...on their restructuring. Securities and capital markets divisions Clients are usually * Institutional investors, corporates or public entities, not private clients; * Mutual funds asset managers; * Pension Fund asset managers; * The insurance companies; * Private Banks; * Hedge Funds; * The treasury departments of large banks or large companies. Capital markets divisions * Equity division: equity research, equity sales, equity trading on cash, flow derivatives and structured products * FIRC or FICC (Fixed Income, currencies and derivatives): * Fixed income cash products, interest and credit derivatives, structured products; * FX: all currency transactions, from plain vanilla spot currency trades to sophisticated derivatives; * Commodities. Investment banking divisions * M&A (Mergers and acquisitions); * Advising on and underwriting securities issues; * Advising on restructurings. Clients are usually government/public bodies, corporates (quoted and...
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...kij1 Master Thesis Supervisor: PETER LØCHTE JØRGENSEN Author: QIAN Zhang (402847) Pricing of principle protected notes embedded with Asian options in Denmark ---- Using a Monte Carlo Method with stochastic volatility (the Heston Model) Aarhus School of Business and Social Science 2011 2 Acknowledgements My gratitude and appreciation goes to my supervisor Peter Lø chte Jø rgensen, for his kind and insightful discussion and guide through my process of writing. I was always impressed by his wisdom, openness and patience whenever I wrote an email or came by to his office with some confusion and difficulty. Especially on access to the information on certain Danish structured products, I have gained great help and support from him. 3 Abstract My interest came after the reading of the thesis proposal on strucured products written by Henrik, as is pointed out and suggested at the last part of this proposal, one of the main limitations of this thesis may be the choice of model. This intrigues my curiosity on pricing Asian options under assumption of stochstic volatility. At first, after the general introduction of strucutred products, the Black Scholes Model and risk neutral pricing has been explained. The following comes the disadvanges of BS model and then moves to the stochastic volatility model, among which the Heston model is highlighted and elaborated. The next part of this thesis is an emricical studying of two structured products embbeded with Asian...
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...Merchant Bank fulfilled the clearing house role (Alexander: 1996). According to Alexander, the Johannesburg Stock Exchange (JSE) together with commercial banks combined to set up a formal futures exchange and the South African Futures Exchange (SAFEX) exchange was eventually formed and opened for business on 30 April 1990. The Johannesburg Stock Exchange’s equity derivative section began operating in 1990 facilitating the trading of financial derivatives to the open market (Adelegan, 2009). Options’ contract trading was initiated in October 1992 and futures on agricultural commodities were available by 1995. In May 1996 the system of automated trading was fully introduced to the Futures exchange (Adelegan, 2009). The main reasons behind the establishment of the derivative market in South Africa were to increase liquidity, improve level of risk management as well as to allow the local market to tackle challenges arising as a result of globalization (Adelgan, 2009). Two broad categories exist in the derivatives market and these are futures and options and these two categories a variety of instruments can be found which include single stock futures, warrants, financial and commodity futures (Adelegan, 2009). Findings: Warrants Warrants Warrants were first launched in South Africa in 1997. Warrants are financial instruments that are traded on the Johannesburg Stock Exchange (JSE) and they represent the right not an obligation to buy or sell the underlying asset on or before...
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..._______________ Harris Rahim _______________ Hudson Joel Division of the Seminar Thesis Division of the seminar thesis is done as follows: Ahmed Mahmoud has done chapter 1 and 2, Harris Rahim has done chapter 3, Hudson Joel has done chapter 4. Content Chapter 1- Introduction 5 1.1 The payoff 6 Chapter 2: Partial Differential Equations 8 2.1 The Black Scholes Model 8 2.2 Reduction to a One-Dimensional Equation 9 Chapter 3- A valuation model for an Average Value (AV) option 11 Chapter 4- Program 15 4.1 Geometric average price call 15 4.2 Geometric average price put 17 References 20 Chapter 1- Introduction Asian option is one type of options where the payoff is determined by the average underlying stock price over a period of time. This differs from the usual European and American options where the payoff depends on the price of the underlying instrument at exercise. Therefore, the Asian options are one of the forms of exotic options. Asian options have a lower volatility and hence rendering them cheaper relative to their European counterparts. They were originally used in 1987 when Banker's Trust Tokyo office used them for pricing average options on crude oil contracts; and hence the name "Asian" option. The popularity of these derivatives arises from their usefulness in hedging, and other...
