Documente Academic
Documente Profesional
Documente Cultură
At the end of the session you will be able to Explain general banking operation Demonstrate general understanding on IB products Foreign Exchange Securities Commodities Derivatives
Corporate
Deutsche Asset Management Fund Managers Multinational Small / Mid size firms
Individuals
High Street Banking (Chase Bank) US Only High Net Worth Individuals (Millionaires / Billionaires)
Banking as a Whole
One of the worlds leading
Commercial Banking
investment banks
Investment Bank
segments: Middle Market Banking, Mid-Corporate Banking, Commercial Real Estate, Asset Based Lending and Commercial Leasing
corporate strategy and structure, raising and placing capital, making markets in financial instruments and offering sophisticated risk management services
Clients
& home finance and workplace banking products to consumers and small businesses
Card Services
services to institutional investors, high net worth individuals & retail customers
Provides personalized advice and solutions to
wealthy individuals
Latin America
EMEA
Asia Pacific
Loans
Services
Fund based activities, greater market risk Fee based activities, lesser market risk
Role of Banks
Intermediary role between lenders and borrowers Lenders Deposits funds with Banks Liability products (Liability for Banks) Borrowers Borrows funds from Banks Asset Products (Assets for Banks)
Commercial Banks
Cooperative Banks
State/Central
Private
Broad Categories
Activities of a Bank
Accepting deposits from Public Lending money to public Remittances/Collection Business Keeping valuables in safe custody Government business Acting as trustee Treasury services Capital Market activity
10
other instruments
Organized, as they are governed by regulatory bodies
11
Financial Markets
12
Regulator Underwriters Merchant Banker / Investment Bank JPM Brokers Exchanges Custodians Banks Depositories Depositary Participants R & T Agents Market Participants
13
SEBI Securities Board of India SEC Securities & Exchange commission (USA) FSA Financial Services Authority (UK)
14
Underwriter
Who underwrites the issue in case of under-subscription; takes the
Merchant Banker / Investment Bank An underwriter or agent for corporations and municipalities issuing securities Maintain broker/dealer operations mostly, maintain markets for previously issued securities Offer advisory services to investors Large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring Do not accept deposits from and provide loans to individuals (Investment Banks, especially)
15
Exchanges
A market in which securities, commodities, options, or futures are traded. Although you will mostly trade stocks through a broker NSE, BSE, NYSE, NASDAQ, LSE
16
Custodian
An agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual fund's, or investment company's assets for them.
Bank
An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.
17
Depository Participant
Any institution like a bank that maintains the dematerialized
accounts of beneficiaries, provides services of settling securities traded on the exchange; Agent of Depository
18
Market Participants
Various persons / entities that indulge in buying & selling Examples: Qualified Institutional Buyers Foreign Institutional Investors, Foreign Venture Capital Domestic Institutional Investors - Banks, Financial Institutions, Insurance Companies, Mutual Funds, Venture Capital Non - Institutional - High Net worth Clients (E.g. NRI, HUF, Government & Private Corporate bodies) Retail Individual Investors
19
20
Foreign Exchange
What is an FX trade How does it work Why are banks in the in the FX Market
21
Complete the grid of descriptions using the following words 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Payment Instructions Receiving / receipt Instructions Currencies 2 Counterparties Broker Value date Booked the right way round Amount Exchange rate Trade Date 22
Component Currencies Amount Exchange rate Value date Booked Right Way Round Broker 2 Counterparties Trade Date Receipt Instructions Payment Instructions
Explanation Has to be two of these for the exchange to be possible A numerical figure that shows the value of the trade The price of one currency expressed in another The day the trade will settle. i.e. the funds will be debit / credit from / to your account Shows which currency we are paying and receiving. Helps to arrange a trade on behalf of others The entities involved in the trade The day the deal was agreed Where we are receiving our currency to? Where are we paying the currency to?
