DERIVATIVES MANGEMENT 1 - Foued Ayar i, PhD Financial I...

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Unformatted text preview: Foued Ayar i, PhD Financial I nstruments M ONEY M ARKET T-BI LL CP CD FEDERAL FUNDS RATE LI BOR REPO.. Foued Ayari, PhD 2 Financial I nstr uments CAPI TAL M ARKET STOCKS BONDS HYBRI D DERI VATI VES OPTI ONS FUTURES FORWARD SWAPS CREDI T DERI VATI VES ALTERNATI VE HEDGE FUND PRI VATE EQUI TY COMMODI TY REAL ESTATE Bank of I nternational Settlement :As of December 2007 Foued Ayari, PhD 3 Debt versus Equities Cor por ations issue equity and/or debt to r aise capital Common stock Fundamental Ownership claim in a public corporation, Common stockholders are entitled to companys profit. Residual claim Limited liability Voting right Can be issued in many classes Preferred stock Hybrid security (both Bonds and Common stocks) Fixed dividends - limited Priority over common Tax treatment Shareholders elect Board of Directors. Companies are run by directors for the shareholders. Ordinary shareholders have voting rights and attend general meeting. ADR: American Depository Receipt 1. Easier to buy foreign stock 2. Currency Risk Foued Ayari, PhD 4 Debt Equity Fixed Maturity No Maturity I nterest Terms Known Dividend at Discretion I nterest Cost Tax Deductible Voting Rights Priority over Common Stockholders Last in Bankruptcy, residual. Debt versus equity Debtholders receive the promise of a known cash flow at specific dates. Sectors: Treasury Agency Municipal Corporate Bonds Loans Debt can be senior or subordinate. Debt can be investment or speculative grade. Price Paid is called Dirty Price, which is Dirty Price=Clean Price + Accrued I nterest Foued Ayari, PhD 5 Money Market I nstruments Maturity less than 1 year, highly liquid, little risk, such as: Treasury bills Certificates of deposit Commercial Paper Eurodollars Federal Funds Repurchase Agreements (Repos) Foued Ayari, PhD 6 Tr easur y Bill I ssued by the US Treasury Negotiable, zero-coupon obligations of the US Treasury I ssued with maturities of 1, 3, 6, and 12 months Very low risk. Often taken as Risk Free I ssued at a discount and redeemed at par Repos REPO AGREEMENTS Definition A transaction in which one party sells to another a security. At the same time, as part of the same agreement the party agrees to repurchase identical securities on a specified date at a specified price. There are two legs to a classic repo The seller delivers securities and receives cash from the buyer The difference between the cash received by the seller in leg 1 and returned in leg 2 is known as the repo rate Foued Ayari, PhD 7 Types of Bond Federal Government, local ,state authorities and corporations; all issue bonds. These leads to a great deal of variation in bond features. An ordinary bond is known as a vanilla bond : Government bonds UK Gilts French OATs German Bunds US T-bonds I ndex-linked Treasury I nflation-Protected Securities (known as TI PS) I ndex-linked gilts Zerocoupon Foued Ayari, PhD 8 Bonds and Fixed I ncome...
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DERIVATIVES MANGEMENT 1 - Foued Ayar i, PhD Financial I...

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