Financial institutions INstruments and markets 9e viney

This new edition, while maintaining its accessible approach and style, encourages students to understand, anticipate and challenge the complex and global nature of finance today KEY FEATURES ▶ Currency Contemporary, reliable and authoritative commentary on modern and topical financial systems, including discussion on ethics and the global financial crisis ▶ New financial case studies With the right balance of local and international examples, students can understand the global nature of financial institutions through real-world cases ▶ Examples Integrated worked examples and short in-chapter exercises assist student learning by bridging the gap between theory and application ▶ Pedagogical features An easy-to-read layout includes tagged learning objectives, chapter summaries and extended learning sections that provide additional resources for self-assessment and study Financial Institutions Instruments & Markets 9TH EDITION 9e VINEY • PHILLIPS Connect is proven to deliver better results Content integrates seamlessly with enhanced digital tools to create a personalised learning experience that provides precisely what you need, when you need it Maximise your learning with SmartBook, the first and only adaptive reading experience designed to change the way you read and learn It creates a personalised reading experience by highlighting the most impactful concepts you need to learn at that moment in time. To learn more about McGraw-Hill SmartBook® visit www.mheducation.com.au/student-smartbook Financial Institutions, Instruments & Markets Now in its ninth edition, Financial Institutions, Instruments and Markets continues to be one of the market leaders in financial institutions management With a wellrespected author team at the helm, it is a comprehensive resource for all students wanting to learn about the modern financial system, as well as those preparing for a career in finance CHRISTOPHER VINEY PETER PHILLIPS www.mhhe.com/au/viney9e spine: 26mm FINANCIAL ABBREVIATIONS ABS ACCC ADI ADR AFMA AFR AGPS ANZ AOFM APRA ARBL ASIC ASX ATM AWOTE BAB BBSW BIS CAR CBA CBOT CD CDI CDS CEDEL CEO CGS CHESS CLICK XT/ITS CME CMT CP CPI CRA CUFS EBIT ECP EDI EDR EFIC EFTPOS EMU EPS ERM ESA ETP EU EUR FDA FEC Fed FRA FRN FTSE FX G-10 GDP GDR GICS GNE HPY IBSA IMF IPO IRR IWT L/C LBO LEPO Australian Bureau of Statistics Australian Competition and Consumer Commission Authorised deposit-taking institution American depositary receipt Australian Financial Markets Association Australian Financial Review Australian Government Printing Service ANZ Banking Group Australian Office of Financial Management Australian Prudential Regulation Authority Assets repriced before liabilities Australian Securities and Investments Commission Australian Securities Exchange Automatic teller machine Average weekly ordinary time earnings Bank accepted bill Bank bill swap rate Bank for International Settlements Capital adequacy requirement Commonwealth Bank of Australia Chicago Board of Trade Certificate of deposit CHESS depositary interest Credit default swap Centrale de Livraison des Valeurs Mobilières Chief executive officer Commonwealth Government Securities ASX Clearing House Electronic Sub-register System ASX securities electronic trading system Chicago Mercantile Exchange Cash management trust Commercial paper Consumer price index Credit rating agency CHESS Units of Foreign Securities Earnings before interest and tax Eurocommercial paper Electronic data interchange Euro depositary receipt Export Finance and Insurance Corporation Electronic funds transfer at point of sale European Monetary Union Earnings per share Exchange rate mechanism (European Union) Exchange settlement account Eligible termination payment European Union Euro Fully drawn advance Forward exchange contract Federal Reserve Bank (USA) Forward rate agreement Floating rate note Financial Times Stock Exchange Foreign exchange Group of ten central banks Gross domestic product Global depositary receipt Global industry classification standard Gross national expenditure Holding period yield International Banks and Securities Association International Monetary Fund Initial public offering Internal rate of return Interest withholding tax Letter of credit Leveraged buy-out Low exercise price option WORLD CURRENCIES LIBID LIBOR LIFFE LIMEAN LME LSE M&A MA MBO MSCI MTN NAB NASDAQ NBFI NCD NGF NIC NIF NPV NTA NYSE OBS OBU OECD OPEC OTC P/E PLC P-note PPP PSBR PV PVCF QIB RBA RBL RBNZ repos RITS ROE ROI RTGS S&P SEC SFE SGC SIBOR SIS SMART SME SOMA SPAN SPI SPV SSP SWIFT T-bill TLC T-note TWI UK USA USCP USSR VaR WBC London interbank bid rate London interbank offered rate London International Financial Futures Exchange London interbank mean rate London Metals Exchange London Stock Exchange Merger and acquisition Moving average Management buy-out Morgan Stanley Capital International index Medium-term note National Australia Bank National Association of Securities Dealers Automated Quotation System Non-bank financial institution Negotiable certificate of deposit National Guarantee Fund Newly industrialising country Euronote issuance facility Net present value Net tangible assets New York Stock Exchange Off-balance sheet Offshore banking unit Organisation for Economic Cooperation and Development Organization of Petroleum Exporting Countries Over-the-counter Price to earnings ratio Publicly listed corporation Promissory note Purchasing power parity Public sector borrowing requirement Present value Present value of cash flows Qualified institutional buyers Reserve Bank of Australia Reasonable benefit limit Reserve Bank of New Zealand Repurchase agreements Reserve Bank Information and Transfer System Return on equity Return on investment Real-time gross settlement Standard and Poor’s Credit Rating Agency Securities and Exchange Commission (USA) Sydney Futures Exchange Superannuation guarantee charge Singapore interbank offered rate Superannuation Industry (Supervision) Act Specific, measurable, achievable, realistic, timely Small- and medium-sized enterprise Surveillance of Market Activity system (ASX) Standard portfolio analysis of risk hare price index Special-purpose vehicle Special service provider Society for Worldwide Interbank Financial Telecommunications Treasury bill Transferable loan certificate Treasury note Trade-weighted index United Kingdom United States of America United States commercial paper Union of Soviet Socialist Republics Value at risk Westpac Banking Corporation ARS AUD BRL CAD CLP RMB CZK DKK EUR HKD HUF INR IDR ILS JPY MYR MXN NZD NOK PKR PHP PLN RUB SAR SGD ZAR KRW LKR SEK CHF TWD THB TRY UAE GBP USD VND spine: 26mm Argentina Australia Brazil Canada Chile China, People’s Republic of • CNY (traded on-shore) • CNH (traded off-shore) Czech Republic Denmark European monetary union • Austria • Belgium • Cyprus • Estonia • Finland • France • Germany • Greece • Ireland • Italy • Latvia • Lithuania • Luxembourg • Malta • The Netherlands • Portugal • Slovakia • Slovenia • Spain Argentine peso Australian dollar Brazilian real Canadian dollar Chilean peso Chinese renminbi (yuan) Hong Kong Hungary India Indonesia Israel Japan Malaysia Mexico New Zealand Norway Pakistan Philippines Poland Russia Saudi Arabia Singapore South Africa South Korea Sri Lanka Sweden Switzerland Taiwan Thailand Turkey United Arab Emirates United Kingdom United States of America Vietnam Hong Kong dollar Hungarian forint Indian rupee Indonesian rupiah Israeli shekel Japanese yen Malaysian ringgit Mexican peso New Zealand dollar Norwegian krone Pakistani rupee Philippine peso Polish złoty Russian rouble Saudi riyal Singapore dollar South African rand South Korean won Sri Lankan rupee Swedish krona Swiss franc New Taiwan dollar Thai baht Turkish lira Emirati dirham British pound US dollar Vietnamese dong Czech koruna Danish krone Euro FINANCIAL ABBREVIATIONS ABS ACCC ADI ADR AFMA AFR AGPS ANZ AOFM APRA ARBL ASIC ASX ATM AWOTE BAB BBSW BIS CAR CBA CBOT CD CDI CDS CEDEL CEO CGS CHESS CLICK XT/ITS CME CMT CP CPI CRA CUFS EBIT ECP EDI EDR EFIC EFTPOS EMU EPS ERM ESA ETP EU EUR FDA FEC Fed FRA FRN FTSE FX G-10 GDP GDR GICS GNE HPY IBSA IMF IPO IRR IWT L/C LBO LEPO Australian Bureau of Statistics Australian Competition and Consumer Commission Authorised deposit-taking institution American depositary receipt Australian Financial Markets Association Australian Financial Review Australian Government Printing Service ANZ Banking Group Australian Office of Financial Management Australian Prudential Regulation Authority Assets repriced before liabilities Australian Securities and Investments Commission Australian Securities Exchange Automatic teller machine Average weekly ordinary time earnings Bank accepted bill Bank bill swap rate Bank for International Settlements Capital adequacy requirement Commonwealth Bank of Australia Chicago Board of Trade Certificate of deposit CHESS depositary interest Credit default swap Centrale de Livraison des Valeurs Mobilières Chief executive officer Commonwealth Government Securities ASX Clearing House Electronic Sub-register System ASX securities electronic trading system Chicago Mercantile Exchange Cash management trust Commercial paper Consumer price index Credit rating agency CHESS Units of Foreign Securities Earnings before interest and tax Eurocommercial paper Electronic data interchange Euro depositary receipt Export Finance and Insurance Corporation Electronic funds transfer at point of sale European Monetary Union Earnings per share Exchange rate mechanism (European Union) Exchange settlement account Eligible termination payment European Union Euro Fully drawn advance Forward exchange contract Federal Reserve Bank (USA) Forward rate agreement Floating rate note Financial Times Stock Exchange Foreign exchange Group of ten central banks Gross domestic product Global depositary receipt Global industry classification standard Gross national expenditure Holding period yield International Banks and Securities Association International Monetary Fund Initial public offering Internal rate of return Interest withholding tax Letter of credit Leveraged buy-out Low exercise price option WORLD CURRENCIES LIBID LIBOR LIFFE LIMEAN LME LSE M&A MA MBO MSCI MTN NAB NASDAQ NBFI NCD NGF NIC NIF NPV NTA NYSE OBS OBU OECD OPEC OTC P/E PLC P-note PPP PSBR PV PVCF QIB RBA RBL RBNZ repos RITS ROE ROI RTGS S&P SEC SFE SGC SIBOR SIS SMART SME SOMA SPAN SPI SPV SSP SWIFT T-bill TLC T-note TWI UK USA USCP USSR VaR WBC London interbank bid rate London interbank offered rate London International Financial Futures Exchange London interbank mean rate London Metals Exchange London Stock Exchange Merger and acquisition Moving average Management buy-out Morgan Stanley Capital International index Medium-term note National Australia Bank National Association of Securities Dealers Automated Quotation System Non-bank financial institution Negotiable certificate of deposit National Guarantee Fund Newly industrialising country Euronote issuance facility Net present value Net tangible assets New York Stock Exchange Off-balance sheet Offshore banking unit Organisation for Economic Cooperation and Development Organization of Petroleum Exporting Countries Over-the-counter Price to earnings ratio Publicly listed corporation Promissory note Purchasing power parity Public sector borrowing requirement Present value Present value of cash flows Qualified institutional buyers Reserve Bank of Australia Reasonable benefit limit Reserve Bank of New Zealand Repurchase agreements Reserve Bank Information and Transfer System Return on equity Return on investment Real-time gross settlement Standard and Poor’s Credit Rating Agency Securities and Exchange Commission (USA) Sydney Futures Exchange Superannuation guarantee charge Singapore interbank offered rate Superannuation Industry (Supervision) Act Specific, measurable, achievable, realistic, timely Small- and medium-sized enterprise Surveillance of Market Activity system (ASX) Standard portfolio analysis of risk hare price index Special-purpose vehicle Special service provider Society for Worldwide Interbank Financial Telecommunications Treasury bill Transferable loan certificate Treasury note Trade-weighted index United Kingdom United States of America United States commercial paper Union of Soviet Socialist Republics Value at risk Westpac Banking Corporation ARS AUD BRL CAD CLP RMB CZK DKK EUR HKD HUF INR IDR ILS JPY MYR MXN NZD NOK PKR PHP PLN RUB SAR SGD ZAR KRW LKR SEK CHF TWD THB TRY UAE GBP USD VND spine: 26mm Argentina Australia Brazil Canada Chile China, People’s Republic of • CNY (traded on-shore) • CNH (traded off-shore) Czech Republic Denmark European monetary union • Austria • Belgium • Cyprus • Estonia • Finland • France • Germany • Greece • Ireland • Italy • Latvia • Lithuania • Luxembourg • Malta • The Netherlands • Portugal • Slovakia • Slovenia • Spain Argentine peso Australian dollar Brazilian real Canadian dollar Chilean peso Chinese renminbi (yuan) Hong Kong Hungary India Indonesia Israel Japan Malaysia Mexico New Zealand Norway Pakistan Philippines Poland Russia Saudi Arabia Singapore South Africa South Korea Sri Lanka Sweden Switzerland Taiwan Thailand Turkey United Arab Emirates United Kingdom United States of America Vietnam Hong Kong dollar Hungarian forint Indian rupee Indonesian rupiah Israeli shekel Japanese yen Malaysian ringgit Mexican peso New Zealand dollar Norwegian krone Pakistani rupee Philippine peso Polish złoty Russian rouble Saudi riyal Singapore dollar South African rand South Korean won Sri Lankan rupee Swedish krona Swiss franc New Taiwan dollar Thai baht Turkish lira Emirati dirham British pound US dollar Vietnamese dong Czech koruna Danish krone Euro Financial Institutions Instruments & Markets vin22943_prelims_i-xxxiv.indd i 01/21/19 11:13 AM www.freebookslides.com ASSURANCE OF LEARNING Many educational institutions today