40 ayear will climb 50 percent to JPY 40 ashare, a figure some analysts saidshare, a figure some analysts saidmay be too optimistic, given themay be too optimistic, given theprofit outlook.profit outlook.


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Sony already announced a job cutSony already announced a job cutof about 20,000 employees out of itsof about 20,000 employees out of itstotal 200,000 with a downsizing of total 200,000 with a downsizing of sales and production sites on itssales and production sites on itselectronics division, a core businesselectronics division, a core business

of Sony, to save about JPY 500bn byof Sony, to save about JPY 500bn bythe end of fiscal 2009 year.the end of fiscal 2009 year. Time Time

Active verb structureActive verb structureImportant numbers firstImportant numbers first


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Sony in April said it would saveSony in April said it would save JPY 500bn this year by cutting 20,000 JPY 500bn this year by cutting 20,000sales and production jobs at itssales and production jobs at itselectronics division out of the totalelectronics division out of the total200,000.200,000.

25 million yen per job? Hmmm


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Sony in April said it would saveSony in April said it would save JPY 500bn this year, partly by cutting JPY 500bn this year, partly by cutting20,000 sales and production jobs at20,000 sales and production jobs atits electronics division out of the totalits electronics division out of the total200,000.200,000.


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A partial divestiture of its financial sector would be amongA partial divestiture of its financial sector would be amongthe possible options for Sony more to improve its financialthe possible options for Sony more to improve its financialcondition and to focus on its core businesses such ascondition and to focus on its core businesses such aselectronics and games for the eyes of shareholders if theelectronics and games for the eyes of shareholders if thecompany keeps forecasting a loss, the analyst said. A fullcompany keeps forecasting a loss, the analyst said. A fullsale of Sony Financial Holdings would be difficult if lookingsale of Sony Financial Holdings would be difficult if lookingfor relevant buyers, given its current high market cap of for relevant buyers, given its current high market cap of about JPY 700bn, the analyst said. Thus, a partial sale of itsabout JPY 700bn, the analyst said. Thus, a partial sale of itsbusinesses such as nonlife insurance, life insurance, orbusinesses such as nonlife insurance, life insurance, or

banking division would be possible, the analyst said, addingbanking division would be possible, the analyst said, addingthat Japanese or foreign financial group might bethat Japanese or foreign financial group might beinterested in its stable financial assets.interested in its stable financial assets.

Start with the subjectStart with the subjectActive construction is better than passiveActive construction is better than passiveConcrete over abstractConcrete over abstract


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Sonys outlook for widening lossesSonys outlook for widening losses

may cause it to sell parts of Sonymay cause it to sell parts of SonyFinancial Holdings, its insurance,Financial Holdings, its insurance,banking and financial services unit,banking and financial services unit,which has a market cap of JPY 700which has a market cap of JPY 700billion. The entire unit may be hardbillion. The entire unit may be hardto sell, given the relatively largeto sell, given the relatively largemarket capitalization, which is itself market capitalization, which is itself

larger than three of Sonys fivelarger than three of Sonys fivebiggest rivals.biggest rivals.


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Sony reported group operating lossSony reported group operating lossof about JPY 227bn, a down 147%of about JPY 227bn, a down 147%from a year earlier on top of its groupfrom a year earlier on top of its groupsales of about JPY 772bn, a downsales of about JPY 772bn, a down12% from a year earlier, for the year12% from a year earlier, for the yearended in March 2009.ended in March 2009.

Sales dropped 12 percent to JPYSales dropped 12 percent to JPY772bn.772bn.


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WSJ

Three More Bodies Found at Air France Crash Site

Three more bodies of victims of Air France Flight 447 wererecovered Sunday by Brazilian navy ships from the AtlanticOcean, a navy official said Sunday in Recife, Brazil.

The bodies, along with two others found Saturday, will be

transported by a navy frigate to the island of Fernando deNoronha, where rescuers have established a mobile morgue,officials said at a news conference.

Navy ships are collecting hundreds of pieces of debris, theofficials said, including oxygen masks and airline seats withAir France logos, and search planes have spotted a piece of one of the plane's wings.

