Capital Markets Mastery Program - CPE Credits: 35
Campus
Duration : 1 week (Full-time)
Teaching Mode : Live Instructor Classes
Duration : 3 weeks
Teaching Mode : Live Virtual Sessions
Duration : 35 Hours (Learn at your pace)
Teaching Mode : Recorded Sessions +
Q&A with Faculty
Capital
Markets
Where company stocks
are bought and sold.
Short-term financial markets
trading liquid instruments
like treasury bills and
commercial paper.
Longer-term debt traded by
dealer network.
Where foreign currencies
are traded in the spot and
forward market.
Certificates of Deposit (CD’s) - Short-or medium-term deposit in a bank or
savings & loan for a stated time period, usually pays fixed rate of interest.
Commercial Paper - Short-term (less than 270 days), unsecured,
unregistered, discounted, and negotiable promissory note sold by a
company or bank to meet immediate cash needs, usually purchased by
investors with short-term idle cash.
Repurchase Agreements (Repos) - Contract in which Investor sells a
security, such as Treasury Bills, and agrees to buy them back at a specified
time and price, buyer earns interest comparable to money market rates.
Fed Funds - Funds in excess of the reserve requirements that banks
deposit in Federal Reserve Banks. The Federal Funds Rate is the interest
rate on overnight loans of reserves between banks.
Money Market Yield =
Face Value - Purchase Price
Purchase Price
360
# days to maturity
Bond Equivalent Yield =
Face Value - Purchase Price
Purchase Price
365
# days to maturity
Discount Basis Yield =
Face Value - Purchase Price
Purchase Price
360
# days to maturity
Valuing of cash flows received or paid at different points in time using a discount rate
Discount Rate - Interest rate used to calculate the Present Value of cash flows
Real Risk-Free Rate - This
assumes no credit risk or
uncertainty and simply
reflects differences in the
preference to spend now and
pay back later versus lend
now and collect later.
Expected Inflation - If market
expects prices to rise then the
currency's purchasing power is
reduced by the inflation rate.
Inflation makes currency less
valuable in the future and is
factored into determining the
nominal interest rate.
Default-Risk
Premium - What is
the chance that the
borrower won't make
payments on time, or
will be unable to pay
what is owed? This
component will be
higher or lower
depending on the
creditworth
Liquidity Premium -
Some investments are
highly liquid, meaning they
are easily exchanged for
cash (i.e. U.S. Treasury
debt). Other securities are
less liquid and trade
infrequently. Holding other
factors equal, a less liquid
security must compensate
the holder by offering a
higher interest rate.
of Interest
Maturity Premium - A bond obligation will be more sensitive to interest rate fluctuations the longer the time to maturity
The value of an investment is the present value of all the
expected future cash flows:
Coupon: Periodic payment of interest by the bond issuer to the bond
owner, usually semi-annual
Maturity: Date of final payment of principal and last payment of interest,
when a bond is retired
Treasury Yield Curve: Shows the yields of treasuries of different maturities
Call Options: Gives holder right to buy from the writer
Put Options: Gives holder right to sell to the writer
• World-wide debt market cap is $217 trillion (327% of GDP),
the Bond Market is bigger than the Stock Market
• Bonds have a maturity, institutional and over the counter,
long term, enforceable contracts, could have collateral and
covenants, trades based on trust and reputation, are issued by
governments and corporations
• International Bonds
• International Bonds
• Floating Rate Notes
• Plain Vanillas or Straights
• Exotics
• Asset Backed Securities
• Bullet
• Sinking Fund
• Serial Maturities
• Pass Through
Primary Market - where new issues of a securities are sold
for the first time, IPOs
Secondary Market - has trading of already issued securities
• Major Listing Markets
• Regional Markets
• Third & Fourth Markets
• Market, Limit
• All-or-none
• Hidden
• Iceberg
• Day
• Good-till-cancelled
• Immediate or Cancel
• Market-on-close
• Stop or Stop-Loss
• Common Stock
• Preferred Stock
• Rights/Warranties
• Depositary Receipts
• Convertible Bonds
and Investment Vehicles
• Help with benchmarking, analyze performance of market in
relation to other equity markets, give a macro view of
health of market
