Derivatives in Financial Market: Portfolio Management

Derivatives in Financial Market: Portfolio Management Derivative Structures in the Market and Their Place in Corporate Portfolio Management Abstract Derivatives are financial instruments that do not hold independent value, but where instead the value of the instrument is based on the underlying value of a given asset, which can range from financial assets such as stocks, bonds and market indexes to commodity assets such as oil, gold or wheat, to more obscure or exotic assets such as weather or other exotic assets. The four main categories of derivative include forwards, futures, options and swaps, each of which is used for a different risk control technique and each of which has its own unique structure, risk, and potential for return. Derivatives are commonly used in financial firms to balance portfolios and reduce risk by spreading it across the market, or in order to mitigate potential risk by limiting it (for example, placing a ceiling or floor on currency exchanges or purchases). This paper explores the use of derivatives in the financial market, including their use in portfolio management. Following a thorough definition of the derivative, the paper explores the use of derivatives in portfolio management and other banking activities, and offers a substantive risk assessment that addresses the potential difficulties that the use of these instruments may pose as well as a description of the benefits of using derivatives. The paper also explores ways in which actual financial institutions use derivatives through examination of public reports and other available information, in order to determine what current practice is in the use of these reports. The report concludes with recommendations for portfolio managers within financial institutions regarding the use of these instruments for risk management as well as the potential dangers of their use. The study is intended to provide an overview guide to this material and an analysis of existing research that can be used for further research and understanding of the subject material. Chapter 1 Introduction to the Research Project The use of derivatives in corporate risk management has come under scrutiny recently in the news, following reports of credit risk derivatives being used improperly by some firms and banks during the mortgage lending collapse of 2007-2008. However, while these instruments may be misused, they also hold an important role in both financial and non-financial firms in hedging risk and balancing corporate portfolios and investments. Derivatives can be used in a number of different applications. These applications include balancing risk across a number of different investors, gaining access to foreign currency or reducing currency exchange risk exposure, and reallocating loan risk across lending portfolios within or among banks. While these instruments clearly have benefits in terms of balancing, spreading and reducing risk to the individual investor, corporation or bank, there are still considerable risks that must be considered. For example, credit risk derivatives were at fault for revenue losses because they were improperly calculated to be less risky than they actually were. Conversely, a currency option, one type of derivative that reduces the potential for risk in currency exchange rates, could end up being a poor rate if the market does not change in the expected manner. These are just a few of the risks that can be encountered within the use of derivatives in financial and non-financial firms. This paper presents an overview of the types of derivatives available, the risk involved in using the derivative, and other important factors that must be considered in its use. Research Aims The main aim of this research is to explore and identify the derivative structures in the financial market and examine different corporate responses to the changes in the market and uses of these derivatives. The research also examines the impact posed by changes in the market on the corporate portfolio strategy. By first providing an overview of the different types of derivative structures available, and then analyzing corporations in order to identify how they use these structures, the research paper analyzes corporate portfolio diversification as a strategy and explores the potential for derivatives in financial markets. Research Objectives The main research objectives of this project include: Definition of the structure and application of derivatives Definition of the risk posed by application of derivatives in a competitive market Description of the common usage and potential impact of derivatives on the financial institution Examination of the impact of market changes in the corporate portfolio within the financial institution Identification of the limitations and risks of derivatives as used in the corporate portfolio Identification of appropriate risk management and portfolio management strategies Importance of the paper Sustained changes in the financial and competitive environment of industries, increasing globalization and increasing complexity of financial markets has led to an unprecedented period of currency and interest rate volatility worldwide. In order to counter