Quĩ đầu tư - Chapter 1: Market organization and structure

Chapter 1Market Organization and StructurePresenterVenueDateWhat Are the Main Functions of the Financial System?Save money for future useBorrow money for current useRaise equity capitalManage risksExchange assets for immediate and future deliveriesTrade on informationHow Are Rates of Return Determined?Money demanded by borrowers and equity sellersMoney supplied by saversEquilibrium interest rateHow Are Markets Classified?Category 1Spot marketsForward and futures marketsOptions marketsCategory 2Primary marketsSecondary marketsCategory 3Money marketsCapital marketsCategory 4Traditional investment marketsAlternative investment marketsHow Are Assets Classified?AssetsSecuritiesCurrenciesContractsCommoditiesReal assetsHow Are Securities Classified?SecuritiesFixed incomeEquitiesPooled investmentsPublicPrivateHow Are Contracts Classified?ContractsForward contractsFutures contractsSwap contractsOption contractsOther contractsPooled InvestmentsPooled InvestmentsDepositoriesInvestorsHedge FundsTrustsMutual FundsLimitedPartnership InterestsDepositoryReceiptsUnitsSharesHedging with Forward ContractsFarmer needs to sell wheat to the miller at a future date.Risk: the price of wheat decreases. The farmer is currently long wheat in the spot market (needs to sell it in the future).The farmer hedges the spot market position by selling wheat forward.Miller needs to buy wheat from the farmer at a future date to sell to bakers.Risk: the price of wheat increases.The miller is currently short wheat in the spot market (needs to buy it in the future).The miller hedges the spot market position by buying wheat forward.Futures versus Forward ContractsFutures contractsStandardizedClearinghouse guarantees performanceStrong secondary marketsForward contractsCustomizedCounterparty riskTypically held to maturitySwap ContractsSwap contractsInterest rateCommodityCurrencyEquityOptionsOptionsCall: Option to buy. Exercised when strike or exercise price is below market price.Put: Option to sell. Exercised when strike or exercise price is above market price.What Are the Major Types of Financial Intermediaries?Commercial, mortgage, and investment banksBrokers and exchangesMutual funds and hedge fundsCredit unionsDealers and arbitrageursInsurance companiesCredit card companiesClearinghouses and depositoriesOther finance corporationsExchanges versus Alternate Trading Systems (ATS)ExchangesMarketplace (physical location) for trading.Increasingly arrange trades submitted via electronic order matching systems.Regulatory authority derived from governments or through voluntary agreements.ATSAlso called electronic communication networks (ECNs) or multi-lateral trading facilities (MTFs).Some offer services similar to exchanges, others offer innovative systems that suggest trades to clients.Do not exercise regulatory authority except with respect to trading.Dark pools—do not display orders.Depository InstitutionsCredit unionSavings associationSavings and loan associationCommercial bankHow Do Investors Influence a Bank’s Investment Decisions?Bank’s Balance SheetDepositsOther fundingsourcesLoansOtherinvestmentsInvestors are the primary source of bank funding.Who or what receives investor funding?Example of SecuritizationMortgage-backed securitiesMortgagesMortgage Bank Balance SheetHomeownersLend money to homeownersMortgages are pooled and securities issued are claims on that pool. Interest and principal payments “pass-through” to investors.InvestorsBuy securitiesMake paymentsReceivepaymentsInsurance CompaniesParties willing to bear riskBuyers of insurance contractsINTERMEDIATIONCredit Default Swaps (CDS)Protection buyerProtection sellerProtection buyerPremiumProtection against defaultProtection sellerPrior to maturity or defaultIn the event of defaultDeliverable obligation (physical settlement) or nothing (cash settlement)Par (physical settlement) or par less recovery value (cash settlement)Dealers versus ArbitrageursDealers provide liquidity to buyers and sellers who arrive at the same market at different times.Arbitrageurs provide liquidity to buyers and sellers who arrive at different markets at the same time.What Positions Can I Take in an Asset?Long positionsAssets or contracts are ownedPosition benefits from price appreciationShort positionsAssets not owned are sold or contracts are soldPosition benefits from a decrease in priceOption Positions and Their Underlying Risk ExposuresStrategyOption positionExposure to underlying riskBuy callLongLongSell callShortShortBuy putLongShortSell putShortLongTerminology for Levered PositionsBuying on marginMargin loanCall money rateInitial margin requirementMaintenance margin requirementMargin callLeverage ratioEXAMPLE 1-19 Computing Total Return to a Leveraged Stock PurchaseA buyer buys stock on margin and holds the position for exactly one year, during which time the stock pays a dividend. For simplicity, assume that the interest on the loan and the dividend are both paid at the end of the year.Purchase price $20/share Sale price $15/shareShares purchased 1,000 Leverage ratio 2.5 Call money rate 5% Dividend $0.10/shareCommission $0.01/share1. What is the total return on this investment?2. Why is the loss greater than the 25 percent decrease in the market price?EXAMPLE 1-20 Margin Call PriceA trader buys stock on margin posting 40 percent of the initial stock price of $20 as equity. The maintenance margin requirement for the position is 25 percent. Below what price will a margin call occur? Compare and Contrast Execution, Validity, and Clearing InstructionsOrderInstructionsExecution: how to fill the orderValidity: when the order may be filledClearing: how to manage trade settlementCompare and Contrast Market Orders with Limit OrdersMarket orderExecutes immediatelyReceives best available priceMay be expensive to executeLimit orderExecutes at limit price or betterReceives best available priceMitigates concerns over price concessionsLimit Order Book: “26 Bid, Offered at 28”Validity InstructionsDay orderGood-till-cancelled order (GTC)Immediate-or-cancel order (IOC)Good-on-close orderMarket-on-close orderGood-on-open orderStop Orders (Stop-Loss Orders)STOP ORDER:Sell at $30Primary and Secondary MarketsPrimary marketPublic offering: Initial public offering (IPO)Public offering: Seasoned offeringPrivate placementShelf registrationDRPS or DRIPSRights offeringSecondary marketCall marketsContinuous marketsHow Do Secondary Markets Support Primary Markets?Low transaction costsSmall price concessionsSecondary marketsPrimary marketsCost of CapitalExecution MechanismsOrder-driven marketsCustomers trade with dealersBond, currency, and most spot commodity tradingQuote-driven marketsOrder-matching systems or ATS matches tradesStock tradingBrokered marketsBrokers arrange tradesTrading in unique instrumentsOrder-Driven MarketsOrder matching rulesOrder precedence hierarchyPrice prioritySecondary precedence rulesTrade pricing rulesUniform pricing ruleDiscriminatory pricing ruleDerivative pricing ruleWhat Are the Characteristics of Well-Functioning Financial System?Well-functioning financial systemCompletenessOperationally efficientInformationally efficientWhat Are the Objectives of Market Regulation?Control fraudControl agency problemsPromote fairnessSet mutually beneficial standardsPrevent exploitationInsure liabilities are fundedSummaryMain functions of the financial systemClassifications of assets and marketsFinancial intermediariesLong and short positionsLeveraged positionsExecution, validity, and clearing instructionsMarket and limit ordersPrimary and secondary marketsQuote-driven, order-driven, and brokered marketsCharacteristics of a well-functioning marketObjectives of market regulation