are focused on the notion of assurance of learning, an important element of some accreditation standards This ninth edition of Financial Institutions, Instruments and Markets is specifically created to support assurance of learning initiatives designed to draw on and expand key knowledge and skill sets required by graduates such as: communication, initiative and enterprise, self-management, life-long learning, problem solving, technology, teamwork, planning and organising.1 Chapter learning objectives and pedagogical features throughout the text are developed to directly relate to the learning outcomes for your course which may assist instructors in making the collection and presentation of assurance of learning data easier AACSB STATEMENT McGraw-Hill Education is a proud corporate member of AACSB International Understanding the importance and value of AACSB accreditation, Financial Institutions, Instruments and Markets 9e has sought to recognise the curriculum guidelines detailed in the AACSB standards for business accreditation A variety of pedagogical features in chapters are designed to draw on the general knowledge and skill guidelines found in the AACSB standards: communication abilities, use of information technology, ethical understanding, reflective thinking, critical analysis and diversity and multicultural understanding.2 The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school and the faculty While Financial Institutions, Instruments and Markets 9e and the teaching package make no claim of specific AACSB qualification or evaluation, we have geared pedagogical features and online assessment tools towards some of the general knowledge and skills areas DEST 2002, Employability skills for the future, Department of Education, Science and Training, Commonwealth of Australia, www.employmentdirections.net.au/docs/employabilityframework.doc AACSB International 2008, Eligibility procedures and accreditation standards for business accreditation, www.aacsb.edu vin22943_prelims_i-xxxiv.indd ii 01/21/19 11:13 AM Financial Institutions Instruments & Markets 9TH EDITION CHRISTOPHER VINEY PETER PHILLIPS vin22943_prelims_i-xxxiv.indd iii 01/21/19 11:13 AM www.freebookslides.com Copyright © 2019 McGraw-Hill Education (Australia) Pty Ltd Additional owners of copyright are acknowledged in on-page credits Every effort has been made to trace and acknowledge copyrighted material The authors and publishers tender their apologies should any infringement have occurred Reproduction and communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the institution (or the body that administers it) has sent a Statutory Educational notice to Copyright Agency and been granted a licence For details of statutory educational and other copyright licences contact: Copyright Agency, 66 Goulburn Street, Sydney NSW 2000 Telephone: (02) 9394 7600 Website: www copyright.com.au Reproduction and communication for other purposes Apart from any fair dealing for the purposes of study, research, criticism or review, as permitted under the Act, no part of this publication may be reproduced, distributed or transmitted in any form or by any means, or stored in a database or retrieval system, without the written permission of McGraw-Hill Education (Australia) Pty Ltd, including, but not limited to, any network or other electronic storage Enquiries should be made to the publisher via www.mheducation com.au or marked for the attention of the permissions editor at the address below National Library of Australia Cataloguing-in-Publication Data Authors: Title: ISBN: Christopher Viney, Peter Phillips Financial Institutions, Instruments and Markets 9e 9781760422943 Published in Australia by McGraw-Hill Education (Australia) Pty Ltd Level 33, 680 George Street, Sydney NSW 2000 Portfolio lead: Jillian Gibbs Content developer: Anne Harmer Senior production editor: Claire Linsdell Copyeditor: Julie Wicks Proofreader: Annabel Adair Cover design: Simon Rattray Internal design: David Rosemeyer Typeset in NimbusRomDOT 10.5/13 by SPi Global Printed in Singapore on 70 gsm matt art by Markono Print Media Pte Ltd vin22943_prelims_i-xxxiv.indd iv 01/21/19 11:13 AM BRIEF CONTENTS PART FINANCIAL INSTITUTIONS  . Chapter A modern financial system: an overview 3 Chapter Commercial banks 41 Chapter Non-bank financial institutions 87 PART EQUITY MARKETS  .129 Chapter The share market and the corporation 132 Chapter Corporations issuing equity in the share market 161 Chapter Investors in the share market .191 Chapter Forecasting share price movements 222 PART THE CORPORATE DEBT MARKET  257 Chapter Mathematics of finance: an introduction to basic concepts and calculations .259 Chapter Short-term debt .287 Chapter 10 Medium- to long-term debt 315 Chapter 11 International debt markets 347 PART GOVERNMENT DEBT, MONETARY POLICY, THE PAYMENTS SYSTEM AND INTEREST RATES  .385 Chapter 12 Government debt, monetary policy and the payments system 388 Chapter 13 An introduction to interest rate determination and forecasting 417 Chapter 14 Interest rate risk measurement 453 PART THE FOREIGN EXCHANGE MARKET  .483 Chapter 15 Foreign exchange: the structure and operation of the FX market 485 Chapter 16 Foreign exchange: factors that influence the exchange rate 513 Chapter 17 Foreign exchange: risk identification and management .538 PART DERIVATIVE MARKETS AND RISK MANAGEMENT  563 Chapter 18 An introduction to risk management and derivatives 565 Chapter 19 Futures contracts and forward rate agreements 594 Chapter 20 Options 626 Chapter 21 Interest rate swaps, cross-currency swaps and credit default swaps .663 v vin22943_prelims_i-xxxiv.indd v 01/21/19 11:13 AM CONTENTS Preface�������������������������������������������������������������������������������� xx Text at a glance��������������������������������������������������������������� xxv About the authors������������������������������������������������������������ xxi Connect�������������������������������������������������������������������������� xxviii Acknowledgments������������������������������������������������������������ xxi Exploring finance on the web���������������������������������������� xxx Highlights of the ninth edition��������������������������������������� xxii Careers in finance��������������������������������������������������������� xxxii PART CHAPTER 1FINANCIAL INSTITUTIONS A MODERN FINANCIAL SYSTEM: AN OVERVIEW  1.1 Theory and facts in finance  1.2 The financial system and financial institutions  1.3 Financial instruments  11 1.3.1 Equity  11 1.3.2 Debt  12 1.3.3 Derivatives  12 1.4 Financial markets  13 1.4.1 Matching principle  14 1.4.2 Primary and secondary market transactions  14 1.4.3 Direct finance and intermediated finance  16 1.4.4 Wholesale and retail markets  20 1.4.5 Money markets  20 1.4.6 Capital markets  24 1.5 CHAPTER Flow of funds, market relationships and stability  27 Case study: The next global financial crisis?  