this increase in risk, innovative foreign exchange risk and interest rate risk hedging techniques have developed at a rapid pace. Although these derivatives are intended to assist in risk management and risk minimization, particularly in terms of uncertain cash flows and currency exchange rates, their use has been uncertain, as instruments grow increasingly exotic. This paper will provide a guide to derivatives and their use in the financial market, as well as provide a clear understanding of the risks involved in the use of derivatives and their appropriate application to risk management, as well as discussion of how the risk of the derivatives themselves may be handled. This information can be used by investment risk managers and others in order to guide policies regarding the use of these instruments and allow for an increased understanding of the underlying issues involving these instruments. Methodology overview The methodology that will be used is that of desk research and meta analysis. This method will assemble information from a large number of sources, including primarily secondary research, and organize and analyze it in such a way as to create an understanding of the research material in the general case. This information will be able to be used for description of the operation and formulation of derivatives in a number of markets. Data collection The main data collection technique used in this discussion will be secondary research or desk research. This method was chosen both because of the limited time available to perform the survey and because of the amount of information already available on the subject matter. Secondary information will include primarily a literature review, which will provide background and theoretical information that can be used in order to form an overall picture of the theory and practice of using derivatives and derivative structures. Other secondary data will be used to examine the issues at hand for analysis, including materials such as company reports, journal articles and time series, and previously conducted surveys that address the subject matter. However, it should be noted that derivatives are not ordinarily considered reportable assets, and so may leave little trace on company reports and discussions. As such, generalized information from sources such as the Bank for International Settlements will be used as much as possible rather than specific firm information. Data analysis Following the collection of data using the method described above, the data will be analyzed using a number of techniques. Analysis methods are intended to be both quantitative and qualitative, in accordance with the data available for analysis. Quantitative analysis will be exploratory and descriptive, using data summaries in such methods as charts, tables, and descriptive statistics. Qualitative analysis techniques that will be used will include categorization, development and analysis of relationships, and descriptive techniques. This data analysis will be used in order to create an overall view of the data that can be used in order to explore the research questions. Organization of the paper The table below presents the organization of the remainder of the paper in terms of chapter numbers and contents. Chapter Contents Chapter 2 Literature review and context review Chapter 3 Methodology overview Chapter 4 Presentation of results of analysis, discussion of results and examination of risk and risk mitigation strategies for firms using derivatives Chapter 5 Conclusions and recommendations for further study Table 1 Organization of the paper Summary This chapter has presented an overview of the aims and objectives of the paper as well as the methods that will be used to explore the research objectives. It will provide a guide to the remainder of the paper. The next chapter, the Literature Review, provides insight into the structure and definition of derivatives as well as providing insight into their use in financial markets. Chapter 2 Review of the Literature In order to provide background and theoretical information for the discussion in the following chapters, this chapter presents an overview of the current state of affairs concerning derivatives and their use in the financial firm. This includes a description of the definition of derivative, the varying types of derivatives and what their uses and significance are, and a description of their current use in the banking context in order to examine the overall importance of derivatives in portfolio management. This chapter will also provide an overview of the concepts of portfolio management in order to examine issues involved in the use of derivatives. Definition of derivatives Although there are a number of different definitions of derivatives, the basic principle of the derivative is that it is not, in and of itself, an asset or investment; instead, it is a financial instrument that is based on the value of an underlying asset or instrument (Hunt Kennedy, 2004, p. 1). As such, it should be clear that as a derivative has no independent financial value, it should not be considered to be an investment per se; if the firm wishes to make an investment in the underlying asset, it is more appropriate to do so