Financial engineering principles phần 10 ppt

to respond with opinions about where they were best ranked relative to the issuer’s capital structure. At the same time, they also issued explicit guide- lines regarding how much of this product type they felt a given entity should issue. Table 6.8, reprinted with permission from the Bank of International Settlements, summarizes various credit-related statutes as practiced within the United States. In closing, investment rules and regulations — both those that are vol- untarily imposed and those that are mandated by formal decree — will always be a key consideration for investors. CHAPTER SUMMARY The very existence of various market rules and regulations (inclusive of taxes) may serve to create pockets of price dislocation in the marketplace. From a pure classical economic viewpoint, this not very surprising. When economic agents act more in response to how someone else wants them to behave than to how they themselves might want to behave, distortions can well arise. When such distortions are a necessary side-effect of commonly accepted prin- ciples of sound behavior (as with protecting the risks that banks or insur- ance companies might take to the detriment of consumers who rely on their sound business practices), such rules and regulations typically are embraced as necessary and reasonable. What particular rules, regulations, and tax poli- cies are helpful or not, and how best to create and enforce them, is a topic of considerable debate and review as long as there are markets. Figure 6.2 offers a three-dimensional viewpoint to help reinforce the inter- relationships presented in this chapter. Again, readers should think about how other product types might be placed here, not just as an academic exercise, but as a practical matter of how portfolios are constructed and managed. With reference to the above mapping process, investors can view a vari- ety of investment choices in the context of legal, regulatory, and tax envi- ronments, then make strategic choices according to their preferences and outlook regarding each category of potential risk and reward. To bridge the first four chapters, Table 6.9 links products, cash flows, credit, and legal and regulatory matters. While they are often thought of as a rather unexciting aspect of finan- cial markets, tax, legal, and regulatory considerations are quite important, fluid, and deserving of very careful consideration. 264 FINANCIAL ENGINEERING, RISK MANAGEMENT, AND MARKET ENVIRONMENT 06_200306_CH06/Beaumont 8/15/03 12:54 PM Page 264 265 06_200306_CH06/Beaumont 8/15/03 12:54 PM Page 265 TABLE 6.8 Partial List of Investor-Related Regulation in the United States [Table not available in this electronic edition.] 266 06_200306_CH06/Beaumont 8/15/03 12:54 PM Page 266 [Table not available in this electronic edition.] Market Environment 267 Legal Cumulative preferred convertible stock Regulatory Tax Treated as an equity for tax purposes, price changes in this security may be subject to either short- or long-term capital gains The usual legal protections are enhanced with special language pertaining to missed dividend payments and how the firm would be expected to respond to prespecified events Regulatory restrictions prohibit bank purchases of convertible preferreds, and this affects supply and demand fundamentals as would any similar restriction A mapping process… FIGURE 6.2 Mapping process for cumulative preferred convertible stock in the con- text of tax and legal and regulatory considerations. TABLE 6.9 Credit-Enhancing Strategies by Product, Cash Flow, and Legal/Regulatory/Tax Product Cash Flow Legal/Regulatory/Tax Shorten maturity √ Change position in capital structure √ Collateralize √ Guarantees √ Covenants √ Wraps √ 06_200306_CH06/Beaumont 8/15/03 12:54 PM Page 267 CONCLUSION As a brief summary of the text, and as another conceptual way of thinking about market interrelationships, consider Figure 6.3. Most continuums are presented as a horizontal line, with one main idea at one end and a contradicting idea at the opposite extreme. Yet in Figure 6.3 we present a continuum in the shape of a semicircle. The purpose for presenting bonds and equities in this circular context is to suggest that while bonds and equities are different product types, they are also closely related—at least more closely related than would be implied by placing them at opposite points of a horizontal continuum. Indeed, as has been referenced earlier in the text, the Achilles’ heel of equities is the right conveyed to share- holders to vote on matters pertaining to the company, and the Achilles’ heel of bonds is the presence of a maturity date. In sum, while it remains popular in financial circles today to emphasize how different bonds are from equities, and how different these are from cur- rencies, and so on, it is this author’s view that financial products of all stripes have much more in common than not; there is much more to be gained ped- agogically by emphasizing commonality as opposed to rifts. When an investor considers any financial product, there ought to be at least some cur- sory consideration of market risk, credit risk, and regulatory and tax issues, 268 FINANCIAL ENGINEERING, RISK MANAGEMENT, AND MARKET ENVIRONMENT Second preferred stock Mezzanine debt Senior debtCommon stock First preferred stock Junior debt Common stock (CS) – Voting rights = Preferred stock (PS) PS + Maturity date = Mezzanine debt (MD) MD – Equity allocation + Maturity date (optional) = Junior debt (JD) JD + Secured status + Maturity date = Senior debt FIGURE 6.3 The debt/equity continuum as semicircular. 