投资学英文课件：Notes_3_SecurityTypes

1、Professor Minwen LiTsinghua UniversitySecurity TypesOur goal in this chapter is to introduce the different types of securities routinely bought and sold in financial markets in the United States as well as worldwide. Concepts, payoff structure, risk components, how to understand their quotes in the

2、financial press. Asset classes in China （Homework)ReferencesChapter 3 (JM) Chapter 2 (BKM)*Classifying Security TypesBasic TypesMajor Subtypes Interest-bearing Money market instruments Fixed-income securities Equities Common stock Preferred stock Derivatives Options Futures, Forwards, Swaps? Any oth

3、er types or subtypes not listed Property, Commodities, Private equities, Venture Capital, Fund families, Collectibles, Bank loans.Classifying Security TypesBasic TypesMajor Subtypes Interest-bearing Money market instruments Fixed-income securities Equities Common stock Preferred stock, Private equit

4、y (VC) Derivatives Options Futures, Forwards, Swaps Fund FamiliesMutual Funds, Hedge Funds, ETFs OthersProperty, Commodities, CollectiblesAlternative InvestmentDefine:An investment product other than the traditional types (stocks, bonds, and cash)Normally include:Properties, Commodities, PE, VC, Hed

5、ge fund, Some derivative contracts, Collectibles .Key feature:Not publically traded, High minimum investment, Less liquid, Low correlation with traditional types, Tremendous growth in the last decade.Interest-Bearing Assets Interest-Bearing Assets are debt obligations that pay interests.Money market

6、 instruments/Cash Equivalents are short-term debt obligations.When issued their lives do not exceed one yearThese securities promise to make one future payment.They normally trade in large denominations ($100,000). Fixed-income securities are longer-term debt obligations.When issued, their lives exc

7、eed one yearThese securities promise to make fixed (one or multiple) payments according to a pre-set schedule.Interest-Bearing Assets: The Great Role of Federal, State, and Local GovernmentsAs of March 1, 2012, the gross public debt of the U.S. government was more than $15 trillion, approximately 10

8、2.7% of annual GDP, making it the largest single borrower in the world.Municipal government debt is also a large debt market. The state and local governments contribute about more than $2.85 trillion of outstanding debt.Source: US “Fiscal Cliff”:US Public Debt As of Perce

9、nt of GDPResource: What is US “Fiscal Cliff”? How to solve it?“Q&A: What Is the Fiscal Cliff?”, WSJWhat is the “fiscal cliff”?The fiscal cliff is the combination of large spending cuts and tax increases that are scheduled to be automatically enacted at the start of 2013How would this impact growth?

10、Congressional Budget Office (CBO) projects that if the tax increases and spending cuts go into effect, the economy would contract at a 2.9% annualized rate in the first six months of 2013 and the unemployment rate would rise to 9.1% at the end of next year. ?.Major Components of the Money MarketMone

11、y Market InstrumentsRepurchase agreements/Repos: the dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price.Savings deposits: savings account at a bank or other financial institution that pays in

12、terest, but cannot be withdrawn by check writing.Time deposits / Certificate of Deposits (CD): A money deposit at a banking institution that cannot be withdrawn for a preset fixed term or period of time.Treasury Bills (T-Bills): 1, 3, 6 month maturity coupon Money Market InstrumentsCommercial paper:

13、 short-term, nonsecured debt notes issued in multiples of $100,000 by large, well-known corporations. Mature in 1-2 months, 270 days.Eurodollars : dollar-denominated deposits at foreign banks or foreign branches of American banks.LIBOR market: LIBOR (London Interbank Offered Rate) is the rate at whi

14、ch large banks in London are willing to lend money among themselves.Money market mutual fund: mutual funds investing in money market instruments. Represents 3.8 trillion in assets as of 2010.Potential Gains/losses of Money Market InstrumentsFixed potential gain: a fixed future paymentRelatively low