• Classifications: Market capitalization of securities (Large
Cap, Mid Cap, Small Cap), Style (Growth or Value),
Geography (US & other “developed” markets: Emerging
Markets)
• Hard to assess as equities are forward looking instruments: look at projections of future
• Valuation models
• Dividend Discount Model
DDM for one-year holding period
• Vj = value of common stock j
• D1 = dividend paid during period t
• SPj1 = sale price for stock j at end of year 1
• ke = required rate of return on common stock
DDM for a multi-year holding period
Where:
Vj = value of common stock j
D1 = dividend paid during period t
SPj1 = sale price for stock j at end of year 1
ke = required rate of return on common stock
• Gordon Growth Model
Mutual Funds - Investment pools that agglomerate assets from investors so that
they may be managed by professional investors, who then buy securities in an
effort to profit from upward movement in prices
Exchange Traded Funds (ETFs) - Securities that track an index, a commodity or a basket of securities, but trade on an organized exchange, much like an individual equity
Hedge Funds - Actively managed investment vehicles that use leverage to
actively trade multiple types of assets, including equities, fixed income, interest
rates and commodities
Other vehicles - Private Equity and Venture Capital
• A derivative is a contract between two parties involving the
purchase or sale of an asset at a given price
• Global derivative market players are banks, corporations, hedge
funds, individuals, governments, and institutional investors
• Used to hedge risks, make profit
• Contract between two parties giving one party the right, but not
the obligation, to buy or sell something to the other party at a
specified price during a specified period of time
• Options protect against unfavorable price movements, but
permit the holder to benefit from favorable price movement
• Options terminology: Call, Put, In-the-money, At-the-money,
Out-of-the-money, Intrinsic value, Time value)
and Bond IPO
• Off-balance-sheet financial instrument
• Permits one party (the “beneficiary”) to transfer the credit risk
of a “reference asset” which it may or may not own, to another
party (the “guarantor”) without actually selling the asset
• Primary market is where issuers
raise capital. Home of IPOs and
creation of new debt securities
• Secondary market is where
investors trade previously
issued securities.
Supporting participants: Stock Exchange,
Financial Industry Regulatory Authority (FINRA),
Transfer agent, Depository Trust Company (DTC),
CUSIP Service Bureau, Stock certificate supplier,
Printer, Road show staff, Investor relations staff
IPO main participants: Company Management, Board
of Directors, Counsel, Independent Accountants,
Pre-IPO shareholders, Managing Underwriters,
Underwriter’s Counsel, Research Analysts, SEC
Forward Rate x ( 1+rDC ) = Spot Rate x ( 1+rFC )
Forward Rate / Spot Rate = ( 1+rFC ) / ( 1+rDC )
Spot rate is today's rate; forward rate is set for a future date.
For rates in FCU/DCU:
DC is the interest rate of domestic currency (DC)
FC is the interest rate of foreign currency (FC) and
Exchange rates are numer of units of foreign currency FC for one
unit of domestic currency DC: FCU/DCU
Forward Rate x ( 1+rFC ) = Spot Rate x ( 1+rDC )
Forward Rate / Spot Rate = ( 1+rDC ) / ( 1+rFC )
Gain/loss from interest differentials in forward FX positions.
Price
S
F
1
F
2
F
3
Time until delivery
S
F
1
F
2
F
3
.svg)
Time until delivery
Price
Spot rate adjusted by interest differentials to negate risk-free arbitrage opportunities.
Forward Rate x ( 1+rFC ) = Spot Rate x ( 1+rDC )
Spot Rate / Forward Rate = ( 1+rFC ) / ( 1+rDC )
EUR: 1-Year Euribor Rate = -0.2371%
USD: 1-Year Libor Rate = .7640%
Spot FX = 1.1752 USD/EUR
Forward FX = ???/EUR
Solution:
$ 1.1752/ F (0,1) = 0.997629 / 1.02764, so Forward FX = 1.2105* USD/EUR
From Tullet Prebon market data F(0,1) = 1.1752 + .0361 = 1.2113* USD/EUR
* A difference of about 8 pips which is the cross-currency basis (deviation
from the rate predited by covered interest rate parity).
PV = Present Value of a single sum of money
FV = Future Value of a single sum of money
r = Interest rate (expressed as a decimal)
N = Number of annual compounding periods
Present value is today's worth; future value
is after a period's adjustment.
Future and spot prices approach each other as expiry nears.
