...Goldman issue new product to bet against the Japanese stock market. Exchange-traded put warrants on Japan’s Nikkei 255 stock average Public launch depends on the price of NPWs (Nikkei put warrants) 1987, BS issued currency warrants by GECC, heavily subscribed. Selling echange-listed currency warrants made three important impressions on GS team. 1. while investors were interested in puts on the yen, puts on the Nikkei would be much more widely demanded. 2. Profits to be made from buying options (sourcing volatility) in institutional markets and resell to retail customers 3. New markets could quickly become satiated. The prices of the currency warrants fell quickly from the initial deal levels Exhibit 1 daily implied volatilities of exchange-listed yen currency warrants 1988, IFR reported the first of a series of recent Eurobonds whose redemption values at maturity were tied to the level of the Nikkei 225 stock average. Exhibit 2 Representative Nikkei-Linked Euro-Yen offerings, Dec 1989 Exhibit 3 Hypothetical Nikkei-Linked Euro-Yen Transactions Through a set of swaps, the issuer transformed its annual fixed-rate yen payments in to dollar-dominated LIBOR-based payments. At maturity, the issuer would redeem the bonds from the investor a price tied to the Nikkei. If Nikkei fell since the bonds were issued, the issuer would pay less than par to redeem the bonds. Thus, it would be as if the issuer sold bonds with final principal payments at par but...
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...The Nikkei 225 Reconstitution by Romain Boulanger ; 30 Apr 2015 ; HBR business case Because the Nikkei 225 reshuffling is thought to induce inefficient prices, the arbitrageur Taka Haneda believes he could squeeze profit opportunities out of it. Conversely, buy-andhold investors will probably encounter losses. Both will interact to make the nicest move. Following the index reconstitution announcement, economics 101 state that the to-be-added large cap stocks will face an upward price pressure whereas deleted and remaining stocks will suffer from downside risk. However, shareholders of an index do enjoy zero tracking errors and will certainly wait until the effective day to rebalance. Therefore, as a trader at Goldman Sachs, I would play the arbitrage game. I would provide liquidity to index investors by shorting freshly added stocks and buying excluded ones. Via this move, I would hope a forthcoming favorable reversal impact as I expect (perhaps wrongly) prices to return to normality. After all, at the announcement date, prices already reflected the health of the underlying company. Even more so, the Nikkei 225 is a closely monitored index. Bid-ask spreads are getting lower. Prices and volumes effects should then be more pronounced. But this is not a foregone conclusion. Prices might not go back to normal. Indeed, the information theory suggests that index changes convey information about the affected stocks, causing “permanent” price movements. More specifically...
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...The Nikkei 225 Reconstitution The objective of this case is to understand the effects of demand on security prices, and to understand the role of price impact on trading decisions 1. As a portfolio manager for the UNIL Advisors Nikkei 225 Index fund, which has ¥100 billion of assets linked to Nikkei 225 index, what would you do when you hear the news of index reconstitution? 2. What would you do if, instead, you were at the proprietary trading desk of Goldman Sacs? Strategic Capital Management, LLC (SCM) The objective of this case is to develop an understanding of how arbitrage acts to enforce the law of one price. It also provides a venue to discuss the various real world imperfections that can prevent arbitrageurs from eliminating mispricing in the equity markets. 1. Is there an arbitrage opportunity based on market valuations of Creative Computers and Ubid as on December 9th, 1998. 2. If yes, how would you take advantage of it? 3. What are the potential risks of such a strategy? AXA MONY The objective of this case is to understand the pricing of convertible bond and how it may be utilized profitably in merger transactions (you may ignore the part of the case dealing with issues of corporate control) 1. How would you price the ORAN at issue? Is it fairly priced? How does the price of ORAN on Feb 9th, 2004, imply about the probability of deal succeeding? 2. What is the fair price of MONY stock? If this is different from the market price of $31...
