1008061-Cor-4_v6 - Equity Derivatives and Related Products...

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Unformatted text preview: Equity Derivatives and Related Products Class 4: Options Introduction Mark Zurack September 21, 2010 1002011-MBA-5 2 Class Objectives Review Assignments 1 and 2 Complete discussion on stock loan and single stock swaps Scott Carter from Deutsche Bank will share his experiences using Equity Derivatives in Prime Brokerage Financing transactions Introduce Options, focusing on how the market operates and describing some basic strategies To explain basic properties of options like intrinsic value, time premium, time and insurance value, and an options delta and gamma Introduce Options Valuation by breaking down the components of an Options price Describe what Delta is and why it is important If there is time, extend our discussion on options valuation to put/call parity and forward prices to show how arbitrage forces affect put and call prices as well as many strategies 1008061-Cor-4 1002011-MBA-5 3 What Determines the Rebate Rate? Starts with rate where lender is able to reinvest cash Reduced by the spread lender wishes to make which depends on the supply/demand for individual securities in the market E.g. IBM, 120 mm available inventory Large amount of supply forces lenders to compete in order to get stock out on loan (pay higher rebates) E.g. PALM, available inventory Any new purchases by lenders will be loaned at market rates or best bids Reduced by the spread broker wishes to make which depends on the cost of using their balance sheet and their ability to find a lender Term usually overnight Clients rebate = Lender return on cash Lender spread Broker spread Rebate Risk: Risk that the rebate, or interest rate earned on the stocks short sale proceeds, declines due to supply/demand imbalances Recall Risk: Risk that the stock borrow, which is necessary to maintain the hedge, is recalled, or sold by the lender of the security and cannot be borrowed from other sources. 1008060-Cor-3 1002011-MBA-5 4 How Single Stock Swaps are Used in Equity Finance Stock Buyers Stock Sellers As a way to obtain more leverage Sometimes more tax efficient Sometimes operationally easier To remove recall and rebate risk Sometimes more tax efficient Sometimes operationally easier Long Swap Example 1008060-Cor-3 Client buys Return on IBM Dealer Customer Total Return on IBM $US LIBOR + 30 bps 1002011-MBA-5 5 How Single Stock Swaps are Used in Equity Finance (Cont.) Short Swap Example A Hedge Fund is considering establishing a short position in ABC Corp which is trading at $100. The rebate rate on ABC is 3%. If ABC declines to $80 in one year, what is the funds profit per...
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1008061-Cor-4_v6 - Equity Derivatives and Related Products...

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