"There is no doubt that the debris being collected is from theAir France flight," an air-force official said. "The bodies are of the passengers on that plane."


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ReutersMore bodies found near Air France crash site

Search crews retrieved four more bodies from a crashed AirFrance jet on Sunday, spotted other corpses and found a largeamount of debris from the plane that plunged into the Atlanticocean.

Six bodies have now been recovered from the plane, followingthe discovery of two unidentified males on Saturday, five daysafter the Airbus A330 crashed on its way from Rio de Janeiro toParis killing all 228 people on board.

Investigators are considering the possibility that the speedsensors on Flight 447 may have iced up, and Air France said lateon Saturday it was accelerating the replacement of speedsensors on all its Airbus long-haul planes.


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NY TimesMore Bodies Recovered Near Site of Plane Crash

SO PAULO, Brazil Brazilian ships picked three more corpses

from the water on Sunday, bringing to five the number of bodies recovered from the area where an Air France Airbusdisappeared over the Atlantic a week ago.

An unspecified number of other bodies have been spottedfloating in the sea and will be picked up in the coming hours,

the Brazilian Air Force said in a statement Sunday morning. The three bodies were picked up Sunday morning by theBrazilian navy ship Caboclo. Two others had been pulled fromthe sea on Saturday.

All five corpses were transferred to another ship, the frigateConstituio, which is taking them to Fernando de Noronha, anarchipelago roughly 45 miles away. The bodies will arrive thereMonday before being transferred to Recife, the coastal citywhere the search and rescue operation is being run, thestatement said.


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OptionOption

An agreement allowing the holder toAn agreement allowing the holder tobuy or sell an asset within a certainbuy or sell an asset within a certaintime at a specific price.time at a specific price.


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Put/CallPut/Call

A put allows its holder to sell anA put allows its holder to sell anasset at a set price at any timeasset at a set price at any timeduring the set period.during the set period.

A call allows its holder to buy anA call allows its holder to buy anasset at at set price at any timeasset at at set price at any timeduring the set period.during the set period.


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VolatilityVolatility

A gauge of average changes in priceA gauge of average changes in priceover time. Investors measureover time. Investors measurevolatility to help assess the riskinessvolatility to help assess the riskinessof an asset and to determine theof an asset and to determine theprice of options.price of options.


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``The spread between implied volatility and historic has``The spread between implied volatility and historic haswidened during the recent dollar-yen rally,'' Mann said.widened during the recent dollar-yen rally,'' Mann said.``We expect the spread to narrow over the next few``We expect the spread to narrow over the next fewmonths as implied volatility declines,'' given the likelymonths as implied volatility declines,'' given the likelyslowdown in the pace of dollar gains.slowdown in the pace of dollar gains.

Implied volatility on three-month options rose as high asImplied volatility on three-month options rose as high as7.65 percent last week, up from 6 percent on June 5, the7.65 percent last week, up from 6 percent on June 5, thelowest since Bloomberg began tracking such data inlowest since Bloomberg began tracking such data inDecember 1995.December 1995.

Volatility on options increased in recent weeks as investorsVolatility on options increased in recent weeks as investorsboosted purchases of put options, which protect against aboosted purchases of put options, which protect against adollar fall. The dollar appreciated 6.6 percent versus thedollar fall. The dollar appreciated 6.6 percent versus theyen in the last four months, touching the strongest inyen in the last four months, touching the strongest inalmost four years at 124.13 yen per dollar on June 22. Thealmost four years at 124.13 yen per dollar on June 22. Therate traded at 123.22 as of 7 a.m. in London from 122.94rate traded at 123.22 as of 7 a.m. in London from 122.94

yesterday in New York.yesterday in New York. In February 2004, the last time the premium on impliedIn February 2004, the last time the premium on impliedvolatility was so large, the dollar-yen rate had tumbled 14volatility was so large, the dollar-yen rate had tumbled 14percent over the preceding eight months. The impliedpercent over the preceding eight months. The impliedversus historical volatility premium was wiped out by Mayversus historical volatility premium was wiped out by May

2004.2004.


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ForwardForward

An agreement to buy or sell aAn agreement to buy or sell acurrency at a set price at a set timecurrency at a set price at a set timein the future.in the future.