Spot
price
Futures
price
Spot
price
Futures
price
Weighted average of the expected returns
of its individual assets.
E(Rp) = Expected return of the portfolio
wi = Weight of asset i in the portfolio
E(Ri) = Expected return of asset i
n = Number of different assets in the portfolio
Market capitalization = market price x number of shares outstanding
wi = fraction of portfolio allocated to security i (or weight of i)
Pi = share price of security i
Qi = # of outstanding shares of security i
N = number of securities in index
Fixed payments made/received over regular
intervals for a specified period
Where:
PV = Present Value of an ordinary annuity
(with first payment beginning next year)
A = Annuity amount (payment)
r = Annual Interest rate
N = Number of years which annuity payments are made
Weighted Average Cost of Capital (WACC)
Average rate a firm pays to fund assets using equity & debt
kd = Cost of debt after tax
= Rd x (1-t)
D = Market value of target debt amount
ke = Cost of equity
E = Market value of target equity amount
Growth
High growth as all
earnings retained.
“Supergrowth”
period
Transitional
Trend growth
slows to GDP
rate as
competition
forces prices to
drop
Mature
Firms earn their cost
of capital; growth
stabilizes; actual and
expected returns will
be equal
© 2023 NYIF.com. All Right Reserved. NYIF is licensed by the New York State Education Department (NYSED) and registered with the National Association of State Boards of Accountancy (NASBA).
In-Person: NY Wall Street
Campus
Duration : 1 Week (Full-time)
Teaching Mode : Live Instructor Classes
Virtual Live
Duration : 3 weeks
Teaching Mode : Live Virtual Sessions
Self-Paced Online
Duration : 35 Hours (Learn at your pace)
Teaching Mode : Recorded Sessions +
Q&A with Faculty
Capital
Markets
Where company stocks
are bought and sold.
Short-term financial markets
trading liquid instruments
like treasury bills and
commercial paper.
Longer-term debt traded by
dealer network.
Where foreign currencies
are traded in the spot and
forward market.
Certificates of Deposit (CD’s) - Short-or medium-term deposit in a bank or
savings & loan for a stated time period, usually pays fixed rate of interest.
Commercial Paper - Short-term (less than 270 days), unsecured,
unregistered, discounted, and negotiable promissory note sold by a
company or bank to meet immediate cash needs, usually purchased by
investors with short-term idle cash.
Repurchase Agreements (Repos) - Contract in which Investor sells a
security, such as Treasury Bills, and agrees to buy them back at a specified
time and price, buyer earns interest comparable to money market rates.
Fed Funds - Funds in excess of the reserve requirements that banks
deposit in Federal Reserve Banks. The Federal Funds Rate is the interest
rate on overnight loans of reserves between banks.
Money Market Yield =
Face Value - Purchase Price
Purchase Price
360
# days to maturity
Bond Equivalent Yield =
Face Value - Purchase Price
Purchase Price
365
# days to maturity
Discount Basis Yield =
Face Value - Purchase Price
Purchase Price
360
# days to maturity
Valuing of cash flows received or paid at different points in time using a discount rate
Discount Rate - Interest rate used to calculate the Present Value of cash flows
Real Risk-Free Rate - This
assumes no credit risk or
uncertainty and simply
reflects differences in the
preference to spend now and
pay back later versus lend
now and collect later.
Expected Inflation - If market
expects prices to rise then the
currency's purchasing power is
reduced by the inflation rate.
Inflation makes currency less
valuable in the future and is
factored into determining the
nominal interest rate.
Default-Risk
Premium - What is
the chance that the
borrower won't make
payments on time, or
will be unable to pay
what is owed? This
component will be
higher or lower
depending on the
creditworth
Liquidity Premium -
Some investments are
highly liquid, meaning they
are easily exchanged for
cash (i.e. U.S. Treasury
debt). Other securities are
less liquid and trade
infrequently. Holding other
factors equal, a less liquid
security must compensate
the holder by offering a
higher interest rate.
