1008051-Cor-2_v2 - EquityDerivatives andRelatedProducts...

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Equity Derivatives  and Related Products Class 2: Futures Markets Mark Zurack September 7, 2010
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1001220-MBA-3 2 Class Objectives Complete our discussion on Exchange Traded Funds Describe how the Stock Index Futures market operates Contrast the size of the futures market with stocks and ETFs Show how Stock Index Futures are valued Introduce Index Arbitrage Introduce Calendar Spreads and explain why rolling futures is  important If there is time, introduce Equity Index Swaps 1008051-Cor-2
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1001220-MBA-3 3 Options Market Hedging Vehicles for Market Makers Stock Market (large orders) ETF Market Futures Market How ETFs Are Created and Managed Trade Futures, Options, ETFs, or Underlying Stocks Investor Buys ETF Investor Sells ETF Create / Redeem ETF for Underlying Stocks Market Maker Trades Futures/Options/Stocks Chosen by Fund Manager ETF Trust / Fund Seed capital  is raised for  the ETF Money manager  decides to create a  new ETF Basket of stocks  used only to hedge  large orders/illiquid  securities Cost of trading ETF  should not exceed  cost of trading  stocks, usually lower Impact of Creation/ Redemption Process 1008050-Cor-1
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1001220-MBA-3 4 ETF Avg Daily Volume 0 20 40 60 80 100 120 140  3/ 02  9/ 02  3/ 03  9/ 03  3/ 04  9/ 04  3/ 05  9/ 05  3/ 06  9/ 06  3/ 07  9/ 07  3/ 08  9/ 08 Sectors & Other Other Broad QQQQ SPX Source: Bloomberg, Goldman Sachs, Reuters 0  1/ 09  4/ 09  7/ 09  10/ 09  1/ 10  4/ 10  7/ 10 Sector Broad Market International Inverse+ Leverage Other $Bln $Bln 1008050-Cor-1 Mar 2002 through Dec 2008 Jan 2009 through Jul 2010
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1001220-MBA-3 5 Total ETF Assets Mar 2002 through Dec 2008 Source: Bloomberg, Goldman Sachs, Reuters 0 100 200 300 400 500 600 700 800 900 1/ 09  4/ 09  7/ 09  10/ 09  1/ 10  4/ 10  7/ 10  Sector Broad Market International Inverse+ Leverage Other 0  3/ 02  9/ 02  3/ 03  9/ 03  3/ 04  9/ 04  3/ 05  9/ 05  3/ 06  9/ 06  3/ 07  9/ 07  3/ 08  9/ 08 Other Broad-based NDX SPX $Bln $Bln 1008050-Cor-1 Jan 2009 through Jul 2010
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1001220-MBA-3 6 Leveraged Long and Short ETFs To provide a multiple of the daily appreciation or depreciation of an Index Selected Large Funds  as of December 31 Index  Ticker ETF Ticker Name Assets (mil)  (a) Volume  (mil)  (b) 8/29- 12/31/08 Index Return (c) 8/29- 12/31/08 ETF Return (d) 2009 Index Return 2009 ETF Return  (d) SPX SSO Ultra S&P 500 ProShares  1,724 826 -29.59% -56.92% 26.50% 46.10% DJUSFN UYG Ultra Financials  ProShares  1,929 123 -36.44% -70.96% 16.57% -5.42% SPX SDS UltraShort S&P 500  ProShares  2,928 1,346 -29.59% 54.25% 26.50% -50.38% NDX QLD Ultra QQQ ProShares 1,004 446 -35.29% -69.18% 53.54% 119.08% DJUSRE SRS UltraShort Real Estate  ProShares 730 252 -40.79% -30.20% 30.81% -85.08% DJUSFN SKF UltraShort Financials  ProShares 834 431 -36.44% -11.56% 16.57% -76.59% Fund Objective Source: Goldman Sachs, Dow Jones, Yahoo Finance, ProShares a) As of December 31, 2009 b) Average volume over 3 months, ending December 31, 2009 1008050-Cor-1
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1001220-MBA-3 7 Leveraged ETFs Simulation No Financing Cost or Dividends Goal: Maintain 2 to 1 leverage at all times Pct Pct Ratio Required Revised Index Change Units Value Financing Equity
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1008051-Cor-2_v2 - EquityDerivatives andRelatedProducts...

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