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...Flaws with Black Scholes & Exotic Greeks Treasury Perspectives Flaws with Black Scholes & Exotic Greeks 1 Flaws with Black Scholes & Exotic Greeks 2 Flaws with Black Scholes & Exotic Greeks Dear Readers:It’s been a difficult and volatile year for companies across the Globe. We have seen numerous risk management policies failures. To name a few... UBS, JPM Morgan, Libor manipulations by European, US and Japanese banks and prominent accounting scandals like Lehman… As rightly said by Albert Einstein “We can't solve problems by using the same kind of thinking we used when we created them.” and when you can't solve the problem, then manage it and don’t be dependent upon science as Science is always wrong, it never solves a problem without creating ten more. The same is the case with Foreign Exchange Risk Management Policies (FXRM) which if can’t be managed properly then would lead to either systematic shocks or negative implications at the bottom line of the corporate, banks, FI and trading houses P&L A/cs. That is something risk management struggles with, say the experts. In Richard Meyers’ estimation, risk managers or traders do not socialize enough. “It’s all about visibility,” he said. Meyers, chairman and CEO of Richard Meyers & Associates, a talent acquisition and management firm in New Jersey, relates the story of a firm that decided to adopt an Enterprise Risk Management (ERM) strategy. Instead of appointing its risk manager to head...
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... of Bonds DEBT MARKETS: FM2014 5-‐6. Debt Markets: Structure, Par+cipants, Instruments, Interest Rates and Valua+on of Bonds 1 FM: Objec+ves A?er successfully comple+ng this topic, you will be able to: § Apply basic pricing models to evaluate stocks and bonds § Describe the theoreIcal determinants of the level and term structure of interest rates § Explain the concept of “yield” and its rela+on to “interest rate” § Determine the price of coupon and discount bonds § Compute the dura+on and convexity of a bond § Differen+ate between Macaulay and modified dura+on § Understand the rela+onship between dura+on and convexity and bond price vola+lity FM2014 5-‐6. Debt Markets: Structure, Par+cipants, Instruments, Interest Rates and Valua+on of Bonds 2 FM: Bond. J. Bond. § ...
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...notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying. Some of the widely known underlying assets are: * Indexes (consumer price index (CPI), stock market index, weather conditions or inflation) * Bonds * Currencies * Interest rates * Exchange rates * Commodities * Stocks (equities) Categorization Derivatives are usually broadly categorized by the: * relationship between the underlying and the derivative (e.g., forward, option, swap) * type of underlying (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives) * market in which they trade (e.g., exchange-traded or over-the-counter) * pay-off profile (Some derivatives have non-linear payoff diagrams due to embedded optionality) Another arbitrary distinction is between: * vanilla derivatives (simple and more common) and * exotic derivatives (more complicated and specialized) There is no definitive rule for distinguishing one from the other, so the distinction is mostly a matter of custom. ------------------------------------------------- Types of Derivatives The range of derivatives is really wide. But some of the most commonly known...
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...to be. For example, derivatives exist with payments linked to the S&P 500 stock index, the temperature at Kennedy Airport, and the number of bankruptcies among a group of selected companies. Some estimates of the size of the market for derivatives are in excess of $270 trillion – more than 100 times larger than 30 years ago. When derivative contracts lead to large fi nancial losses, they can make headlines. In recent years, derivatives have been associated with a few truly notable events, including the collapses of Barings By René M. Stulz Financial Derivatives Third Quarter 2005 21 Bank (the Queen of England’s primary bank) and Long-Term Capital Management (a hedge fund whose partners included an economist with a Nobel Prize awarded for breakthrough research in pricing derivatives). Derivatives even had a role in the fall of Enron. Indeed, just two years ago, Warren Buffett concluded that “derivatives are fi nancial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” michael morgenstern 22 The Milken Institute Review But there are two sides to this coin. Although some serious dangers are associated with derivatives, handled with care they have proved to be immensely valuable to modern economies, and will surely remain so. the nuts and bolts Derivatives come in fl avors from plain vanilla to mint chocolate-chip. The plain vanilla include contracts to buy...