of Interest
Maturity Premium - A bond obligation will be more sensitive to interest rate fluctuations the longer the time to maturity
The value of an investment is the present value of all the
expected future cash flows:
Coupon: Periodic payment of interest by the bond issuer to the bond
owner, usually semi-annual
Maturity: Date of final payment of principal and last payment of interest,
when a bond is retired
Treasury Yield Curve: Shows the yields of treasuries of different maturities
Call Options: Gives holder right to buy from the writer
Put Options: Gives holder right to sell to the writer
• World-wide debt market cap is $217 trillion (327% of GDP),
the Bond Market is bigger than the Stock Market
• Bonds have a maturity, institutional and over the counter,
long term, enforceable contracts, could have collateral and
covenants, trades based on trust and reputation, are issued by
governments and corporations
• International Bonds
• International Bonds
• Floating Rate Notes
• Plain Vanillas or Straights
• Exotics
• Asset Backed Securities
• Bullet
• Sinking Fund
• Serial Maturities
• Pass Through
Primary Market - where new issues of a securities are sold
for the first time, IPOs
Secondary Market - has trading of already issued securities
Types of Equity Markets
• Major Listing Markets
• Regional Markets
• Third & Fourth Markets
Types of Orders
• Market, Limit
• All-or-none
• Hidden
• Iceberg
• Day
• Good-till-cancelled
• Immediate or Cancel
• Market-on-close
• Stop or Stop-Loss
Equity Securities
• Common Stock
• Preferred Stock
• Rights/Warranties
• Depositary Receipts
• Convertible Bonds
and Investment Vehicles
• Help with benchmarking, analyze performance of market in
relation to other equity markets, give a macro view of
health of market
• Classifications: Market capitalization of securities (Large
Cap, Mid Cap, Small Cap), Style (Growth or Value),
Geography (US & other “developed” markets: Emerging
Markets)
• Hard to assess as equities are forward looking instruments: look at projections of future
• Valuation models
• Dividend Discount Model
DDM for one-year holding period
Where :
• Vj = value of common stock j
• D1 = dividend paid during period t
• SPj1 = sale price for stock j at end of year 1
• ke = required rate of return on common stock
DDM for a multi-year holding period
Where:
Vj = value of common stock j
D1 = dividend paid during period t
SPj1 = sale price for stock j at end of year 1
ke = required rate of return on common stock
Assumes dividends paid at end of each year
• Gordon Growth Model
Mutual Funds - Investment pools that agglomerate assets from investors so that
they may be managed by professional investors, who then buy securities in an
effort to profit from upward movement in prices
Exchange Traded Funds (ETFs) - Securities that track an index, a commodity or a basket of securities, but trade on an organized exchange, much like an individual equity
Hedge Funds - Actively managed investment vehicles that use leverage to
actively trade multiple types of assets, including equities, fixed income, interest
rates and commodities
Other vehicles - Private Equity and Venture Capital
• A derivative is a contract between two parties involving the
purchase or sale of an asset at a given price
• Global derivative market players are banks, corporations, hedge
funds, individuals, governments, and institutional investors
• Used to hedge risks, make profit
• Contract between two parties giving one party the right, but not
the obligation, to buy or sell something to the other party at a
specified price during a specified period of time
• Options protect against unfavorable price movements, but
permit the holder to benefit from favorable price movement
• Options terminology: Call, Put, In-the-money, At-the-money,
Out-of-the-money, Intrinsic value, Time value)
• Off-balance-sheet financial instrument
• Permits one party (the “beneficiary”) to transfer the credit risk
of a “reference asset” which it may or may not own, to another
party (the “guarantor”) without actually selling the asset
Equity and Bond IPO Participants
• Primary market is where issuers
raise capital. Home of IPOs and
creation of new debt securities
• Secondary market is where
investors trade previously
issued securities.
Supporting participants: Stock Exchange,
Financial Industry Regulatory Authority (FINRA),
Transfer agent, Depository Trust Company (DTC),
CUSIP Service Bureau, Stock certificate supplier,
Printer, Road show staff, Investor relations staff
IPO main participants: Company Management, Board
of Directors, Counsel, Independent Accountants,
Pre-IPO shareholders, Managing Underwriters,
Underwriter’s Counsel, Research Analysts, SEC
Forward Rate x ( 1+rDC ) = Spot Rate x ( 1+rFC )
Forward Rate / Spot Rate = ( 1+rFC ) / ( 1+rDC )
Spot rate is today's rate; forward rate is set for a future date.