directly. Instead, derivatives are used to gain potential access to cash flows, risk, currency exchanges or other valuable items or to distribute risks across a number of different users, markets, or geographic areas rather than assigning all risk to a single portfolio or individual (Hunt Kennedy, 2004, p. 3). Derivatives may be based on the value of a wide range of underlying instruments, including stocks, bonds, indexes, exchange rates, interest rates or the prices of commodity such as wheat, oil or livestock (Hunt Kennedy, 2004). More exotic underlying instruments include credit risks of packaged assets and even long-range weather forecasts; however, these exotic underlying instruments fall outside the scope of this discussion and will not be examined in-depth. Underlying concepts There are a number of underlying concepts that must be understood if the idea of the derivative is to be fully described. The first such idea is that of replication. In brief, replication is the portfolio of assets (trading strategy that will pay out an identical amount to the payout of the derivative in any potential trading circumstance (Hunt Kennedy, 2004, p. 3). In other words, the balance of the portfolio, on which option pricing theory is based, is dependent on its ability to mirror the price of the option that it is compared against. The second important underlying idea is that of arbitrage. Hunt and Kennedy (2004, p. 3) defined arbitrage as a trading strategy that generates profit from nothing with no risk involved. Arbitrage opportunities are assumed not to exist in the trading of derivatives; although it is clear that some random arbitrage opportunities might exist, they cannot be counted upon in a trading strategy and should not be considered for the purposes of this analysis. The underlying security is defined as the security involved in an option or other derivative transaction (Chorafas, 2008, p. 36). In other words, the underlying security (or underlying asset) is the security or asset from which the derivative derives its value, like a commodity such as oil, gold or wheat. These underlying securities rarely actually change hands (although it may occasionally occur). As Chorafas noted, while the underlying security may be based in an asset or liability, it cannot be considered to be an asset or liability itself, but is instead intended only to hedge risks from other market areas. Chorafas demonstrated that the relationship between the underlying security and the derivative is likely to be nonlinear; that is, the price of the derivative will not depend immediately on the price of the underlying security, but will instead be offset by other factors. The figure below demonstrates this nonlinear relationship. Figure 1 Nonlinear relationship between the value of derivatives and underlying instruments (Chorafas, 2008) The idea of notional principle amount, or face amount, is the amount of money on which the trade is based; however, this money is never actually intended to change hands, it only provides a basis for such characteristics of the derivative as interest rate calculation or other bases for engaging in the trade (Chorafas, 2008, p. 36). This may be specified not only in currency, but also in any other relevant measurement, such as shares, kilos, gallons, bushels, or whatever the natural means of measuring the underlying asset might be. Types of derivatives There are a wide range of types of derivatives, and custom derivatives are often assembled in order to meet the requirements of the parties involved in the trade that do not easily coincide with the definition of any standard type. However, the four major categories of derivatives include options, forwards, futures and swaps. Each of these types has a different structure and different uses within the market, and each is traded differently within the market. The description, structure and main uses of each of these types of derivatives are described in detail below. Options An option is an instrument that gives the buyer the opportunity (but not the requirement) to purchase a given instrument at a specific time for a specific price (Chorafas, 2008, p. 39). An option may be a call option (guaranteeing the buyer the right to buy the underlying good at the set price) or a put option (guaranteeing the owner the right to sell the underlying good at the strike price) (Kolb, 2003, p. 4). The buyer of an option may decide to exercise it (in which case they take delivery of the underlying) or to not exercise it (in which case it expires); if the buyer does exercise the option (decide to take delivery) the seller must give it to them for the agreed-upon price. The price at which the buyer may exercise the option is the strike price, while the price paid to the seller for the option is known as the premium (Chorafas, 2008, p. 40). The expiration date is the date by which the option must be exercised is the expiration date. The type of option will determine whether the option can be exercised only on that date, at any time prior to that date, or at certain specific times prior to the expiration date. American options can be exercised at any point up to the expiration date, while European options allow exercise only on the expiration date (Kolb, 2003, p. 