23
Different Trades
Spot trade: Value date = trade date + 2 Cash trade: value date = trade date Tom trade: Value date = trade date +1 Forward trade: Value date = trade date + 3(or more)
24
BMW now need to pay in USD but only have a EURO account The Solution: Do a Foreign Exchange Trade
Contact Citibank: Want to Buy $5,000,000. Will pay for it in EUROs. JPMorgan will ask what date they want the currency (Value Date) JPMorgan will advise the Exchange rate. (How much will $5mio cost in EURO) Rate is 1.27 (Euro 1 = $1.27)
Munich
BMW need to import gearboxes that have been made in the US. Cost $5,000,000
BMW
Citibank
Pay EURO 3,937,008.
25
Speculation
Example
Microsoft USA
Sell GBP 1 M
Citibank
Rec $1.9 M
USA
buy GBP1M
Microsoft speculates that GBP price will increase from $1.7 to 1.9 in 3 months time
JPMC
Will pay for it in JPMorgan will ask what date they want the currency (Value Date) JPMorgan will advise the Exchange rate. (How much will GBP5mio cost in USD) Rate is 1.7 (GBP 1 = $1.7)
26
Currencies
Have a name: Eg United States Dollar, Japanese Yen Have a 3 figure code Eg, USD and JPY
27
Price of a currency
Factors that affect the price of a currency -Economic e.g. Interest rate, inflation rate - Political Strong currency Weak currency
28
WHY FX
For personal requirement For business requirement For speculation
29
Products: Commodities
Commodities
What are Commodities? Commodities Categories Example of a trade
30
Products: Commodities
Review cards and put them into 4 categories Put a name to the 4 categories
31
Products: Commodities
Energy e.g. Gas, Oil Base Metals e.g. Copper, Aluminium Precious Metals e.g. Gold, Silver Soft Commodities e.g. Coffee, Sugar, paper
32
Products: Commodities
What Precious metals do banks trade in?
(In place of currency codes the chemical elements of the metal are used to identify the metal) 33
Products: Commodities
Example:
Watch maker requires gold to manufacture watches Finds a company selling gold Agrees how much Gold Agree on the price Agree on Delivery
Pay $300,000
JPMorgan
Deliver Gold
Products: Commodities
Settlement
Use depositories
Allocated
Un allocated
35
Products: Bonds
Bond Trades
What is a Bond? How does it work? What role does JPMorgan play?
36
What is a Bond?
A certificate of debt (usually interest-bearing) that is issued by a government or corporation in order to raise money
The issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal Effectively it is a loan. The company who receives the money, issues a Bond with terms and conditions stating when they will pay back interest and principle amount to the lender of the money (Investor)
37
Products: Bonds
Key Terms of a Bond
Face Value
Nominal Amount What the Bond is worth when redeemed at maturity
Coupon
Amount of interest paid to Bond Holder during the life: (e.g. 5% = 5% of Face Value of investment) Date for coupon payments. Usually 6 monthly (does depend on terms of issuance)
Maturity
Date the principle amount is paid back to the investor.
Issuer
Who Issued the Bond. (Received the money)
Products: Bonds
Conceptual Example
Pay $1,000,000
Receives Bond
Bond Issuer
e.g. A Corporation or Government Makes regular payments (Coupons)
Investor
39
Products: Bonds
Conceptual Example
Pays $1,000,000
Big Company Ltd Investor(s)
1. Big Company Ltd want to buy Small Company Inc. In order to do so it needs to raise capital. The purchase price is $1,000,000
4.Raising capital: An Investor buys the bond. (can be a bank, corporation, Individual etc etc)
5. End Result Big Company Ltd can now finance its purchase of Small Company Inc and will pay the Investors back. How much depends on the bond (loan) terms.