28 Master before you move on  Extended learning A: The global financial crisis of 2008  Extended learning B: The impact of the Asian financial crisis on the financial system  Questions  Key terms  30 32 35 38 39 COMMERCIAL BANKS 41 2.1 The main activities of commercial banking  43 2.2 Sources of funds  44 2.2.1 Current account deposits  44 2.2.2 Call or demand deposits  45 2.2.3 Term deposits  45 2.2.4 Negotiable certificates of deposit  45 2.2.5 Bill acceptance liabilities  46 2.2.6 Debt liabilities  46 2.2.7 Foreign currency liabilities  47 2.2.8 Loan capital and shareholders’ equity  47 vi vin22943_prelims_i-xxxiv.indd vi 01/21/19 11:13 AM 2.3 Uses of funds  48 2.3.1 Personal and housing finance  48 2.3.2 Commercial lending  50 2.3.3 Lending to government  51 2.3.4 Other bank assets  51 2.4 Off-balance-sheet business  52 2.4.1 Direct credit substitutes  53 2.4.2 Trade- and performance-related items  53 2.4.3 Commitments  53 2.4.4 Foreign exchange contracts, interest rate contracts and other market-rate-related contracts  ����������������������������������������������������������������������������������������������54 2.4.5 Volume of off-balance-sheet business  54 2.5 Regulation and prudential supervision of commercial banks  56 2.6 A background to the capital adequacy standards  57 2.7 The Basel accords: evolution from Basel I to Basel III  59 2.7.1 Minimum capital adequacy requirement  59 2.7.2 The definition of capital  60 2.7.3 Basel III structural framework  60 2.7.4 Basel III and bank liquidity  67 2.8 Liquidity management and other supervisory controls  69 2.8.1 Other regulatory and supervisory controls  70 CHAPTER Case study: Basel III reforms  71 Summary  Extended learning A: The standardised approach to credit risk  Extended learning B: Business continuity risk management  Extended learning C: Corporate governance and ethics  Questions  Key terms  72 74 77 82 84 85 NON-BANK FINANCIAL INSTITUTIONS 87 3.1 Investment banks  89 3.1.1 Sources of funds and uses of funds  89 3.1.2 Off-balance-sheet business  90 3.2 Managed funds  94 3.2.1 Structure of the managed funds sector  95 3.2.2 Sources and uses of funds  95 3.2.3 Capital guaranteed funds  97 3.2.4 Capital stable funds  97 3.2.5 Balanced growth funds  97 3.2.6 Managed growth or capital growth funds  97 vii vin22943_prelims_i-xxxiv.indd vii 01/21/19 11:13 AM www.freebookslides.com Glossary middle office  the name given to those activities within an investment bank that not involve client relations but may complement or monitor front office activities; risk measurement and reporting are examples mutually exclusive projects  from a choice of two or more projects, only one project will be chosen modern portfolio theory  concepts that enable a portfolio to be constructed with optimal risk and return relationships naked warrants  a warrant issued independently of a bond monetary policy  actions of a central bank that influence the level of interest rates in order to achieve economic outcomes; primary target is inflation monetary policy channel  the effects of monetary policy changes on interest rates and economic activity money  a commodity that is universally accepted as a medium of exchange money markets  wholesale markets in which shortterm securities are issued and traded money supply  the total amount of money in an economy; includes currency and deposits with financial institutions money-laundering transaction  executing a transaction in order to move illegally gained funds into the financial system money-market hedge  strategy: borrow FX today, convert to local currency at spot rate, invest in money markets (BSI) moral hazard  the taking of excessive risk in the belief that losses will be diminished by regulation or insurance mortgage  a form of security whereby a lender registers an interest over the title of a property mortgage insurance  insurance cover that protects a lender in the event that a borrower defaults on a mortgage loan mortgage originators  specialist mortgage lenders that typically refinance their lending through securitisation mortgage trust  invests in mortgages registered as loan securities over land mortgagee  the lender who registers an interest in land and property thereon as security for a loan mortgagor  the borrower who assigns security over land and the property thereon to a lender moving-averages model (MA)  a graph of a series of average prices constructed over time MTN tap approach  each tranche within a euro-MTN issue incorporates specific maturities and coupon rates mutual funds  managed funds that are established under a corporate structure; investors purchase shares in the fund naked call option  a call option writer does not hold the underlying asset natural foreign currency hedge  a strategy that matches the denomination of foreign currency inflows and outflows natural hedge  the use of matching transactions to offset a potential risk exposure neckline  a line drawn across the bottoms of the left and right shoulders negative correlation  data that move in the opposite direction negative covenants  conditions included in a loan contract that restrict the activities and financial structure of a borrower negotiable certificate of deposit  a discount security issued by a bank negotiable debt instrument  a debt instrument that can be sold by the original lender through a financial market negotiable security  a financial instrument that can easily be sold into a deep and liquid secondary market net lease  the lessee is responsible for the insurance and maintenance of the leased asset net present value (NPV)  the difference between the cost of an asset and the present value of future cash flows net stable funding ratio (NSFR)  the ratio of the amount of available stable funding to required stable funding new float or initial public offering (IPO)  the initial listing of the securities of a corporation on a stock exchange news analytics  the collection and analysis of textbased non-quantitative news and media stories no liability company  shareholders may decide not to pay calls on partly paid shares, but will forfeit such shares noise  the opposite of information but can be mistaken for it nominal rate of interest  the annual market interest rate; includes the real rate of return plus an anticipated inflation component non-completion covenants  specific loan conditions enforceable against project sponsors if a project is not completed non-conventional cash flows  occur when the ongoing cash flows from an investment are not always positive 704 vin22943_glo_691-711.indd 704 01/04/19 04:41 PM www.freebookslides.com Glossary non-detachable warrant  a warrant that cannot be separated from the host debt security non-executive board members  board members who are not part of the management of a corporation or its subsidiaries non-notification basis  accounts receivables are paid by a firm’s debtors directly to an address controlled by the factor non-recourse lending  the lender is totally reliant on future project cash flows for