507). A Bermuda option has set intermediate dates between the purchase and the expiration date at which it may be exercised (Kolb, 2003). There are also a number of exotic options that provide more customized payment, delivery and exercise agreements that may rely on the price of the underlying asset; for example, a barrier options exercise depends on the value of the underlying asset reaching a price specified in the contract, while an Asian option depends on the average price of the underlying security (Kolb, 2003). A so-called plain vanilla option, however, depends only on the current price of the underlying and other characteristics of the option such as exercise price and time until expiration (Kolb, 2003, p. 577). Caps, floors and collars are particular characteristics of a given option, which are intended to limit exposure to upside and downside risk (Smith Walter, 2003, p. 84). A cap, commonly used in an interest rate swap as well as other options, fixes the upper rate of exchange, while a floor similarly fixes the lower rate of exchange; as can be envisioned, a collar fixes both the upper and lower rates of exchange in order to reduce the potential for risk. Options are extremely popular derivatives that are used in both financial and nonfinancial firms for portfolio balance. Forwards A forward, or more properly a forward contract or option, is structured in much the same way as an option; however, rather than the exercise of the instrument being optional at the expiration date, exercise is mandatory at that time (Kolb, 2003). A basic definition of a forward was given by Kolb, who remarked, A forward contract always involves a contract initiated at one time; performance in accordance with the terms of the contract occurs at a subsequent time. Furthermore, the type of forward contracting to be considered here always involves an exchange of one asset for another. The price at which the exchange is set at the time of the initial contracting. Actual payment and delivery of the good occurs later (Kolb, 2003, p. 2). Forward contracts are commonly used in currency exchange operations and other transactions in which the individuals involved wish to reduce uncertainty; for example, in a currency exchange forward, the seller ensures the present value of the trade, as does the buyer. Although the currency exchange rates may fluctuate over the time between the contract and the expiration date, the risk for each party will be reduced because they will be able to protect themselves from changes in the currency exchange (Kolb, 2003). As such, forwards are commonly used for securing access to foreign currency or other underlying assets that an individual will need in the future at a risk-controlled price. In effect, the use of forwards removes uncertainty from the future business climate, therefore reducing risk. Forwards may also be used in order to create a position in the weaker currency when performing interest rate hedging (Smith Walter, 2003, p. 43). In effect, the investor attempts to determine when a weak currency is going to undergo a currency collapse (such as the 1997-1998 Asian market collapse, which began with a weakened currency in Thailand), and then purchases interest rate forwards in this currency, then waits for the interest rate in the country to drop as monetary policy shifts to propping up the currency rather than attempting to slow growth. However, this strategy is not without risk because there is always the potential that the currency may not depreciate or, if it does, that the requisite interest rate drop will not occur, or will not be sufficient to make the investment worthwhile. Futures Futures are an even more specialized form of the option. Futures contracts, which always trade on organized exchanges rather than in over the counter transactions, are a type of forward contract with highly standardized and specified contract terms futures contracts are highly standardized with a specified quantity of a good, and with a specified delivery date and delivery mechanism (Kolb, 2003, p. 3). According to Kolb, performance on a futures contract is also guaranteed with by a clearing house, or a financial institution that guarantees the integrity of the market, and are protected by margin, or security payments posted by traders as a good-faith indication of willingness to trade (Kolb, 2003, p. 3). Futures, unlike other forms of derivatives, trade in a regulated market and as such may not be as complex to handle as other forms of derivatives such as forwards. Futures are most commonly used for trade in commodities, and are often used by nonfinancial institutions rather than financial institutions. Swaps Unlike the other forms of derivatives, a swap is not just a specialized form of option, but is instead a different type of instrument. A swap is an over-the-counter instrument involving the exchange of one stream of payment liability for another (Smith Walter, 2003, p. 75). According to Smith and Walter, this derivative has only developed since the 1980s, with an increasing use of derivatives by non-financial corporations in order to reduce risk and reduce cost of listing on stock and bond markets. Swaps, as contingent values, are also not listed on financial reports, which allow