06_200306_CH06/Beaumont 8/15/03 12:54 PM Page 268 Market Environment 269 particularly since every financial product is affected by each of these ele- ments. And for securities in the form of spot, a forward or future, or an option, these structures certainly share much in common across each and every type of financial instrument that they embody. Perhaps the real conclusion here is that there is no conclusion, that read- ers are now in possession of a new toolbox filled with fresh perspectives of the marketplace, and as such are fully equipped to better understand exist- ing products as well as engineer a financial innovation or two of their own. Good luck to you! 06_200306_CH06/Beaumont 8/15/03 12:54 PM Page 269 06_200306_CH06/Beaumont 8/15/03 12:54 PM Page 270 271 Index 401k plans. See Retirement accounts 529 plans. See College savings accounts A A tranches, 141 Absolute return fund, 150 investing, 150–153 ABSs. See Asset-backed securities Accept delivery, 46 Add-on, usage, 260 Adjustable-rate mortgages (ARMs), 164–165 Agency bonds, 245 taxable status. See U.S. federal agency bonds tax-adjusted total returns, 145t Agency securities, tax-adjusted total returns, 244t Aggressive growth, 150 Alpha, 161 American option, 145 Annualization term, 18 Appreciation, 8. See also Credit- related appreciation Arbitrage. See Fixed income; Market neutral ARMs. See Adjustable-rate mortgages Asset-backed bonds, 91 Asset-backed instruments, 135fn Asset-backed securities, 91, 103, 134–135 servicer, 91 Asset-backed securities (ABSs), types, 262 Asset-liability management, 156 Asset-liability portfolio management, 156 Assets market value, 202 stream, 156 volatility, 202 Asymmetrical information, 203 At-the-money 10–non-call-2, price volatility, 144 call option, 215 option, 63fn, 210, 213 put, 208 strike prices, 127 Available for sale, 259 Average life, 139 prepayment rate, contrast, 139f sensitivity test, 262 tests, 262 07_200306_Index/Beaumont 8/15/03 4:05 PM Page 271 B B tranches, 141 Backed-out. See Implied forward credit outlook Bad debt, 24 Balanced funds, 155 Bank for International Settlements (BIS), 221, 259–260 Bankruptcies, 4 scenario, 254 Bankruptcy-remote entity, 93 Banks, liabilities, 156 Basis points (bps), 8. See also Total return gain, 52 Basis risk, 114 Basis trade, 114–118, 210f creation, 114f Basle Committee (1993), 260–261 Bear market environment, 102 Benchmark. See Market quantitative measure, 163 risk, 238–240 security, 28 Beta definition, 183 industry types, 185f unity, value, 184 usage, 182–204 Bid/offer spreads, 213 Binomial option model, tree, 59 BIS. See Bank for International Settlements Black-Scholes application, 72f Black-Scholes assumption. See Log-normality Black-Scholes option pricing formula, 70 Blue chip stocks, 30 Bond-equivalent basis, 173 Bond-equivalent yield, 25, 174–175 Bonds. See Shorter-maturity bonds basis, 122f basket, 121fn cheapness/richness, 27fn coupon value, accruing, 37 credit quality, 96f futures, 45–47 CTD, 123 price, 46–47 indices, investment-grade portion, 169 market, callable structures, 129 portfolio construction, 234 price risk, 172–182 sensitivity, 189 products, optionality variations, 134–150 statistical methods, 205 summary, 64 total returns, 232 uncertainty, layers, 25fn yield curve. See U.S. Treasury Bonex bonds/securities, 86–87 272 INDEX 07_200306_Index/Beaumont 8/15/03 4:05 PM Page 272 Bonex clause, 86–87 Book value, 31 Bootstrapping effect, 43 Borrowings. See Longer-term borrowings; Short-term borrowings Brady bonds, 159fn credit benefits, 149 Bullet bond, 70, 208 Business cycle, 5 Busted PAC, 142 Buy-and-hold-oriented investors, 244 C C tranches, 141 Call option, 133, 203f, 256. See also At-the-money; Credit; Short call option; Synthetic call option calculation, 59t value, 53 Call payoff profile, 208f Call value, 54–55 Callable bonds, 133, 149 conceptual presentation, 130f creation, 129f issuing, 130 payoff profile, 209 price, definition, 199 Callable structures. See Bonds Callables, 200. See also Discrete callables price, 133 Called away, 200 Canadian Treasury bills, 50–51 Capital, 91–97 adequacy, supervisory review, 259 allocation. See Risk amount, availabililty, 217 base, 155 exposure, 159 flight, 85 gains. See Long-term capital gains guidelines/restrictions, 217. See also Risk-based capital guidelines impact. See Collateralization preservation, 155 fund, 154 representation, 218 requirements, 259 return. See Return on risk-adjusted capital; Risk-adjusted return on risk-adjusted capital structure, 92, 202 value, 205 Capital Asset Pricing Model (CAPM), 219 Capital-adjusted variables, 219–220 Carry (cost of carry), 35, 212. See also Negative carry; Positive carry component, 189 duration, relationship, 190f options, 119 Index 273 07_200306_Index/Beaumont 8/15/03 4:05 PM Page 273 . 79 increase, 100 option, 100 trades, 166 watch, 75 yield spreads, 60f Credit absorbing vehicle, 101 Credit card receivables, 262 Credit derivatives, 75, 97 108 issuer-specific types, 101 profiles, 107 t valuation,. Loan Mortgage Corporation Financial engineering, 113 appendix, 161–170 Financial fundamentals, 5 Financial guarantee schematic, 104 f Financial products, investing profile, 158–159 Financial Times Stock Exchange (FTSE),. securities, 79 Credit-linked note, 101 , 105 schematic, 101 f Credit-related appreciation, 149 Credit-related events, 99 Credit-related risks, layering, 93f Credit-sensitive bond, 100 Credit-sensitive instrument.