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...NIKKEI 225 RECONSTITUTION 1) As a portfolio manager for the HEC-UNIL Advisors Nikkei 225 Index Fund, which has ¥100 billion of assets linked to Nikkei 225 index, what would you do when you hear the news of index reconstitution? The Nikkei 225 is a price-weighted average of the stocks it incorporates. It simply adds the prices of the 225 stocks and divides this sum by a divisor. When the announcement about index change takes place, the index is calculated as the above-mentioned method until the new composition of stocks becomes effective. The announcement date and the date of “effectiveness” are different – there is a time period between them. After the effectiveness date the shares of new member companies are added and divided by the new divisor. The price sequence has to be maintained by the index. Therefore, the new divisor is calculated to guarantee the sequence before and after the effectiveness date. The equation below must be satisfied: Σ 225 stocks before changeDivisor before change= Σ 225 stocks after changeNew divisor From the point of view of one who does not like a lot of risk and wants to minimize it. So, I would like to sell stocks that will be deleted and then will be stocks that will be added one day before the effectiveness date. In this case, if I would be able to swap the deletions and additions at the date, I would bear no risk. 2) What would you do if, instead, you were at the proprietary trading desk of Goldman Sachs? There are two possible...
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...assumed, as well as concepts regarding structured finance. Grading Class Participation 50% Class Presentation 50% Course Outline |Session |Cases, Readings and Exercises | | | | |1 |Case: CML Group, Inc. (A) and (B) | | | | | |Session 1 CML Group, Inc. (A) and (B); the (C) for class distribution. | | |2 Hutchison-Whampoa LTD - Yankee Bond Offering | | |3 Chase's Strategy for Syndicating the Hong Kong Disneyland Loan (A) | | |(B) for class distribution. | | |4 Goldman, Sachs and Co. | | |5 Chrysler's Warrants: Sept., 1983...
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...Investments Fall 2014 Case Discussion Questions Instructor: Professor Edward H. Chow 周行一 Case study: financial bubble Case: Trouble with a bubble (9-808-067) 1. Why did Irving Fisher believe that stock prices had reached a permanently high plateau? 2. Why did the stock market crash in 1929? 3. Why did influential individuals like Fisher, Keynes and Rockefeller believe that the downturn would only be temporary? Case study: investment banking business and global financial crisis Case: Investment banking in 2008 (A): Rise and fall of the Bear (KEL378) 1. What role did Bear’s culture play in its positioning vis-à-vis its competitors, and what role might that culture have played in its demise? 2. How did Bear’s potential collapse differ from that of LTCM in the eyes of the Federal Reserve? 3. What would Bear have done differently to avoid its fate? A. - In the early 2000s? B. - During the summer of 2007? C. - During the week of March 10, 2008? 4. Who stood to benefit from Bear’s implosion? 5. Is market perception of liquidity more important for an investment bank than it is for an traditional manufacturing or distribution business? If so, why? 6. How could Bear have addressed perceptions of its liquidity? Could it have stopped the run on the bank, and if so, how? 7. Did Bear’s failure undermine the viability of so called “pure-play” investment banks? 8. What role should the Fed play in maintaining order in world securities markets? Case: Investment banking...
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...Dow Jones Industrial AverageTM Stated Objective To represent large and well-known U.S. companies. Covers all industries with the exception of Transportation and Utilities. Key Features — The index is maintained by the Averages Committee. — Components are added and deleted on an as-needed basis. For the sake of continuity, such changes are rare, and typically occur following corporate acquisitions or other significant changes in a component company's core business. When one component is replaced, all of them are reviewed. — While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the index is also a consideration in the selection process. — The index is price weighted. — The Dow Jones Industrial AverageTM was first calculated on May 26, 1896. Descriptive Statistics Market Capitalization (Billions) ComponentCurrency Number | Float-Full Adjusted Mean Median Largest Smallest | USD 30 | 5,016.6 4,769.7 159.0 137.8 412.4 34.2 | Data calculated as of end of October, 2014. Mean, median, largest component and smallest component values are based on float-adjusted market capitalization. Performance ...