firms to manoeuvre their full investment in a given position if desired (Smith Walter, 2003, p. 76). Common swaps include interest rate swaps and currency exchange swaps. Currency swaps allow firms to exchange their exposure to currency risk (for example, by limiting the amount paid in interest from one position to another) by exchanging currency rates from one to the other. Historical currency swap rates demonstrate the overall growth in currency swaps. The table below demonstrates the growth in currency rate swaps over the top ten traded currencies in 2000. As can be seen, the Euro almost immediately became prominent, with rapidly increasing amounts of currency swaps overtaking the currency as it was instituted. The use of currency swaps is extremely common in financial and non-financial firms that require protection from currency risk. For example, those with operations in multiple countries (Smith Walter, 2003). Currency Notional Amount Traded Per Year (Historical Figures) 1998 1999 2000 Australian dollar 206 365 387 Canadian dollar 594 647 623 Danish Kroner 28 37 40 Euro 4,667 5,981 Hong Kong dollar 89 321 450 Japanese yen 5,319 4,236 4,254 New Zealand dollar 10 6 3 Norwegian Kroner 48 127 103 Pound Sterling 2,512 2,242 2,391 Swiss franc 419 459 456 Table 2 Historical trades in currency swaps, 1998-1999 (Smith Walter, 2003) Interest rate swaps allow for firms to exchange interest rates on funds, often in exchange for future value of a payment stream. As noted by Smith and Walter, these instruments are advantageous because they allow for the transfer of potential immediate interest risk, as well as offering individuals access to funds at lower interest rates. In addition to an immediate swap, a pair of traders may engage in what is called a forward swap, in which payments at some time in the future are fixed rather than immediately exchanging hands (Smith Walter, 2003, p. 83). These derivatives are not commonly used in the financial world, but may take place for example in order to fix interest rates through the duration of a long-term building project or perform similar interest rate fixation. Credit derivatives Of particular current concern is the credit derivative, which protect the lender against loan default in much the same way as a loan guarantee. According to Smith and Walter (85), the major types of credit derivatives include total return swaps (in which the potential returns from a risky underlying loan instrument are exchanged for a lower, but less risky, guaranteed return); credit default swaps (in which an upfront fee is exchanged for coverage in the case of a default on the underlying loan instrument); and the credit linked note (in which the buyer makes a series of payments to the seller, which are returned if there are no credit difficulties during the lifetime of the loan) (Smith Walter, 2003, p. 86). Banks have commonly used these derivatives in the recent past in order to limit their exposure to consumer debt; however, as the recent subprime mortgage crisis in the United States has shown, reckless use of credit derivatives may not be appropriate. Many hedge funds (estimated by Douglas to be a tenth of the total market) specialize in credit derivatives, following a number of different strategies for engaging in credit derivatives trading and arbitrage. The authors noted that of the participants in the credit derivative markets, the majority of funds that specialized in credit derivatives worked in emerging debt markets and convertible arbitrage opportunities, rather than in less risk, but less rewarding, areas such as distressed debt and high yield debt (Douglas, 2007). The risks of credit derivative instruments will be explored more fully in Chapter 3, Data and Analysis. Derivative trading Derivatives are traded in one of two ways. Over the counter derivatives (OTC derivatives) are derivatives that are traded directly between private parties, rather than being traded through an exchange (Smith Walter, 2003). Some of the most commonly traded derivative structures that are traded over the counter include swaps (which are usually custom-packaged in order to meet the needs of both parties involved in the trade) and exotic options and other custom-packaged derivative products (Smith Walter, 2003). These instruments are best traded over the counter because of their custom nature; the OTC sale format allows for customization of the package in order to meet the needs of the purchaser in terms of portfolio balance and risk adjustment (Chorafas, 2008, p. 58). However, this flexibility comes with a cost in risk undertaking, as there is no open market value of the instrument in order to ensure that the buyer does not overpay (Chorafas, 2008, p. 59). Although precise figures on the trade of OTC derivative instruments are difficult to obtain due to the private and non-reported nature of the trades, evidence points to a very large market for these instruments. According to the Bank for International Settlements, the estimated international trade in OTC derivatives as of December 2007 was approximately 596,004 billion US dollars (Bank for International Settlements, 2007). The second form of derivative trading is exchange-traded derivative trading, in which derivatives are listed