15、riskMarketable, liquid.Some products could hedge against unexpected inflation.Most important risk is default risk! An example: Do you know what your money-market fund is investing in?Money market fund was established in 1970s in US.On September 16, 2008, Reserve Primary Fund “broke the bucks” becaus

16、e of exposure to Lehman Brothers debt securities : its net asset value had declined below the $1-a-share Many investors began withdrawing money in the wake of that news, and the Treasury Department stepped in to offer a guarantee program for money-market funds that pay to participate, which helped s

17、tabilize the market.Fixed-Income Securities1)U.S. Treasury Notes and Bonds (T-Notes 2-10 years; T-Bonds 20-30 years)2)Treasury Inflation-Protected Securities (TIPS)3)Municipal Bonds (Munis)4)Federal Agency Debt5)Corporate Bonds6)International Bonds7)Mortgages and Mortgage-Backed Securities8)Other As

18、set-Backed SecuritiesDeveloped in the 1970s to help liquidity of financial institutions which originated fixed-rate mortgages.Debt obligations with a claim on the cash flow of a pool of mortgage loans.Government agencies (Fanni Mae (Federal National Mortgage Association), Freddie Mac(Federal Home Lo

19、an Mortgage Association), Ginnie Mae(Government National Mortgage Association) or private entities(e.g. bank of America) purchase mortgage loans from local banks or other originators.These loans are assembled into collections, or pools” to mitigate the prepayment and default risk associated with the

20、se mortgages.These loans are then sold to institution, corporate or individual investors. Mortgages and Mortgage-Backed SecuritiesSecuritizationtaking off BS!Mortgages and Mortgage-Backed SecuritiesMarket has experienced very high rates of growth. As of 2007, $ 3.8 trillion of mortgages are securiti

21、zed into mortgage-backed securities.Subprime mortgage crisis in 2007-2008.Prime mortgages are mortgages with prime borrowers, full documentation (such as verification of income and assets), strong credit scores, etc.Subprime mortgages have weaker credit scores, no verification of income or assets, e

22、tc.How to market subprime mortgages? “Fancier” Securitization: CDO Q: how is creation of CDO products related to the 2007-2008 global financial crisis?Mortgage-backed Security Issuances 1990-2009Data: US CBO (Congressional Budget office)Mortgage-backed Securities Outstanding, 1979-2007Pricing of Fix

23、ed Income Securities22where:F = face valueiF = contractual interest rateC = F * iF = coupon payment (periodic interest payment)N = number of paymentsi = market interest rate, or required yield, or observed / appropriate yield to maturityM = value at maturity, usually equals face valueP = market pric

24、e of bond.Potential Gain/loss of Fixed Income SecuritiesFixed coupon payments and final payment at maturity, except when the borrower defaults. Risks involvedInterest rate risk: possibility of gain (loss) from fall (rise) in interest ratesDefault (credit) risk:Inflation risk:Q: pricing fixed income

25、products versus equity products, which one is more complex?Potential Gain/loss of Common StockDividend yield: Many companies pay cash dividends to their shareholders. However, neither the timing nor the amount of any dividend is guaranteed.Capital Gain: The stock value may rise or fall depending on

26、company-specific prospects, industry-common events, and market-wide circumstances.What are Derivatives?Primary assets: Securities originally sold by firms or government to raise money (stocks and bonds) as well as stock indexes (S&P, Nikkei) and commodities (gold, coffee). Note: other than stock ind

27、exes, they are all real assets!Derivative assets: Financial assets are derived from existing primary assets. Their payoffs depend on the payoffs of primary assets.DerivativesFutures and forwards contractAn agreement made today that give the buyer and seller the obligation to trade a specific asset a

28、t a specified condition in the future.Option contractAn agreement made today that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specified condition in the future.Swap contractAn agreement that the two counterparties agree to exchange one stream of cash flows

29、 of an asset against another stream of cash flow of an asset.Forward ContractA forward contract is an agreement made today between a buyer and a seller who are obligated to complete a transaction at a date in the future. Two parties of the contract(Counterparties): buyer- long position; seller-short