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...------------------------------------------------- ------------------------------------------------- Individual Final Project ------------------------------------------------- Case 2: “WorldCom, Inc.: Corporate Bond Issuance” Case Highlights This case is about the $37-billion bid for MCI Corp., by WorldCom – the United States’ second largest long distance phone company (after AT&T at the time). The purchase should come through by using its own stock to buy the public shares of MCI that did not belong to British Telecommunications (BT), and paying with cash the 20% stake BT held in MCI. In order to finance BT’s stake, WorldCom planned to issue the highest bond offering up to date in the markets of $6 billion. Also to be taken into account in this case, is the timing of the bond issuance, with some turmoil conditions in the bond and equity markets at the time due to the Asian crisis, the large volume of debt issues scheduled for issuance on the same week, and the pricing of the “jumbo” bond. For the remainder of this paper, I will analyze in detail each of these issues. WorldCom’s Background The company was born after the breakup of AT&T, in 1983, with the rise of long-distance telephone business. Bernie Ebbers, CEO, conducted a series of acquisitions which led LDDS (company’s name at the time – Long Distance Discount Services) to become the fourth-largest long-distance carrier in the USA. LDDS changed its name to WorldCom...
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...of mutual funds include professional management, diversification, variety, liquidity, affordability, convenience, and ease of recordkeeping—as well as strict government regulation and full disclosure. The Mutual Funds originated in UK and thereafter they crossed the border to reach other destinations. The concept of MF was indianized only in the later part of the twentieth century in the year 1964 with its roots embedded into Unit Trust of India (UTI). Since its inception in 1964 there were only 25cr assets under management like a sapling but it has grown into a big banyan tree with assets of Rs. 481749cr under assets management companies till March 2010. But presently it has increases up to 700538cr at the end of March 2011. Now, booming stock markets & innovative marketing strategies of mutual fund companies in India are influencing the retail investors to invest their surplus funds with different schemes of mutual fund companies with or without complete understanding of Mutual Funds (MF). This paper focuses on the analysis of the mutual funds, its benefits, and drawbacks and I have made a detailed summary on its various aspects. Keeping in mind the rise and fall in the money market it is better to invest in mutual funds for those investors who are risk adverse and for those who are risk taker it is better for them to invest in share market. I have...
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...CoCos 1 What is a Contingent capital bond and how do they work? A Contingent capital bond, also known as contingent convertibles, is a contingent capital investment, which, according to the article, is a “relatively new form of capital conceptualized in the wake of the crisis.”1 According to the frequently asked questions on the issue, “contingent capital securities are hybrid securities issued by financial institutions that are intended to provide leverage in good economic times and provide a buffer (i.e., loss absorption) under stress scenarios when it would be difficult for financial institutions to raise new capital.”2 This implies the usefulness of the CoCos in the good economic times as well as in crisis. According to the Financial Times lexicon, “contingent capital is debt that converts into equity when there is a crisis or when certain triggers are met… It keeps down the cost of capital in the short term, by classifying it as debt, but provides a buffer in case of emergencies that can be switched into loss-absorbing equity.”3 An example of a trigger could be that the Core Tier I capital ratio is falling below 5%. When that happens, coco bonds would then automatically be transformed into shares,4 providing capital. The trigger events and the conversion rates are stated in the contract with the investors. The remarkable trait of coco bonds is that “even though they pay a regular coupon (like plain vanilla bonds) there is always the risk of a conversion...
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... GLOBAL CORPORATE FINANCE SPECIAL COMMENT The Current Menu for Renminbi Bonds in Hong Kong: Dim Sum or Synthetic? Overview 1 2 5 Table of Contents: OVERVIEW MARKET PERSPECTIVE SURGE IN RENMINBI DEPOSITS AND TRADE SETTLEMENTS IN HONG KONG GROWTH IN RENMINBI TRADE SETTLEMENTS SUBJECT TO REGULATORY MEASURES SURGE IN DIM-SUM BOND ISSUANCE DIVERSIFICATION OF ISSUERS THE “DIM-SUM SUBSTITUTE”: SYNTHETIC RENMINBI BONDS 6 6 7 9 This report addresses recent developments in the offshore market for bonds denominated in mainland China’s currency, the Renminbi (RMB), whether settled in RMB or another currency. Called “dim sum” bonds when settled in RMB or “synthetic” if settled in other currencies such as U.S. dollars, these debt instruments have so far come out primarily in Hong Kong, with several synthetic convertible bonds in Singapore. However, in future, Chinese authorities may allow offshore RMB transactions elsewhere, and more euro-RMB bonds1 issued in other financial centers could soon appear. A comment answering investors’ frequently asked questions on our approach to rating both types of these bonds will follow within a few weeks. The progressive internationalization of the RMB will facilitate growth in Hong Kong of both kinds of RMB-denominated bonds. In particular, the rapidly expanding volume of the city’s deposits and of trade settlements in RMB has driven growth in dim-sum bonds, and the Chinese government’s allowance last week for Chinese enterprises to settle...