loan repayments non-renounceable right  a right attached to a security that cannot be sold to a third party normal or positive yield curve  long-term interest rates are higher than short-term rates notification basis  a firm must notify debtors that accounts receivable should be paid directly to the factor company notional principal amount  the underlying amount specified in a contract that is used to calculate the value of the contract novation  the process by which one party to a contract is replaced with another party NPV decision rule  accept an investment opportunity that has a positive NPV objectives and policies  what a company intends to achieve and how that will be achieved obligor  a party who is bound to another by a contract or other legal procedure off-balance-sheet business  transactions that represent a contingent liability and therefore are not recorded on the balance sheet offer  the sell price offered for a financial asset offer price  the price at which an FX dealer will sell the base currency official interest rate  the central bank’s target interest rate for the overnight cash rate official reserve assets  central bank holdings of foreign currencies, gold and international drawing rights on-exchange transactions  buying and selling securities on a formal exchange such as a stock exchange open market operations  actions of the Reserve Bank in the money markets to maintain the cash rate consistent with its stance on monetary policy open outcry  dealers conduct face-to-face transactions using verbal and hand-signal conventions operating account  a cheque account through which a firm conducts its day-to-day financial transactions operating FX exposure  the risk that day-to-day operating revenues and expenses will be affected by FX movements operating lease  a short-term lease; the asset may be leased many times; asset maintained and insured by lessor operational liquidity  access to funds to meet dayto-day expenses and take advantage of business opportunities operational risks  exposures that may impact on the normal day-to-day business functions of an organisation option contract  the right, but not the obligation, to buy or sell a commodity or security at a predetermined exercise price; the option buyer pays a premium to the option writer ordinary annuity  periodic cash flows that occur at the end of each period ordinary share or common stock  the principal form of equity issued by a corporation; bestows certain rights on the shareholder original exposure method  off-balance-sheet capital calculation based on the notional contract value multiplied by a credit conversion factor out-clause  specific conditions that preclude an underwriting agreement from being fully enforced out-of-the-money  an option that has a negative intrinsic value; buyer will not exercise overdraft  an arrangement with a bank that allows a business to place its operating account into debit up to an agreed limit overdraft facility  a fluctuating credit facility provided by a bank; allows a business operating account to go into debit up to an agreed limit overseas currency account  a foreign currencydenominated account opened with a bank over-the-counter contracts  non-standardised contract negotiated between a writer and a buyer over-the-counter transactions  buying and selling of securities conducted directly; no formal exchange; mostly between institutional investors passive investment  a portfolio structure based on the replication of a specific share-market index participating banks  banks that provide funds as part of a syndicated loan facility participating preference shares  holders will receive a higher dividend if ordinary shareholders receive a dividend above a specified amount 705 vin22943_glo_691-711.indd 705 01/04/19 04:41 PM www.freebookslides.com Glossary pay anyone  an internet banking service that enables funds to be transferred to any financial institution in Australia payee  the party who receives the funds when a bill of exchange is initially discounted paying agents  arrange periodic coupon payments when due; redeem bonds at the maturity date payments system  facilitates the transfer of value from one party to another for financial transactions performance benchmark index  broad measures of share-market performance; based on capitalisation and liquidity perpetuity  a cashflow series where the same regular payment occurs each period forever price series  a graph of historic share price or market index movements over time price to earnings ratio (P/E)  the current share price divided by the earnings per share price-maker  a dealer that quotes both bid and offer prices primary market  the issue of new financial securities such as ordinary shares primary market transaction  the issue of a new financial instrument; funds are obtained by the issuer prime rate  a reference interest rate set by a financial institution for the purpose of pricing certain variablerate loans principal  the face value amount of a loan or deposit physical market  a market in which a commodity or financial instrument is issued or traded profit and loss payoff profiles  the potential gains and losses available to the buyer and writer of an option Pillar 1  incorporates components of credit risk, operational risk and market risk within the Basel III framework profit test  minimum financial performance requirements to be met by an entity seeking listing on a stock exchange placement  additional ordinary shares are sold by a corporation to selected institutional investors program trading  buy and sell orders automatically triggered by rules entered into a computer program point  the final decimal place in an FX quotation project completion  point at which a project is built and is generating a prescribed level of cash flows pole  rapid rise in share prices and volumes before a pennant or flag forms policyholder  the person who takes out an insurance policy that covers a defined risk event portfolio structuring  the buying and selling of assets and liabilities to best meet current savings, investment and funding needs portfolio variance  the variability of the returns of an investment portfolio positive correlation  data that move in the same direction positive covenants  actions specified in a loan contract which must be taken by a borrower posted rate  the quoted yield at which an issuer is willing to sell a security preference shares  a hybrid security that combines characteristics of both equity and debt; preference shares usually pay a fixed dividend and offer the right to convert to ordinary shares at a future date (also known as a redeemable convertible preference share) project finance  financing large projects where loan repayments are based on the future cash flows of the completed project project sponsors  the originators and equity providers of a project promissory notes (P-notes)  discount securities issued by corporations without an acceptor or endorsement promoter  the party (company) seeking to list as a corporation on a stock exchange property trusts  invest in different types of property specified in the trust deed; includes industrial, commercial and retail property pro-rata offer  a proportional offer to buy securities based on an investor’s current shareholding prospect theory  an alternative model of choice under risk premium  the amount paid by the buyer of a contract, such as an option or an insurance policy prospectus  document prepared by a company stating the terms and conditions of an issue of securities to the public present value  the current value derived by discounting a future cash flow by a required rate of return proxy  a party authorised to vote on behalf of a shareholder at a general meeting price risk  the impact of a change in interest rates on the value of assets and liabilities prudential liquidity  liquidity held above operational liquidity needs; may be prescribed by a regulator 706 vin22943_glo_691-711.indd 706 01/04/19 04:41 PM www.freebookslides.com Glossary prudential supervision  the imposition and monitoring of standards designed to ensure the soundness and stability of a financial system public liability insurance  covers injury or death of a third party due to negligence of a property owner or occupier public sector borrowing requirement  the total borrowing requirements of various levels of government and their instrumentalities public sector superannuation fund  a governmentsponsored fund established for the benefit of government employees public unit trust  investors purchase units in a trust; the pooled funds are invested in asset classes specified in the trust deed redemption yield  the total return (interest and capital gains) received if a security is held to maturity reference interest rate  a benchmark interest rate published daily and used for pricing variable-rate loans regression analysis  a statistical technique that determines the relationship between a dependent variable and independent variables regression coefficient  measures the responsiveness of a dependent variable to an independent variable reinvestment risk  a change in interest rates will also change future cash flows related to an investment or debt renounceable  a right that can be sold before it is executed publicly listed corporation  a company whose shares are listed and quoted on a stock exchange renounceable right  a right attached to a security that can be sold to a third party purchasing power parity (PPP)  where exchange rates adjust to ensure prices of the same goods are equal between countries re-pricing gap  rate-sensitive assets minus ratesensitive liabilities put bear spread  the simultaneous purchase and sale of put options; short put further out-of-the-money put option  gives the buyer the right, but not the obligation, to sell a specified commodity or financial instrument at a specified price and date quasi-equity  a security that has the attributes of both debt and equity quota  a government restriction on the amount of a specified good that may be imported into the country quoting two-way prices  the practice of a dealer quoting both bid and offer prices on a financial asset re-pricing gap analysis  monitoring interest rate sensitivities of assets and liabilities over specified planning periods repurchase agreement (REPO)  the Reserve Bank purchases eligible debt securities in order to provide the seller with same-day funds; REPO is reversed at a specified date resistance lines  higher price levels where an increase in supply halts a price rise responsible entity  the trustee and manager of a trust in Australia random walk hypothesis  each new share price change is independent of the previous share price retail market  financial transactions conducted with financial intermediaries mainly by individuals and small to medium-sized businesses rate of return  the financial benefit gained from investment of savings; expressed in percentage terms return line  a line drawn parallel to a trend line to create a trend channel rating symbols  represent a credit rating; S&P long-term ratings range from AAA to D and short-term from A-1 to D return on equity  operating profit after tax as a percentage of shareholders’ funds real estate investment trust (REIT)  managed funds that provide investors with the opportunity to invest in a range of property categories such as industrial, hotels and retail return or yield  the total financial benefit received (interest and capital gain) from an investment; expressed as a percentage real-time gross settlement (RTGS)  high-value payments system; transactions are settled immediately through exchange settlement accounts revolving facility  a rollover arrangement; as existing P-notes mature, new notes are issued and discounted red herring  a preliminary prospectus prepared by the lead manager right of foreclosure  the right of a lender to take possession and sell an asset to recover any amount owing on a loan redeemable preference shares  may be redeemed for cash at the expiry date right of perpetual succession  a corporation continues to operate regardless of changes in ownership 707 vin22943_glo_691-711.indd 707 01/04/19 04:41 PM www.freebookslides.com Glossary right shoulder  third rally and reaction in head and shoulders pattern semi-government securities (SEMIS)  long-term coupon securities issued by central borrowing authorities rights issue  the issue of additional shares to existing shareholders on a pro-rata basis semis  the term used to describe bonds issued by state government borrowing authorities in Australia risk  the possibility or probability that an actual outcome will vary from the expected outcome; uncertainty semi-strong form efficiency  all publicly available information is fully reflected in a share price risk component  the cost of the actual life insurance cover as determined by an actuary serial offering technique  each series tranche has the maturity and coupon terms set when the facility is established risk-free rate of return  the yield on a security issued by the government; zero default risk assumed rollover facility  an arrangement whereby a bank agrees to discount new securities over a specified period as the existing securities mature rollover fund  holds existing eligible termination payments within the regulated superannuation environment sale and lease-back arrangement  asset is sold to a lessor on condition it is leased back to the previous owner same-day funds  funds that not require clearing through the payments system; required for exchange settlement account secondary market  a market that facilitates the buying and selling of existing securities secondary market transaction  the buying and selling of existing financial securities; transfer of ownership; no new funds raised by issuer sectorial flow of funds  the flow of funds between surplus and deficit sectors in an economy; the business, financial, government, household and restof-the-world sectors secured