30、 position. The buyer and the seller “know” each other. The negotiation process leads to customized agreements: What to trade; Where to trade; When to trade; How much to trade?Futures ContractA Futures contract is also an agreement made today between a buyer and a seller who are obligated to complete

31、 a transaction at a date in the future.The buyer and the seller do not “know” each other.The terms of a futures contract are standardized. That is, the future contract specifies what to trade; where to trade; When to trade; How much to trade; what quality of good to trade.Unlike forwards, futures ty

32、pically have interim partial settlements or true-ups“/ mark to market” in daily margin requirements. For typical forwards, the net gain or loss accrued over the life of the contract is realized on the delivery date.Traded through an exchange and via a clearing house.Futures have the initial minimum

33、deposit requirement (initial margin).The initial margin of futures is in general much lower than that of equity trading. FX futures:100:1 max for individuals, 500:1 max for institutionsFutures have daily resettlement of gains and losses rather than one big settlement at maturity.Every trading day:if

34、 the price goes down, the long pays the shortif the price goes up, the short pays the longMaintenance margin requirementAfter the daily resettlement, each party has a new contract at the new price with one-day-shorter maturityMark to MarketOrganized Futures ExchangesEstablished in 1848, the Chicago

35、Board of Trade (CBOT) is the oldest organized futures exchange in the United States.Other Major Exchanges:New York Mercantile Exchange (1872)Chicago Mercantile Exchange (CME 1874)Kansas City Board of Trade (1882)Early in their history, these exchanges only traded contracts in storable agricultural c

36、ommodities (i.e., oats, corn, wheat).Agricultural futures contracts still make up an important part of organized futures exchanges.Financial FuturesFinancial futures are also an important part of organized futures exchanges. Some important milestones:Currency futures trading, 1972.Gold futures tradi

37、ng, 1974. Actually, on December 31, 1974.The very day that ownership of gold by U.S. citizens was legalized.U.S. Treasury bill futures, 1976. U.S. Treasury bond futures, 1977.Eurodollar futures, 1981.Stock Index futures, 1982.Today, financial futures are so successful that they constitute the bulk (

38、more than 75%) of all futures trading.Futures Contracts BasicsIn general, futures contracts must stipulate at least the following five terms:The underlying commodity or financial instrument.Contract size.Maturity date, also called the expiration date.The delivery or settlement procedure.The futures

39、price.Main purpose of investing in futures:1.Speculation2.HedgingExample I: Speculating in Gold FuturesYou believe the price of gold will go up. So,You go long 100 futures contract that expires in 3 months.The futures price today is $1700 per ounce.There are 100 ounces of gold in each futures contra

40、ct.Your position value is: $1700 100 100 = $17,000,000Suppose your belief is correct, and the price of gold is $1720 when the futures contract expires. Your position value is now: $1720 100 100 = $17,200,000Your long speculation has resulted in a gain of $200,000What would have happened had the gold

41、 price been $1680?Speculating with Futures, ShortSelling a futures contract (today) is often called “going short,” or establishing a short position. Recall: Each futures contract has an expiration date.Every day before expiration, a new futures price is established.If this new price is higher than t

42、he previous days price, the holder of a short futures contract position loses from this futures price increase.If this new price is lower than the previous days price, the holder of a short futures contract position profits from this futures price decrease.Example II: Speculating in Gold FuturesYou

43、believe the price of gold will go down. So,You go short 100 futures contract that expires in 3 months.The futures price today is $1700 per ounce.There are 100 ounces of gold in each futures contract.Your position value is: $1700 100 100 = $17,000,000Suppose your belief is correct, and the price of g

44、old is $1680 when the futures contract expires. Your “position value” is now: $1680 100 100 = $16,800,000Your short speculation has resulted in a gain of $200,000What would have happened had the gold price been $1800?Hedging with FuturesA hedger trades futures contracts to transfer price risk. A hed

45、ger normally has an interest in the underlying asset.A speculator seeks to make a profit by predicting market moves and opening a derivative contract related to the asset on paper, while they have no practical use for or intent to actually take or make delivery of the underlying asset.?Q: who are th