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Floating\ Free FloatingFloating\ Free Floating

When a currencys value is notWhen a currencys value is notcontrolled by a governmentcontrolled by a governmentmonetary authority or central bank, itmonetary authority or central bank, itis a floating or free floating currency.is a floating or free floating currency.

The dollar, yen and euro are floating The dollar, yen and euro are floatingcurrency. The yuan and thecurrency. The yuan and the

Singapore dollar do not float, theySingapore dollar do not float, theyare pegged currencies.are pegged currencies.


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Investors should bet that option volatility on the dollar-yenInvestors should bet that option volatility on the dollar-yenexchange rate will decline as a four-month U.S. currencyexchange rate will decline as a four-month U.S. currencyrally wanes, Standard Chartered Plc said.rally wanes, Standard Chartered Plc said.

Demand for the dollar should fall as U.S. interest rates slip,Demand for the dollar should fall as U.S. interest rates slip,reducing the currency's allure, the bank said in a researchreducing the currency's allure, the bank said in a researchnote. Standard Chartered economists expect the Federalnote. Standard Chartered economists expect the FederalReserve to decrease the benchmark lending rate by 0.25Reserve to decrease the benchmark lending rate by 0.25percentage point to 5 percent and the Bank of Japan to liftpercentage point to 5 percent and the Bank of Japan to liftits key rate by 0.25 percent to 0.75 percent by year end.its key rate by 0.25 percent to 0.75 percent by year end.

Volatility on three-month options on the dollar-yen rate wasVolatility on three-month options on the dollar-yen rate was6.78 percent today, 2.29 percentage points above historical6.78 percent today, 2.29 percentage points above historicalvolatility of 4.49 percent. The difference, or spread, was asvolatility of 4.49 percent. The difference, or spread, was aswide as 2.61 percent this week, the greatest premium of wide as 2.61 percent this week, the greatest premium of implied volatility over actual since February 2004.implied volatility over actual since February 2004.

Implied volatility, a gauge of traders' expectations for priceImplied volatility, a gauge of traders' expectations for priceswings, increases as demand for options rises. Tradersswings, increases as demand for options rises. Tradersquote implied volatility as part of pricing options.quote implied volatility as part of pricing options.


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Carry tradeCarry trade

Borrowing in one currency to investBorrowing in one currency to investin assets denominated in anotherin assets denominated in anothercurrency, usually to take advantagecurrency, usually to take advantageof differences in interest rates. Manyof differences in interest rates. Manyinvestors currently borrow in yen atinvestors currently borrow in yen atlow interest rates, then invest thelow interest rates, then invest the

money in dollar, or euro assets thatmoney in dollar, or euro assets thatpay higher interest rates.pay higher interest rates.


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LIBORLIBOR

London Interbank Offered Rate, orLondon Interbank Offered Rate, orthe average interest rate at whichthe average interest rate at whichlarge banks agree to lend to eachlarge banks agree to lend to eachother overnight in London.other overnight in London.LIBOR is typically used as theLIBOR is typically used as thereference for floating interest rates inreference for floating interest rates inswaps and other contracts.swaps and other contracts.


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Interest rate swapsInterest rate swaps

An agreement to exchange cash flowAn agreement to exchange cash flowfrom one interest rate for another.from one interest rate for another.

Typically, the cash flow from a fixed Typically, the cash flow from a fixedinterest rate, such as a bond or bankinterest rate, such as a bond or bankdeposit, is exchanged for a floatingdeposit, is exchanged for a floatingone, such as the London Interbankone, such as the London Interbank

Offered Rate, LIBOR.Offered Rate, LIBOR.


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Currency PegCurrency Peg

When the central bank or monetaryWhen the central bank or monetaryauthority of a country maintains theauthority of a country maintains thevalue of its currency against another.value of its currency against another.Chinas yuan, for example, is peggedChinas yuan, for example, is peggedto the dollar. So when the dollar risesto the dollar. So when the dollar risesagainst the euro and yen, Chinasagainst the euro and yen, Chinas

monetary authority buys yuan andmonetary authority buys yuan andsells euro and yen to increase thesells euro and yen to increase thevalue of the yuan to match thevalue of the yuan to match the

dollar.dollar.