debt  a debt instrument that provides the lender with a claim over specified assets if the borrower defaults securities  financial assets that are traded in a formal secondary market (e.g stock exchange) Securities and Exchange Commission (SEC)  the regulator of the securities markets in the USA securities portfolio  financial securities held by an institution for investment and trading purposes securitisation  non-liquid assets are sold into a trust; the trustee issues new securities; cash flows from the original securities are used to repay the new securities service fee  charged by a lender to offset ongoing loan account administration costs settlement risk  the possibility that one party to a financial transaction will not deliver value share market  a formal exchange that facilitates the issue, buying and selling of equity securities share options  the remuneration of a manager may include an option to purchase shares in the company at a specified price share price index  measures changes over time in the price of shares included in the index share price pattern  a graph over time of movements in a share price or a market index share price to net tangible assets ratio  current share price relative to the firm’s net tangible assets share purchase plan  an offer to existing shareholders to purchase a fixed dollar amount of new ordinary shares share split  a proportional division of the number of shares issued by a company shelf registration  registration with the SEC of a delayed or continuous debt issue short position  entering into a forward contract to sell an asset that is not held at that time short straddle  the simultaneous selling of a call option and a put option with a single exercise price short strangle  the simultaneous selling of a call option and a put option with equally out-of-the-money exercise prices short-call party  the writer (seller) of a call option short-term debt  a debt financing arrangement for a period of less than one year SIBOR  Singapore interbank offered rate: the average of rates at which selected banks in the Singapore market will lend to each other segmented markets theory  all bonds are not perfect substitutes; investors have different preferences when investing in either short- or longer-term bonds simple interest  interest paid on the original principal amount borrowed or invested sell-down provision  a clause in a loan contract that allows a lender to sell the debt to another party SMART  performance objectives should be specific, measurable, achievable, realistic and timely 708 vin22943_glo_691-711.indd 708 01/04/19 04:41 PM www.freebookslides.com Glossary sovereign risk  a risk that a foreign government will default on its obligations special-purpose vehicle  a trust established to hold securitised assets and issue asset-backed securities specific market risk  the risk that the value of a security will change due to issuer-specific factors spin-off  a situation where a part of a company is separated from the whole and begins an existence as an independent company spot transaction  locks in an exchange rate today for settlement and delivery in two business days from the date of the transaction spread  the points difference between bid and offer prices in a quote spread position  buying and selling of related, samedelivery-date contracts to benefit from price variances standard delivery  futures contract—settled by physical delivery of the specified asset standard deviation  a statistical measure of the dispersion of a set of data around a central point standardised approach to credit risk  provides risk weights to be applied to balance-sheet assets and off-balance-sheet items to calculate minimum capital requirement strong form efficiency  all publicly available information and private research is fully reflected in a share price structured finance  funding provided for major infrastructure projects structured products (SPs)  instruments that promise a rate of return based on the movement in the price of some asset subordinated debt  a long-term debt issue; holders’ claims are subordinated against all other creditors, but before equity holders subordinated junior debt  claims of these security holders are subordinated after all other creditors subparticipation  a lender retains a loan while transferring the right to receive interest and principal payments sub-prime mortgages  loans to borrowers that, under normal credit assessment standards, would not have the capacity to repay subscribers to an issue  agree to purchase some of the securities offered superannuation  savings accumulated by an individual to fund their retirement from the workforce standby facility  a contingency line of credit that is established with a financial institution superannuation guarantee charge (SGC)  the compulsory superannuation scheme operating in Australia stockbroker  acts as the agent for an investor in the buying and selling of stock-market securities support lines  lower price levels where an increase in demand halts a price fall stock liquidity  the percentage of a corporation’s shares available for trading on a stock exchange surplus units  savers or providers of funds; funds are available for lending or investment stock-market index  a measure of the price performance of the share market or a sector of the market swap contract  an agreement between two parties to swap future cash flows; interest rate swaps and currency swaps straddle  buying and selling of contracts with different delivery dates to benefit from price variances straight bond  a fixed-interest bond paying equal periodic coupons; principal repayable at maturity straight corporate bond  a long-term debt instrument paying a fixed-interest coupon; principal repayable at maturity straight eurobonds  a fixed-interest bond paying periodic coupons; principal repayable at maturity strategic asset allocation  a portfolio structured to meet an investor’s personal preferences strike price  the exercise price; the price specified in an option contract at which the option buyer can buy or sell strip of FRAs  a series of consecutive forward rate agreements over time swap rate  the fixed interest rate specified in a swap contract SWIFT  electronic system operated by global financial institutions that facilitates international financial transactions symmetrical triangles  a series of price fluctuations with each top and bottom smaller than the previous triangle syndicated loan  the provision of loan funds by a group of financiers for a single project system being down  occurs when payments by the official sector to the private sector are less than payments to the official sector system surplus  occurs when payments by the official sector to the private sector exceed payments to the official sector 709 vin22943_glo_691-711.indd 709 01/04/19 04:41 PM www.freebookslides.com Glossary systematic risk  exposures that affect the price of the majority of shares listed on a stock exchange systemic