46、e hedgers investing in financial futures?Hedgers transfer price risk by adding a futures contract position that is opposite of an existing position in the commodity or financial instrument.When the hedge is in place:The futures contract “throws off” cash when cash is needed.The futures contract “abs

47、orbs” cash when cash is available.Hedging with Futures, Short HedgeA company has a large inventory that will be sold at a future date. So, the company will suffer losses if the value of the inventory falls.Suppose the company wants to protect the value of their inventory.Selling futures contracts to

48、day offsets potential declines in the value of the inventory.The act of selling futures contracts to protect from falling prices is called short hedging.Example: Short Hedging with Futures ContractsSuppose Starbucks has an inventory of about 950,000 pounds of coffee, valued at $0.57 per pound.Starbu

49、cks fears that the price of coffee will fall in the short run, and wants to protect the value of its inventory.How best to do this? You know the following: There is a coffee futures contract at the New York Board of Trade.Each contract is for 37,500 pounds of coffee.Coffee futures price with three m

50、onth expiration is $0.58 per pound.Selling futures contracts provides current inventory price protection.25 futures contracts covers 937,500 pounds.26 futures contracts covers 975,000 pounds. Real world decision!The Short Hedge PerformanceThe hedge was not perfect. But, the short hedge “threw-off” c

51、ash ($56,250) when Starbucks needed some cash to offset the decline in the value of their inventory ($57,000). What would have happened if prices had increased by $0.06 instead?DateStarbucksCoffee InventoryPriceStarbucks Inventory ValueNear-Term Coffee Futures PriceValue of 25 Coffee Futures Contrac

52、tsNow$0.57$541,500$0.58$543,7501-MonthFrom now$0.51$484,500$0.52$487,500Gain (Loss)($0.06)($57,000)$0.06$56,250Open Interest: total number of contracts that have not been settled.Example: Short Hedging with Futures Contracts, Cont.Starbucks decides to sell 25 near-term futures contracts.Over the nex

53、t month, the price of coffee falls. Starbucks sells its inventory for $0.51 per pound.The futures price also falls, to $0.52. (There are two months left in the futures contract)How did this short hedge perform? That is, how much protection did selling futures contracts provide to Starbucks?Exercise

54、for discussion next weekDescribe the properties, market value, and trading volumes of main asset classes in China.What are the main regulations regarding trading of these asset classes?Option ContractsA call option gives the owner (long a call option) the right, but not the obligation, to buy an ass

55、et.Counterparty- writer/seller/shorter of a call optionA put option gives the owner (long a put option)the right, but not the obligation, to sell an asset.Counterparty- writer/seller/shorter of a put optionThe price you pay to buy an option is called the option premium.The specified price at which t

56、he underlying asset can be bought or sold is called the strike price, or exercise price.Option ContractsAn American option can be exercised anytime up to and including the expiration date.A European option is less flexible as it can be exercised only on the expiration date.Option versus Future Contr

57、actsOptions differ from futures in two main ways:Holders of call /put options have no obligation to buy/sell the underlying asset.To avoid this obligation, buyers of calls and puts must pay a price today. Holders of futures contracts do not pay for the contract today. Potential gains/losses from Cal

58、l OptionsBuyers/holders (Long Call)gain if the strike price is lower than the market price, and the difference is greater than the option premium. In the worst case, buyers lose the entire premium. Thus, the buyer has unlimited gain and limited loss.Sellers /writers (Short Call) gain the premium if

59、the market price is lower than strike price. Here, the gain is limited but the loss is unlimited.The writer believes it is unlikely that stock price will rise above the strike price at the expiration date.If you write a call on stock you already own, this is a good way to generate immediate income w

60、ithout taking on substantial risk.Potential gains/losses from Put OptionsBuyers/holders (Long Put)Profit when the strike price minus the market price is greater than the option premium. Best case, market price (for the underlying) is zero.-limited gain Worst case, the put buyer loses the entire prem