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Repatriation flowRepatriation flow

Cash that investors or individualsCash that investors or individualshave earned abroad and arehave earned abroad and arereturning into their home currency.returning into their home currency.In Japan, almost all the repatriationIn Japan, almost all the repatriationflow is from companies that haveflow is from companies that haveexport earnings in dollar or euro andexport earnings in dollar or euro and

need to convert them to yen.need to convert them to yen.


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Sony recorded a huge loss;Sony recorded a huge loss;financial division would befinancial division would beseriously reviewedseriously reviewed

Sony, a listed Japanese consumer electronicsSony, a listed Japanese consumer electronicsconglomerate, recorded a huge loss and analystconglomerate, recorded a huge loss and analystsaid a partial divestiture of financial divisionsaid a partial divestiture of financial divisionwould be considered.would be considered.

Sony, Japans second-largest consumer electronicsSony, Japans second-largest consumer electronicsmaker, recorded a loss, prompting an analyst to saymaker, recorded a loss, prompting an analyst to saythe company may sell its financial unit.the company may sell its financial unit.


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Sony posted group net deficit of about JPY 98bn, aSony posted group net deficit of about JPY 98bn, adown 126% from a year earlier, for the yeardown 126% from a year earlier, for the yearended in March 2009. A dividend for this year isended in March 2009. A dividend for this year isabout JPY 40, which is 50% higher than theabout JPY 40, which is 50% higher than theprevious year. An analyst doubts if Sony would beprevious year. An analyst doubts if Sony would beable to pay higher dividends in next year if theable to pay higher dividends in next year if thecompany keeps forecasting a minus on net andcompany keeps forecasting a minus on net and

operating profit; JPY 120bn and JPY 110bn,operating profit; JPY 120bn and JPY 110bn,respectively.respectively.

Group net loss widened to about JPY 98bnfor the year ended March 2009, more thandouble the loss a year earlier. The annualdividend rose 50% to JPY 40. An analyst doubtsif Sony would be able to pay higher dividends innext year if the company keeps forecasting aminus on net and operating profit; JPY 120bnand JPY 110bn, respectively.


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Sony already announced a job cut of aboutSony already announced a job cut of about20,000 employees out of its total 200,000 with a20,000 employees out of its total 200,000 with a

downsizing of sales and production sites on itsdownsizing of sales and production sites on itselectronics division, a core business of Sony, toelectronics division, a core business of Sony, tosave about JPY 500bn by the end of fiscal 2009save about JPY 500bn by the end of fiscal 2009year.year.

Sony in April said it expected to save JPY500bn this year by eliminating 20,000employees out of a workforce of 200,000, layingoff sales and production workers in itselectronics division.


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A partial divestiture of its financial sectorA partial divestiture of its financial sectorwould be among the possible options forwould be among the possible options forSony more to improve its financialSony more to improve its financialcondition and to focus on its corecondition and to focus on its corebusinesses such as electronics and gamesbusinesses such as electronics and gamesfor the eyes of shareholders if thefor the eyes of shareholders if thecompany keeps forecasting a loss, thecompany keeps forecasting a loss, theanalyst said. A full sale of Sony Financialanalyst said. A full sale of Sony FinancialHoldings would be difficult if looking forHoldings would be difficult if looking forrelevant buyers, given its current highrelevant buyers, given its current highmarket cap of about JPY 700bn, themarket cap of about JPY 700bn, theanalyst said. Thus, a partial sale of itsanalyst said. Thus, a partial sale of itsbusinesses such as nonlife insurance, lifebusinesses such as nonlife insurance, lifeinsurance, or banking division would beinsurance, or banking division would bepossible, the analyst said, adding thatpossible, the analyst said, adding that

Japanese or foreign financial group might Japanese or foreign financial group might

Sony may also raise money by selling assetssuch as the insurance or banking businesses atSony Financial Holdings, an analyst said. Theunit has a market value of JPY 700bn, which isprobably too large to draw a buyer, the analystsaid.


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fifth class summer 2009

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