40
Products: Bonds
Conceptual Example
Paid $1,000,000
Coupon payments made every 6 months for term of bond 10 Year Bond = 20 payments
Investor(s)
41
Products: Bonds
Role of banks in bonds
Example
EURO 5 M
EURO 5 M
BMW
Bonds
JPMorgan
Bonds
Bond Market
Issue Bonds into the market Want to start design and produce a new model car Estimate they need EURO 5 million to do this They chose to raise this capital by issuing a Bond BMW Contact JPMorgan and appoint them as Lead Manager on Bond Issue JPMorgan Pay BMW EURO 5 Million and receive Bonds
Receive Bonds
42
Products: Equities
Equity Trades
What is an Equity trade? How does it work? What role does JPMorgan play?
43
Products: Equities
Big Company is now looking to expand its operation again and needs to raise cash in order to do this. The company decides it will raise the cash by selling shares Will Issue IPO. It uses a bank to advise how to do this
Bank
44
Products: Equities
Bank will: Assist with company valuation Can under-write shares Advise on timing Advise on how much of company to sell
Potential investors contact bank and register their interest Advertise the IPO
Bank
Investors
45
Products: Equities
Secondary Market
Investor Investor Investor
Stock Exchange
Current Share holders
Investor
Investor
Investor
Investor
46
Products: Equities
Secondary Market
Investor Investor Investor
Stock Exchange
Big Company Ltd
Investor
Investor
Investor
Investor
47
Products: Equities
How do banks participate in the Equities market?
Client A, wants to buy shares in Big Company Ltd They contact JPMorgan with the details of their requirements JPMorgan trader contacts Stock Exchange. Wants to Buy 500 shares
Client A
JPMorgan
(JPMSL)
JPMorgan and Stock Broker agree price and terms through the Stock Exchange
Stock Exchange
Current Shareholder
Stock Broker
Products: Equities
What are we looking to confirm?
Share name Number of shares Price of share Buying or Selling Currency paying Trade date Value date Payment details Big Company Ltd 500 EURO 20 Buying Shares EURO 13th October 2005 15th October 2005 (T +2) Where to pay shares and cash to (from both parties)
Activity
49
JPMorgan and Client send instructions to their Agents. Details of the trade and when to settle Trades can settle over a central depository
10,000 10,000
After Payment
The Shares are now transferred to JPMorgans a/c within Kassenverein They will hold shares on behalf of their client Original Big Company Share Holder, now has 10,000
Current Shareholder
Citibank Frankfurt
50
Types of Shares
Ordinary Share These shares give the investor the right to a dividend, if declared. Should the company go into liquidation, then holders of this class of share holds the lowest priority of repayment.
Deferred Ordinary share- These give shareholders additional voting rights or the right to higher dividends. Often these shares will not qualify for dividend until a particular date has been reached or the company profit has reached a pre- determined.
Golden Shares These shares are designed to allow the shareholders the right to a casting vote. In cases of privatization, the government often held golden shares. This allowed them to have the casting vote if required, as a form of control, during take-over bids or other serious matters. These shares are normally used in UK.
Preference Shares These shares form part of the share capital of the company. They pay fixed dividend and in the event of liquidation they hold preference
51
Differences
Bonds Vs Equities
52
Products: Derivatives
Derivative Trades
What is a Derivative? How does it work? What role does JPMorgan play?
53
Products: Derivatives
Definition
A security, such as an Option or Futures contract, whose value depends on the performance of an underlying product. Derivative in itself is not a product, it does however rely on an underlying product for its market value.
Products: Derivatives
Futures
What is a Future? How does it work?
55
Products: Derivatives
Futures
Definition Standardised exchange-traded contract to buy or sell a commodity at an agreed price for settlement or delivery on an agreed future date
56
Products: Derivatives
Futures
UK Potato Farmer Has crop of potatoes Ready to sell in 6 months
What can happen in the 6 months before the potatoes are ready?
Potato Supplies worldwide except UK could fail In 5 months time there is a scare about effect of potatoes on health Supply remains stable with no impact on current prices
57
Products: Derivatives
Futures
What can happen in the 6 months before the potatoes are ready?