For rates in FCU/DCU:
DC is the interest rate of domestic currency (DC)
FC is the interest rate of foreign currency (FC) and
Exchange rates are numer of units of foreign currency FC for one
unit of domestic currency DC: FCU/DCU
Forward Rate x ( 1+rFC ) = Spot Rate x ( 1+rDC )
Forward Rate / Spot Rate = ( 1+rDC ) / ( 1+rFC )
PV = Present Value of a single sum of money
FV = Future Value of a single sum of money
r = Interest rate (expressed as a decimal)
N = Number of annual compounding periods
Present value is today's worth; future value
is after a period's adjustment.
Time Value of Money: Annuities
Fixed payments made/received over regular
intervals for a specified period
Where:
PV = Present Value of an ordinary annuity
(with first payment beginning next year)
A = Annuity amount (payment)
r = Annual Interest rate
N = Number of years which annuity payments are made
Gain/loss from interest differentials in forward FX positions.
Price
S
F
1
F
2
F
3
Time until delivery
S
F
1
F
2
F
3
Time until delivery
Price
Future and spot prices approach each other as expiry nears.
Spot
price
Futures
price
Spot
price
Futures
price
Market capitalization = market price x number of shares outstanding
wi = fraction of portfolio allocated to security i (or weight of i)
Pi = share price of security i
Qi = # of outstanding shares of security i
N = number of securities in index
Growth
High growth as all
earnings retained.
“Supergrowth”
period
Transitional
Trend growth
slows to GDP
rate as
competition
forces prices to
drop
Mature
Firms earn their cost
of capital; growth
stabilizes; actual and
expected returns will
be equal
Calculation of No-Arbitrage Forward FX Rate
Spot rate adjusted by interest differentials to negate risk-free arbitrage opportunities.
Forward Rate x ( 1+rFC ) = Spot Rate x ( 1+rDC )
Spot Rate / Forward Rate = ( 1+rFC ) / ( 1+rDC )
EUR: 1-Year Euribor Rate = -0.2371%
USD: 1-Year Libor Rate = .7640%
Spot FX = 1.1752 USD/EUR
Forward FX = ???/EUR
Solution:
$ 1.1752/ F (0,1) = 0.997629 / 1.02764, so Forward FX = 1.2105* USD/EUR
From Tullet Prebon market data F(0,1) = 1.1752 + .0361 = 1.2113* USD/EUR
* A difference of about 8 pips which is the cross-currency basis (deviation
from the rate predited by covered interest rate parity).
Expected Return of a Portfolio
Weighted average of the expected returns
of its individual assets.
E(Rp) = Expected return of the portfolio
wi = Weight of asset i in the portfolio
E(Ri) = Expected return of asset i
n = Number of different assets in the portfolio
Weighted Average Cost of Capital (WACC)
Average rate a firm pays to fund assets using equity & debt
kd = Cost of debt after tax
= Rd x (1-t)
D = Market value of target debt amount
ke = Cost of equity
E = Market value of target equity amount
© 2023 NYIF.com. All Right Reserved. NYIF is licensed by the New York State Education Department (NYSED) and registered with the National Association of State Boards of Accountancy (NASBA).
Capital Markets Mastery Program - CPE Credits: 35
In-Person: NY Wall Street
Campus
Duration : 1 week (Full-time)
Teaching Mode : Live Instructor Classes
View Program
Virtual Live
Duration : 3 weeks
Teaching Mode : Live Virtual Sessions
View Program
Self-Paced Online
Duration : 35 Hours (Learn at your pace)
Teaching Mode : Recorded Sessions +
Q&A with Faculty
View Program
Capital
Markets
Where company stocks
are bought and sold.
Short-term financial markets
trading liquid instruments
like treasury bills and
commercial paper.
Longer-term debt traded by
dealer network.
Where foreign currencies
are traded in the spot and
forward market.
Certificates of Deposit (CD’s) - Short-or medium-term deposit in a bank or
savings & loan for a stated time period, usually pays fixed rate of interest.
Commercial Paper - Short-term (less than 270 days), unsecured,
unregistered, discounted, and negotiable promissory note sold by a
company or bank to meet immediate cash needs, usually purchased by
investors with short-term idle cash.
Repurchase Agreements (Repos) - Contract in which Investor sells a
security, such as Treasury Bills, and agrees to buy them back at a specified
time and price, buyer earns interest comparable to money market rates.
Fed Funds - Funds in excess of the reserve requirements that banks
deposit in Federal Reserve Banks. The Federal Funds Rate is the interest
rate on overnight loans of reserves between banks.