on exchange for buyers and sellers in much the same fashion as stock or bond markets (Chorafas, 2008). The potential for overpricing that exists in OTC derivatives is not present in exchange-traded derivatives, because the existence of the open market results in the establishment of a fair market value for the derivative (Chorafas, 2008, p. 60). However, many types of derivatives are traded in derivative exchanges; most commonly, interest rate swaps and commodity forwards and futures are available on derivative exchanges (Chorafas, 2008, p. 75). While customization of derivative packages is not possible, for some purposes the use of a traded derivative is entirely sufficient to meet the needs of the portfolio management problem, and should be considered as lower cost than creating a customized over the counter derivative sale. According to the Bank for International Settlements, the exchange trading activity in derivatives during the 2nd quarter of 2008 (March to June) totalled 600,465 billion US dollars, which represented a total trade volume of 2,397 million contracts in total (Bank for International Settlements, 2008). Portfolio management The main use of derivativ Louis Isadore Kahn | Architect Biography Louis Isadore Kahn | Architect Biography Louis Kahn was one of the most renowned personalities of the 20th century Architecture. The impact that he made with some of his works was so remarkable that he was rightly compared with Corbusier and Mies Van Der Rohe. Louis Kahns work made huge impact specifically on the younger generation who were more willing to try out the non-traditional way of designing buildings. Louis Kahn truly believed that all architects should thrive for unparalleled excellence which would help them make an ever-lasting impact on the society, as seen by the works of Greeks and Eygpt. Keeping this goal in mind, Louis Kahn devoted his entire career in seeking perfection and pursing excellence. Louis Kahns best works are located in India, US and Bangladesh and incidentally they were produced in last two decades of his career. His works represent precise integration and assembly of structure, a silent admiration for materials and lights, a dedication to classical geometry, and a great deal of concern for human values. Louis Kahn was considered a enigmatic thinker or more like a philosopher who wanted to bring out change in the field of Architecture. BACKGROUND Born in 1901 in Estonia, Russia, Louis Isadore Kahn is considered to be one of the most influential architects of the second half of the twentieth century throughout the world. Louis Kahn migrated to the U.S. along with his family in his early years (in 1905). After completing his graduation from the University of Pennsylvania in 1924, Louis Kahn started his career as a draughtsman and later worked as head designer in several other firms in Philadelphia. He also worked in the offices of Philadelphias leading architects, Paul Cret (1929-1930) and Zantzinger, Borie and Medary (1930-1932). In the latter half of 1930s Louis Kahn served as a private consultant to the Philadelphia and The United States Housing Authority. His knowledge in modern architecture expanded when Kahn worked with European emigres Alfred Kastner and Oskar Stonorov. In the early 1940s Louis Isadore Kahn associated with Stonorov and George Howe, with whom Louis Isadore Kahn designed several wartime housing projects. K ahn was not only an American architect, but was also an educator and philosopher. Until 1947, Kahn had worked with a series of partners, after which, Kahn set up his independent/private practice. It was during this year, that Kahn also began with his influential teaching career atÂÂ  Yale University as Chief Critic in Architectural Design and Professor of Architecture (1947-1957) and then at the University of Pennsylvania as Cret Professor of Architecture (1957-1974). SIGNIFICANT ELEMENTS OF DESIGN Kahn wanted to redefine the bases of architecture through a re-examination of structure, form, space, and light; since his earlier work abstained from the international style modernism. Earlier works of Kahn had a traditional international style of architecture. However somewhere in the middle of his career, Kahn turned his back on this traditional approach and pursued innovation by redefining the use of structure, light, form and space. Louis Kahn described his quest for meaningful form as a search for beginnings, a spiritual resource from which modern man could draw inspiration. It is widely believed that Louis Kahn, who was then a Resident Architect at the American Academy in Rome, was extremely impressed by the astonishing architectural feats of Greeks, Egyptians and the Romans and this triggered the change in his approach of designing the buildings. Other experts believe Kahn was also influenced by the part of Philadelphia where he grew up. There were many factory buildings with large windows. These brick structures were very solid. This industrial design is apparent in several of Kahns early works. The impact of this European experience can been seen in Louis Kahns latter works. The work undertaken by him in last two decades of his life demonstrated a sincere desire to create a sense of place, showcased the true side of structure, and