Controls: Insurance
Agree buyer now at agreed price (Future trade)
58
Products: Derivatives
Futures
UK Potato Farmer
Futures Exchang e
Supermarket
Using the Futures Exchange Finds a buyer for potatoes Agrees a price Agrees a delivery date
Seller: UK Potato Farmer Buyer: Supermarket Product: Grade A Potatoes Price: 5 / sack Quantity: 5,000 Sacks Delivery: 5th June 2005 Total Price: 25,000
59
Products: Derivatives
Futures June 5th 2005
Farmer will deliver potatoes to Supermarket through Exchange Supermarket will pay Farmer through Exchange Farmer has guaranteed income
(providing crop doesnt fail insurance would cover this)
This agreement means the Farmer has an obligation to deliver potatoes on this date and Supermarket has an obligation to pay farmer the agreed price. All this happens via Exchange
60
Products: Derivatives
Options
What is an Option? How does it work?
61
Products: Derivatives
Options
Definition
The buyer has the right, but not the obligation to buy or sell the underlying product at an agreed price on an agreed date The buyer pays a premium to the seller have this right.
62
Page 45-49 in Workbook
Products: Derivatives
FX Option
Big Company has ordered a supply of computer components from CRUUK (Computer R Us UK)
What needs to happen To Pay for this order Big Company will have to do a Foreign Exchange trade. They need to buy GBP 1,000,000 (to pay CRUUK) And pay for it with USD
Computer R Us UK will deliver the computer equipment in 3 months time This will cost Big Company Ltd GBP 1,000,000. in 3 months
Computer R Us UK (CRUUK)
63
Page 45-49 in Workbook
Products: Derivatives
FX Option What choices does Big Company Ltd have?
Buy the s via a forward FX trade (arrange today value 3 months) Buy the s in 3 months spot trade (exchange rate unknown until 3 months) Do an FX Option
64
Page 45-49 in Workbook
Products: Derivatives
FX Option
Why?
Want to know state of cash flows (now and future) FX Option will limit any exchange rate movements
65
Page 45-49 in Workbook
Products: Derivatives
FX Option
How does it work? Big Company (USA)
Bought By On January 5th 2004 Big Company contact JPMorgan
To have this right but not obligation Big Company pay JPMorgan a premium
The FX Option
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 1,500,000 Put: USD:
Big Company agree to buy an FX Option from JPMorgan. This Option gives them the right but NOT the obligation to use this trade on the delivery date
Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000
JPMorgan
66
Page 45-49 in Workbook
Products: Derivatives
FX Option
Big company now have the right to use [exercise] this trade for settlement on March 7th What are the key dates?
Expiry Date: Date that Big Company have to decide whether to exercise the Option Delivery Date: Date that transfer of funds would occur if Big Company Ltd exercise this Option
The FX Option
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: Put: USD: 1,000,000 1,500,000
Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000
Products: Derivatives
FX Option
How do Big company know whether to exercise the Option?
The FX Option
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: Put: USD: 1,000,000 1,500,000
On 5th March
Look at current FX [Spot] rate If they used the spot rate (Not the Option Strike rate) how much would it cost to buy the 1,000,000? Would it be cheaper to use the Spot rate and let the Option expire or Use the Option because the spot price in market would cost more in USD. Lets look at possible choices Big Company Could make
68
Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000
Products: Derivatives
FX Option
To buy 1,000,000 on Spot Market
The FX Option
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: Put: USD: 1,000,000 1,500,000
5th March
If SPOT Rate
Exercise Option NO
If SPOT Rate
YES
Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000
$1,500,000
Remember:
Big Company bought the Option 3 months ago So wouldnt know what the rates would be today. Buying the Option limits the cost of the Computer purchases to a maximum of $1,500,000. (plus the $5000 premium) 69
Products: Derivatives
FX Option: To buy 1,000,000
In the Money
At the Money
1.3
1.7
70
Page 45-49 in Workbook