Money Market Yield =
Face Value - Purchase Price
Purchase Price
360
# days to maturity
Bond Equivalent Yield =
Face Value - Purchase Price
Purchase Price
365
# days to maturity
Discount Basis Yield =
Face Value - Purchase Price
Purchase Price
360
# days to maturity
Valuing of cash flows received or paid at different points in time using a discount rate
Discount Rate - Interest rate used to calculate the Present Value of cash flows
Real Risk-Free Rate - This
assumes no credit risk or
uncertainty and simply
reflects differences in the
preference to spend now and
pay back later versus lend
now and collect later.
Expected Inflation - If market
expects prices to rise then the
currency's purchasing power is
reduced by the inflation rate.
Inflation makes currency less
valuable in the future and is
factored into determining the
nominal interest rate.
Default-Risk
Premium - What is
the chance that the
borrower won't make
payments on time, or
will be unable to pay
what is owed? This
component will be
higher or lower
depending on the
creditworth
Liquidity Premium -
Some investments are
highly liquid, meaning they
are easily exchanged for
cash (i.e. U.S. Treasury
debt). Other securities are
less liquid and trade
infrequently. Holding other
factors equal, a less liquid
security must compensate
the holder by offering a
higher interest rate.
of Interest
Maturity Premium - A bond obligation will be more sensitive to interest rate fluctuations the longer the time to maturity
The value of an investment is the present value of all the
expected future cash flows:
Coupon: Periodic payment of interest by the bond issuer to the bond
owner, usually semi-annual
Maturity: Date of final payment of principal and last payment of interest,
when a bond is retired
Treasury Yield Curve: Shows the yields of treasuries of different maturities
Call Options: Gives holder right to buy from the writer
Put Options: Gives holder right to sell to the writer
• World-wide debt market cap is $217 trillion (327% of GDP),
the Bond Market is bigger than the Stock Market
• Bonds have a maturity, institutional and over the counter,
long term, enforceable contracts, could have collateral and
covenants, trades based on trust and reputation, are issued by
governments and corporations
• International Bonds
• International Bonds
• Floating Rate Notes
• Plain Vanillas or Straights
• Exotics
• Asset Backed Securities
• Bullet
• Sinking Fund
• Serial Maturities
• Pass Through
Primary Market - where new issues of a securities are sold
for the first time, IPOs
Secondary Market - has trading of already issued securities
Types of Equity Markets
• Major Listing Markets
• Regional Markets
• Third & Fourth Markets
Types of Orders
• Market, Limit
• All-or-none
• Hidden
• Iceberg
• Day
• Good-till-cancelled
• Immediate or Cancel
• Market-on-close
• Stop or Stop-Loss
Equity Securities
• Common Stock
• Preferred Stock
• Rights/Warranties
• Depositary Receipts
• Convertible Bonds
• Help with benchmarking, analyze performance of market in
relation to other equity markets, give a macro view of
health of market
• Classifications: Market capitalization of securities (Large
Cap, Mid Cap, Small Cap), Style (Growth or Value),
Geography (US & other “developed” markets: Emerging
Markets)
• Hard to assess as equities are forward looking instruments: look at projections of future
• Valuation models
• Dividend Discount Model
DDM for a multi-year holding period
Where:
Vj = value of common stock j
D1 = dividend paid during period t
SPj1 = sale price for stock j at end of year 1
ke = required rate of return on common stock
Assumes dividends paid at end of each year
• Gordon Growth Model
DDM for one-year holding period
Where :
• Vj = value of common stock j
• D1 = dividend paid during period t
• SPj1 = sale price for stock j at end of year 1
• ke = required rate of return on common stock
Mutual Funds - Investment pools that agglomerate assets from investors so that
they may be managed by professional investors, who then buy securities in an
effort to profit from upward movement in prices
Exchange Traded Funds (ETFs) - Securities that track an index, a commodity or a basket of securities, but trade on an organized exchange, much like an individual equity
Hedge Funds - Actively managed investment vehicles that use leverage to
actively trade multiple types of assets, including equities, fixed income, interest
rates and commodities
Other vehicles - Private Equity and Venture Capital
• A derivative is a contract between two parties involving the
purchase or sale of an asset at a given price
• Global derivative market players are banks, corporations, hedge
funds, individuals, governments, and institutional investors
• Used to hedge risks, make profit
• Contract between two parties giving one party the right, but not
the obligation, to buy or sell something to the other party at a
specified price during a specified period of time
• Options protect against unfavorable price movements, but
permit the holder to benefit from favorable price movement
• Options terminology: Call, Put, In-the-money, At-the-money,
Out-of-the-money, Intrinsic value, Time value)
• Off-balance-sheet financial instrument
• Permits one party (the “beneficiary”) to transfer the credit risk
of a “reference asset” which it may or may not own, to another
party (the “guarantor”) without actually selling the asset
Equity and Bond IPO Participants
• Primary market is where issuers
raise capital. Home of IPOs and
creation of new debt securities
• Secondary market is where
investors trade previously
issued securities.