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...The number of international stock market indexes is . quite large. For many of us, the level of the Dow or . the S&P 500 is known. How about the Nikkei 225? Or . the FTSE 100? Do you know what countries these . represent? ------------------------------------------------- Types of indices Stock market indices may be classed in many ways. A 'world' or 'global' stock market index includes (typically large) companies without regard for where they are domiciled or traded. Two examples are and S&P Global 100. A 'national' index represents the performance of the stock market of a given nation—and by proxy, reflects investor sentiment on the state of its economy. The most regularly quoted market indices are national indices composed of the stocks of large companies listed on a nation's largest stock exchanges, such as the American S&P 500, the Japanese Nikkei 225, and the British FTSE 100. Other indices may be regional, such as the FTSE Developed Europe Index or the FTSE Developed Asia Pacific Index. The concept may be extended well beyond an exchange. The Wilshire 5000 Index, the original total market index, represents the stocks of nearly every publicly traded company in the United States, including all U.S. stocks traded on the New York Stock Exchange (but not ADRs or limited partnerships), NASDAQ and American Stock Exchange. Russell Investment Group added to the family of indices by launching the Russel Global Index. More specialized indices...
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...Global Macro Research Top of Mind November 13, 2014 Issue 29 Is Europe the Next Japan? From the editor: A slowdown in Euro area growth momentum from an already anemic pace, combined with ongoing concerns about deflation risks, has made comparisons with Japan’s so-called “lost decades” Top of Mind. We ask three experts whether the Euro area is set to repeat Japan’s prolonged period of stagnation and deflation: former BOJ Governor Masaaki Shirakawa (unclear, but Euro area recovery requires addressing the underlying problem of economic integration and not its symptom, deflation), GS Chief European Economist Huw Pill (low growth and even some deflation similar to Japan, in terms of outcome if not in terms of causes, are likely in the short term, but – also akin to Japan – a deflationary spiral is not), and LSE Professor Paul De Grauwe (there is a real risk of this outcome or worse unless policies change). We conclude that Euro area economies and assets could escape Japan’s fate but warn that Euro area stagnation would have a greater impact on the global economy than did Japan’s. Inside Interview with Masaaki Shirakawa Former Governor of the Bank of Japan 4 Headed for Japanese-style deflation? Silvia Ardagna, GS Rates Strategy 6 Interview with Huw Pill GS Chief European Economist 8 Euro area stagnation and its discontents Jose Ursua, GS Global Economics Research 10 Interview with Paul De Grauwe Professor, London School of Economics ...
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...FIN 3103 FINANCIAL MARKETS AND INSTITUTIONS– SECTION 1A AN INTRODUCTION TO THE ASIAN EQUITY MARKET & ITS EXCHANGES SAMUEL TOW WEE YAP (A0102724U) LIEW KUANG CHEN JOEL (A0004624U) ANG CHUAN HWEN JEREMY (A0080928X) LIAW YIH HANG (A0091535E) WU GUIYAN (A0100395N) ZHAO CHUANYI (A0105563L) Contents 1. Introduction ..................................................................................................................................................................................................... 4 2. Objectives of the Stock Market ................................................................................................................................................................. 4 2.1 Capital Formation ......................................................................................................................................................................................... 4 2.2 Connecting Traders ...................................................................................................................................................................................... 4 2.3 Security............................................................................................................................................................................................................. 4 2.4 Economic Indicator ...................................................................................................
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...Daniels Fund Ethics Initiative University of New Mexico http://danielsethics.mgt.unm.edu Banking Industry Meltdown: The Ethical and Financial Risks of Derivatives INTRODUCTION The 2008–2009 global recession was caused in part by a failure of the financial industry to take appropriate responsibility for its decision to utilize risky and complex financial instruments. Corporate cultures were built on rewards for taking risks rather than rewards for creating value for stakeholders. Unfortunately, most stakeholders, including the public, regulators, and the mass media, do not always understand the nature of the financial risks taken on by banks and other institutions to generate profits. Problems in the subprime mortgage markets sounded the alarm in the 2008–2009 economic downturn. Very simply, the subprime market was created by making loans to people who normally would not qualify based on their credit ratings. The debt from these loans was often repackaged and sold to other financial institutions in order to take it off lenders’ books and reduce their exposure. When the real estate market became overheated, many people were no longer able to make the payments on their variable rate mortgages. When consumers began to default on payments, prices in the housing market dropped and the values of credit default swaps (the repackaged mortgage debt, also known as CDSs) lost significant value. The opposite was supposed to happen. CDSs were sold as a method of insuring against loss. These...
