Abstract
This presentation provides an overview of Equity and Equity derivatives (definition, illustrated examples, stakeholders, etc.).
This is a useful tool for students and professional operations in the capital markets (consultants, new joiners in the financial markets, etc.) to gain understanding of how the equity market operates.
The public can apply for shares directly to the issuer. A sponsor is appointed by the issuer (normally an investment bank) in order to advise the issuer, promote the issue to prospective investors and to underwrite the issue. A prospectus is published and details of the issue are published in the press (both incorporate an application forms).Those who wish to apply have to complete the application form and send it to the appointed agent before the deadline. Total number of shares applied for is calculated and compared to available shares in case of oversubscriptions; the basis of share allotments is announced (pro-rata, ballot).
Extract
[...] Breakeven Point Strike + Premium Premium Strike Price Price of the Underlying Profit Reduced profit Loss Option is “out-of-themoney” Option is “in-themoney” If price = strike, option is “at-the-money”, i.e. has no monetary value, only time value 22 Options: Short Call of Strategies with a Short Call Limited profit (premium) if the market is stagnant or declining Unlimited losses when prices are rising Naked Short Call: The seller of the call does not own the shares that would have to be sold to the buyer of the call, if exercised Here heavy losses can occur if the option is exercised and the holder has to buy the required shares at the market Therefore the holder has to deposit margin with the exchange Covered Short Call: If the seller owns the shares no additional margin is required Example Example An Aninvestor investorbought boughtaashare sharefor for€98 €98and andsells sellsaaCall Calloption optionon onitit(strike (strike€100) €100)for for€4. [...]
[...] in a basket option Etc. Exotic options can pose challenging problems in valuation and hedging 37 Exotic Instruments Barrier Option Type of financial option where the option to exercise depends on the underlying crossing or reaching a given barrier level Created as a way to provide the insurance value of an option without charging as much premium For instance, if one believes that Daimler Chrysler will go up this year, but is willing to bet that it won't go above €44, then one can buy the barrier and pay less premium than the vanilla option Knock-out The barrier means either the option comes to life (knock-in) or ceases to exist (knock-out) 38 Exotic Instruments Lookback Options Lookback-Strike-Option Is a path dependent option where the option owner has the right to buy (sell) the underlying instrument at its lowest (highest) price over some preceding period Floating maximum Example: Payoff of a Lookback put Payoff of a Lookback call Floating minimum Lookback-Price-Option In this type the difference between the highest (call) resp. [...]
[...] These products are traded over-the-counter (OTC). For example, derivatives on an equity index: A straight call or put would be considered non-exotic (vanilla) An exotic product could have one or more of the following features: Payoff at maturity depends not just on the value of the underlying index at maturity, but at its value at several times during the contract's life, e.g. an Asian option depending on some average a lookback option depending on the maximum or minimum a barrier option which ceases to exist if a certain level is reached or not reached by the underlying a digital option, range options, etc. [...]
[...] Contracts traded on futures exchanges are always standardized. To ensure high liquidity, there is only a limited number of standardized contracts even when many more types would be possible to create Exchange traded contracts are not issued like securities, but they are “created” when one party buys a contract from another party The exchange is the counterparty for all trades. It does not take any net positions though (number of bought contracts always equals number of sold contracts). [...]
[...] They can have various underlying markets as the following examples: Potatoes Credits Currencies Petroleum Gold Grains Commodities Precious Metals UnderlyingMarkets Markets Underlying Silver Platinum Interest Rates Interest rates for time deposits with standardized maturity Bonds with certain maturities Stocks/ Shares Shares of certain corporations Stock market indices reflecting the composite value of its components 11 Types of Derivatives of Range Rangeof ofDerivatives Derivatives Exchange Exchange- -traded traded Instruments Instruments Contracts are bought and sold on a recognized exchange, e.g. LIFFE (London International Financial Futures Exchange), CBOT (Chicago Board of Trade) or electronic exchanges as EUREX (European Electronic Exchange) Each exchange-traded contract has a ‘contract specification', which details precisely the characteristics of the underlying, and who is under obligation to do what at maturity Typical exchange-traded instruments include - Financial futures - Commodity Futures - Listed options OTC OTCInstruments Instruments Contracts are bought and sold over the counter (OTC) Instrument is written or created mostly by a bank and tailored to suit the exact requirements of the client Occasionally banks purchase these products from companies or other non-banks; each buyer/ seller needs to take the credit risk of the counterparty OTC products allow greater flexibility in terms of expiry date, reference price, amount, underlying commodity, and vast amount of transactions are executed every day Simple products are known as ‘vanilla', but there also can be exceedingly complex structures 12 Types of Derivatives of A further differentiation of derivative types is if they are premium or non-premium based Non- premium Nonpremium based based Premium based Premium based Any product where the buyer has paid a premium allows the buyer himself to decide what course of action to take at or during the maturity, i.e. [...]