demonstrated the successful application of Platonic geometry principles. Louis Kahn must be credited for re-introducing various concepts which most of the modern architects had deserted like centralized spaces, using extensive geometric principles and demonstrating solid mural strength. Kahns buildings are admired for outstanding use of geometric shapes and implementing platonic geometry principles which creates magnificent experience for the users. Louis Kahn is credited in re-defining modern architecture in more than one ways. For e.g. Kahn was known to appreciate the appearance and feel of different materials that he used in his work. Kahn is also known to have used brick and concrete extensively and his innovative usage of these materials demonstrated his talent to the world. Kahn realised the importance of sunlight and was highly impressed by its usage in Egyptians and Greek works. Hence Kahns works demonstrates wide-scale implementation of sunlight through different kinds of interesting windows and openings. Egyptian works also inspired Kahn to use extensive geometric shapes and hence we find many of his buildings taking shape of squares, circles or triangles. Louis Kahns vision on how an architect can make difference to his design can be seen from the masters own words. A building is like a human, an architect has the opportunity of creating life. The way the knuckles and joints come together make each hand interesting and beautiful. In a building these details should not be put in a mitten and hidden. Space is architectural when the evidence of how it is made is seen and comprehended. EXAMPLES OF PROJECTS WHERE ELEMENTS OF LOUIS KAHN DESIGN WERE IMPLEMENTED All these elements of design philosophy can be seen in all the works of Louis Kahn starting from his first mature work the addition to the Yale University Art Gallery (New Haven, Connecticut, 1951-1953). This is considered to be Kahns first architectural masterpiece where one can see that much prominence has been give to the structural innovations demonstrated by hollow tetrahedral concrete ceiling and floor slab system, which was a mater-piece, a fantastic design of placing the mechanical and electrical systems. Kahns magnificent artistic sense can be seen from the design of the triangle-shaped staircase which sits in a rounded concrete shell, defining the servant space to be distinguished from the served spaces of the building. Richards Medical Research Building at the University of Pennsylvania (1957-1965) and the Salk Institute for Biological Studies (LaJolla, California, 1959-1965) demonstrated magnificent use of spaces and is the primarily responsible for the origin of the phr ase served and servant spaces. Kahn applied his principles to create masterpieces, which made a great deal of sense to the usage of space and light. His buildings, like the Yale Art Gallery extension (1951-53) or the Trenton Boathouse in New Jersey (1954-59) or even the Richards Medical Towers in Philadelphia (1957-62), create astonishing effects with the change in light, all possible due to the intelligent use of space and light. As a result, the user gets an entirely different experience of working in the building during different times of a day. By constructing Salk Institute in La Jolla, California (1959-67), Kahn created another masterpiece which had extraordinarily inspiring sequence of buildings. Richards Medical Towers This building demonstrates many key elements of Louis Kahns architecture. All these elements have been used before by other architects but not all at the same time. Through this structure, Kahn demonstrates the application of servant and served spaces, overcomes the problem of in sufficient lighting and more importantly integrates form, material, and process. As stated by Romaldo Giurgola and Jaimini Mehta, Richards Medical Towers represents a significant turning point in contemporary architecture. Salk Institute in La Jolla This particular building emphasizes the principle, Keep it simple and strong. Through this building, Kahn has achieved astonishing use of space, may it be the space available for Laboratories where research is conducted, or may it be the office space where ideas arise. This institute shows a wonderful collaboration of mind and action. The buildings beautiful concrete surfaces ensure precise detailing and magnificent experience. The structure is created in such a way that it takes care of the need to enclose specific spaces and does not rely on a general envelope to cover such specific space. Paul Heyer, described the central court of the building in a very artistic way. The central court, as a typical Kahn-like space of shimmering blue water, a band pointing toward the ocean epitomizing what human endeavour can accomplish at one scale with geometric clarity and authoritative but modest deliberation, to give to the scale less sweep of the ocean, here the Pa cific, a poignant gesture. Louis Kahn was known for his ability to create epic architectural structures that showcased human scale. He predominantly used brick and bare concrete as his building materials and he used highly refined surfaces like travertine marble for reinforcing the textures. (http://www.answers.com/topic/louis-kahn) Beyond its