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...Equity Derivative Strategies Equity Derivative Strategies Joanne M. Hill Vice President, Equity Derivatives Goldman, Sachs & Company Understanding the tax implications of equity derivatives and the application of these instruments for taxable U.S. clients is a challenge worth meeting. Equity derivatives can playa useful role in implementing tax-efficient strategies that maximize after-tax returns. The key is to understand the costs, benefits, and rules for applying each instrument or strategy and then to select the best instrument to accomplish the investor's objectives and minimize the taxes. istorically, u.s. trust departments that managed money for taxable investors were restricted in their use of derivative securities. Because of such obstacles (some of which are a matter of education more than anything else), derivatives are not the first tool that comes to mind for managing taxable investments, even though they offer advantages for many clients. Derivatives are often perceived as complex in themselves; the roles derivatives can play when taxes are involved add yet another layer of complexity. Equity derivatives, independent of any tax motivation, are used for reducing the risk of holding equities or as efficient substitutes for equities. In both contexts, derivatives have natural applications in tax-related strategies. This presentation discusses the general tax issues facing corporate money managers or high-networth individuals with respect to equity derivatives...
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...-1- Anatomy of a Credit Crisis 2009-07-24 This timeline has grown and been amended since it first appeared in the December, 2008, issue of The Australian Journal of Management, as the editorial, under the title of “The Dominoes Fall: a timeline of the squeeze and crunch”. I include below the December preamble. The version of mid-May, 2009, will appear as the editorial of the June 2009 issue of the AJM, under the title “Anatomy of a Credit Crisis.” I include below the June preamble, in which I assay a framework for understanding the genesis of the crisis. December, 2008: IN ITS LEADER of October 13, 2008, the Financial Times characterized the western world’s banking system as suffering “the equivalent of a cardiac arrest.” The collapse of confidence in the system means that “it is now virtually impossible for any institution to finance itself in the markets longer than overnight.” This occurred less than a month after Lehman Brothers (LB) collapsed, without bailout. Six months earlier Bear Stearns (BS) had been bailed out after JP Morgan Chase (JPM Chase) had bought it for $10 a share, at the regulator’s urging. After LB fell, who would be next? And if LB, who was not at risk? Despite the earlier U.S. government bailouts of the erstwhile government mortgage originators (and still seen as government-sponsored enterprises, or GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and the later bailout of the...
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...RESEARCH PAPER 99/14 11 FEBRUARY 1999 The Asian Economic Crisis This paper considers the economic crisis that began in the financial markets of South East Asia in 1997 and the consequences for the economies of the region and the rest of the world. The paper provides a chronology of and explores the factors that led to the crisis. An overview is given of the policy measures that the international financial institutions (IFIs), such as the IMF, have taken to deal with the crisis. Some of the arguments and policy proposals made to try to avoid future crises are also covered. Eshan Karunatilleka ECONOMIC POLICY AND STATISTICS SECTION HOUSE OF COMMONS LIBRARY Recent Library Research Papers include: 98/119 98/120 99/1 Unemployment by Constituency - November 1998 Defence Statistics 1998 The Local Government Bill: Best Value and Council Tax Capping Bill No 5 of 1998-99 16.12.98 22.12.98 08.01.99 99/2 99/3 99/4 Unemployment by Constituency - December 1998 Tax Credits Bill Bill 9 of 1998-9 The Sexual Offences (Amendment) Bill: 'Age of consent' and abuse of a position of trust [Bill 10 of 1998-99] 13.01.99 18.01.99 21.01.99 99/5 99/6 99/7 The House of Lords Bill: 'Stage One' Issues Bill 34 of 1998-99 The House of Lords Bill: Options for 'Stage Two' Bill 34 of 1998-99 The House of Lords Bill: Lords reform and wider constitutional reform Bill 34 of 1998-99 28.01.99 28.01.99 28.01.99 99/8 99/9 99/10 99/11 99/12 Economic Indicators Local Government...
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...customers with a poor credit history or no credit history without any security in return of the money lending. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. Subprime lenders To access this increasing market, lenders often take on risks associated with lending to people with poor credit ratings or limited credit histories. Subprime loans are considered to carry a far greater risk for the lender due to the aforementioned credit risk characteristics of the typical subprime borrower. Lenders use a variety of methods to offset these risks. In the case of many subprime loans, this risk is offset with a higher interest rate or various credit...
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