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...In Partial Fulfillment of the Requirements in Feasibility Studies Submitted to: Leo Santiago C. Arrabaca III, MBA Date Submitted: January 24, 2015 I. Executive Summary A. Market Research 1. Research Methods a. Survey: (Location where Survey was done) The surveys were administered to people around the Divisoria area through printed questionnaires. b. Observation: (Location where Observation was done) Observations were done at Something Sweet, Sweetleaf, Greenwich, Chinkee Tea, and Coffee Works. All located in the Divisoria area. c. Focus Group Interview: (Location where FGI was done) The focus group interview was held at Insideout City, 4/f One Montecarlo Building, Corner Corrales-Hayes, Hayes Street, Cagayan de Oro City. 2. Demand Analysis a.Total Monthly Demand of Products = 7110 units/month b. Market Share: Something Sweet 15.11% Sweet leaf 20.51% Greenwich(pearl coolers) 10.40% B. Marketing Mix 1. Name of product / service / company: Table Top 2. Price per variant: Php 60.00 3. Distribution Channel: Somewhere in Divisoria 4. Promotions: a.) Business Uniforms b.) Product Packaging (jars and notes) c.) Loyalty Stamp Card for customers C. Production Plan Production Schedule: Everyday for 6 days per week except for school holidays. Total Duration per Production: Per unit=5 minutes Total Number of Units Produced...
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...Bond Market INTRODUCTION Presently, as there is a robust growth of industrial activity in our economy, the need for investment has grown significantly and has resulted in a strong credit growth Some disintermediation is expected to take place as the most creditworthy borrower seeks the lowest borrowing costs. This development has re-emphasized the fact that bond financing has to supplement the traditional bank financing to take care of the growing credit needs of the economy. The Indian debt market, particularly the government securities market, has undergone a significant transformation since the introduction of reforms in the financial markets in 1991-92. The primary objective behind the reforms has been to moderate liquidity growth, contain inflationary pressure, and conduct public debt management in a cost-effective manner. Various reforms have also been undertaken in the corporate debt market. The corporate bond market is an important segment of the financial market in terms of funds raised well as potential for future growth. The Securities and Exchange Board of India (SEBI) was established in 1992, to regulate the primary issue in equity and de markets and to ensure sound trading practices in the secondary market throu stock exchanges. The bond market is an important source of funding for both t government and corporate sector. The bond market, also known as the debt, credit, or fixed income market, is a market where participants buy and sell debt securities...
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...Traditional VS Islamic Financial Derivatives To: Prof. Naser Abu Mustafa By: Mwaffaq Al Jayousi & Mohammad Al Shdooh Abstract This study focuses the light on defining financial derivatives and briefly describe their different types (Options, Forwards, Futures, Swaps, etc.). At the same time it tries to find if these financial derivatives exists in the Arab world, how they are implemented, and if we have an Islamic alternatives for them. Introduction There is a big debate in the Arab world regarding the usage of financial derivatives, Wither they are legal according to Islam or not, and If they are illegal in Islam; are there any Islamic alternatives to them. First we have to ask our self: Is there any need to use derivatives? And why they recently became so popular in the western countries? The need for financial derivatives emerges when people realize that there must be a way to reduce the risk associated with the trading of different kinds of goods. Risks such as price fluctuations and the uncertainty about the future market conditions. And since there are some people who are willing to bear this risk instead of us, this market took off and recently because of the communications revolution it flourished. Then why these financial derivatives did not reach the Arab world? The answer is simply because they hugely rely on speculations and anticipation; which are considered illegal according to Islam. But someone can ask: if it is illegal in Islam, then how come we...
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