functional role, Louis Isadore Kahn believed architecture must also evoke the feeling and symbolism of timeless human values. Louis I. Kahn attempted to explain the relationship between the rational and romantic dichotomy in his form-design thesis, a theory of composition articulated in 1959. In his personal philosophy, form is conceived as formless and unmeasurable, a spiritual power common to all mankind. It transcends individual thoughts, feelings, and conventions. (http://architect.architecture.sk/louis-isadore-kahn-architect/louis-isadore-kahn-architect.php) Integral to Kahns notion of timeless form in the making of significant architectural spaces is the role of natural light. Louis Isadore Kahn described structure as the giver of light. For several projects located in hot sunny climates, such as the U.S. Consulate in Luanda, Angola (1959-1962). the meeting houses of the Salk institute, the Indian Institute of Management (Ahmadabad, India, 1962-1974), and the National Capital at Dhaka, Louis Isadore Kahn developed visually dynamic sunscreens. Great walls with variously shaped openings shield inner rooms from the harsh light. The evocation of a wall in ruins suggests an ancient part Louis Isadore Kahn s handling of light is a central theme in two unrealized synagogue projects, Mikveh Israel (Philadelphia Pennsylvania, 1961-1972) and Hurva (Jerusalem Israel, 1967-1974) as well as in one of his greatest works the Kimbell Art Museum (Fort Worth, Texas. 1966-1972). In the art museum, light enters through narrow slits in the concrete cycloid vaults and is diffused through the gallery interiors, which are rich with travertine and oak. Kimbell Art Museum This Louis Kahns masterpiece in Fort Worth is a beautiful demonstration of outmost perfection which can be compared only to the works done by the Greeks. Kahn used all the tools and available resources with such flawlessness, that it produced a building which had all the components working in a sychronized way and the system as a whole worked perfectly. It is difficult to find any building that does not utilize the materials properly and this one is no exception. INSPIRATION FOR OTHER ARCHITECTS Louis Kahns philosophy and extraordinary work has had influence on quite a number of contemporary architects. Tadao Ando, in his early twenties, took intiative and travelled throughout Japan, Europe, Africa and the United States for his architectural studies. He never took any formal training in the field of architecture. He would study architecture by observing the actual buildings and reading books of renowned architects such as Le Corbusier, Mies Van der Roher, Louis Kahn, etc. After he had gathered enough knowledge through his journey across different countries, he started his own practice. When asked about defining his style of architecture, Tadao had once said that, To me, walls are the most basic elements of architecture, and in all my works, light is an important factor. The Benetton Communications Research Center (Italy) and the Naoshima contemporary art museum, (Japan) showed that Tadoa Ando was truly inspired and has learned a lot from the works of Louis Kahn. Renzo Piano (born in 1937) completed his graduation in architecture in 1964 after which he worked in his family business. From 1965-1970, Renzo Piano worked in the offices of Louis Kahn (Philadelphia) and ZS. Makowski (London). Along with Renzo Piano, another famous architect who was greatly influenced by Louis Kahn was Richard Rogers. Renzo Piano met Richard Rogers at the Expo70 in Osaka and both immediately realized that they had common interests. One of the most famous projects of Renzo Piano Richard Roger is that of Georges Pompidou Centre in Paris. The building was designed in such a way, as if it were turned inside-out, with the services visible on the exteriors of the building making the inside of the building light and airy. Thus, this building can be said to be made on the similar basic concept which Kahn had applied years earlier in the Arts Centre where because of his theory of served and servant spaces, huge services ducts rose up through the building. Hence, it can be s afely concluded that Renzo Piano and Richard Roger were both influenced by Louis Kahn. Architect Norman Foster is another famous personality influenced by Louis Kahn. Foster happened to study masters in architecture in America at a time when Louis Kahn was designing the extension at the Yale University. Getting influenced by Kahns designs and philosophy, the two architects have also ended up designing the worlds most exciting buildings. For example, Norman Fosters Hongkong and Shanghai Bank project demonstrates Louis Kahns influence on Norman Foster. Another architect inspired by Kahn is James Stirling. Stirling was known for his experimental approach, which meant that he was not committed to one particular style. Also, this approach meant that Stirling was ready to try out new ideas and that definitely reflected Louis Kahns quality of designing. Stirlings earlier projects for Oxbridge stressed more importance to the concept than to the artistic and utilitarian needs. Due to this experimental approach and rigid adherence to concept, Stirling was often criticized for not following architectural principles.