Supporting participants: Stock Exchange,
Financial Industry Regulatory Authority (FINRA),
Transfer agent, Depository Trust Company (DTC),
CUSIP Service Bureau, Stock certificate supplier,
Printer, Road show staff, Investor relations staff
IPO main participants: Company Management, Board
of Directors, Counsel, Independent Accountants,
Pre-IPO shareholders, Managing Underwriters,
Underwriter’s Counsel, Research Analysts, SEC
Forward Rate x ( 1+rDC ) = Spot Rate x ( 1+rFC )
Forward Rate / Spot Rate = ( 1+rFC ) / ( 1+rDC )
Spot rate is today's rate; forward rate is set for a future date.
For rates in FCU/DCU:
DC is the interest rate of domestic currency (DC)
FC is the interest rate of foreign currency (FC) and
Exchange rates are numer of units of foreign currency FC for one
unit of domestic currency DC: FCU/DCU
Forward Rate x ( 1+rFC ) = Spot Rate x ( 1+rDC )
Forward Rate / Spot Rate = ( 1+rDC ) / ( 1+rFC )
PV = Present Value of a single sum of money
FV = Future Value of a single sum of money
r = Interest rate (expressed as a decimal)
N = Number of annual compounding periods
Present value is today's worth; future value
is after a period's adjustment.
Time Value of Money: Annuities
Fixed payments made/received over regular
intervals for a specified period
Where:
PV = Present Value of an ordinary annuity
(with first payment beginning next year)
A = Annuity amount (payment)
r = Annual Interest rate
N = Number of years which annuity payments are made
Gain/loss from interest differentials in forward FX positions.
Time until delivery
Time until delivery
Future and spot prices approach each other as expiry nears.
Time
Spot
price
Futures
price
Spot
price
Futures
price
Time
Market capitalization = market price x number of shares outstanding
wi = fraction of portfolio allocated to security i (or weight of i)
Pi = share price of security i
Qi = # of outstanding shares of security i
N = number of securities in index
Growth
High growth as all
earnings retained.
“Supergrowth”
period
Transitional
Trend growth
slows to GDP
rate as
competition
forces prices to
drop
Mature
Firms earn their cost
of capital; growth
stabilizes; actual and
expected returns will
be equal
Calculation of No-Arbitrage Forward FX Rate
Spot rate adjusted by interest differentials to negate risk-free arbitrage opportunities.
Forward Rate x ( 1+rFC ) = Spot Rate x ( 1+rDC )
Spot Rate / Forward Rate = ( 1+rFC ) / ( 1+rDC )
EUR: 1-Year Euribor Rate = -0.2371%
USD: 1-Year Libor Rate = .7640%
Spot FX = 1.1752 USD/EUR
Forward FX = ???/EUR
Solution:
$ 1.1752/ F (0,1) = 0.997629 / 1.02764, so Forward FX = 1.2105* USD/EUR
From Tullet Prebon market data F(0,1) = 1.1752 + .0361 = 1.2113* USD/EUR
* A difference of about 8 pips which is the cross-currency basis (deviation
from the rate predited by covered interest rate parity).
Expected Return of a Portfolio
Weighted average of the expected returns
of its individual assets.
E(Rp) = Expected return of the portfolio
wi = Weight of asset i in the portfolio
E(Ri) = Expected return of asset i
n = Number of different assets in the portfolio
Weighted Average Cost of Capital (WACC)
Average rate a firm pays to fund assets using equity & debt
kd = Cost of debt after tax
= Rd x (1-t)
D = Market value of target debt amount
ke = Cost of equity
E = Market value of target equity amount