risk  the risk that the failure of an institution will adversely affect the market as a whole T + 2  settlement of a share transaction will occur in two business days tactical asset allocation  a portfolio structured to take account of a dynamic investment environment tariff  a charge levied by a government on imports into the country technical analysis  explains and forecasts price movements based on past price behaviour tender panel  a group of banks that agree to make a market in a particular security; quote bid and offer prices tender system  investors bid a price on government securities, thus setting the yield; allocated in order of lowest yields term deposits  funds lodged in an account for a pre­ determined period and at a specified fixed interest rate term loan  a loan advanced for a specific period, usually for a known purpose; may include a fixed interest rate or a variable interest rate term structure of interest rates  the relationship between interest rates and term to maturity for debt instruments in the same risk class term-life policy  life insurance cover for a fixed amount and a predetermined period terms currency  the second-named currency in an FX quote; used to express the value of the base currency the City  the term used to describe the financial centre within London third-party policy  policy covers only third-party vehicle or property damage third-party, fire and theft policy  policy covers only fire or theft of the insured vehicle, plus third-party vehicle or property damage Tier capital  additional capital that contributes to a bank’s financial strength time-pattern of cash flows  the frequency of periodic cash flows (interest and principal) associated with a financial instrument top-down approach  forecasts the overall global and domestic economic environment in which corporations operate total and permanent disablement insurance  insurance policy covering loss of limbs or total inability to resume an occupation tradable benchmark index  a narrow index generally used as the basis for pricing certain derivative products trade- and performance-related item  an undertaking provided by a bank to a third party promising payment under the terms of a specified commercial contract trade bill  a bill of exchange issued to finance a specific international trade transaction trade credit  a supplier provides goods to a purchaser with an arrangement for payment at a later date traders  buy and sell contracts, typically very short term, on their own account tranches  a larger issue of paper (debt) is broken up into smaller packages of securities with the same features and sold progressively over time transaction FX exposure  the risk that future foreign currency cash flows will vary due to exchange rate movements transferable loan certificates (TLCs)  a lender converts a loan into transferable certificates that have the same terms as the original loan translation FX exposure  the risk that the conversion and consolidation of foreign currency assets and liabilities will have an adverse impact on the balance sheet transparency  the level of information that is provided to market participants trauma insurance  a lump-sum payment made if a specified trauma event, such as a stroke, occurs Treasury bonds  medium- to long-term securities issued by the government; pay regular half-yearly interest, principal repaid at maturity Treasury division  responsible for balance-sheet funding, managing cash flows and financial risk management tod value transactions  an FX contract with settlement and delivery today Treasury notes (t-notes)  short-term discount securities issued by the government; face value payable at maturity tom value transactions  an FX contract with settlement and delivery tomorrow trust deed  document detailing the sources, uses and disbursement of funds in a trust tombstone  a notice placed in the financial press advising details of a completed issue of securities trust fund  managed funds established under a trust deed; managed by a trustee or responsible entity 710 vin22943_glo_691-711.indd 710 01/04/19 04:41 PM www.freebookslides.com Glossary trust indenture  appoints a qualified trustee and specifies a range of conditions designed to protect debt security holders two-way prices  the dealer quotes both a buy (bid) and a sell (offer) price on a currency variable-rate debt  the interest rate payable on a debt facility may vary from time to time vertical bear spread  combination options strategy; buy a put and sell a call with a higher exercise price uncertificated securities  electronic record of share ownership; original share certificate is not issued vertical bull spread  combination of option contracts with the same expiration date but different exercise prices underwriter  an institution that supports the issue of securities by a client and agrees to buy any securities not bought by investors vertical takeover  when the target company in a merger and acquisition operates in a business related to that of the takeover company underwriting banks  banks that agree to purchase any unsold notes at the issue and future rollover dates warrant  a financial instrument that conveys a right in the form of an option underwriting syndicate  promoters of an issue who agree to purchase paper that is not taken up by the tender panel warrant issuer  a third party, such as a bank, authorised by a stock exchange to write warrant contracts underwriting  a contractual undertaking to purchase securities that are not subscribed to by investors unit of the quotation  the first-named currency in an FX quote; one unit expressed in terms of another currency unit trusts  investors buy units issued by the trust; pooled funds invested (e.g equity trusts and property trusts) unlisted trust  to sell units, a unit holder must sell them back to the trustee after giving the required notice unpledged assets  assets of a company over which no interest has been conveyed to another party unsecured note  a corporate bond issued without any form of underlying security attached unsystematic risk  exposures that specifically impact on the share price of a particular corporation uptrend line  achieved by connecting the lower points of a rising price series USCP  United States commercial paper; discount securities USSR  a federation of Russia and a number of surrounding countries, dissolved in 1990 value at risk (VaR)  a statistical probability model that measures financial risk exposures based on historic observations weak form efficiency  share price changes are independent and not based on historic price data wealth channel  the effects of monetary policy changes on asset values weighted average issue yield  the average of the proportional yields bid on a bond issue whole-of-life policy  a life insurance policy that incorporates a risk component and an investment component, thus accumulating bonuses and a surrender value wholesale market  direct financial flow transactions between institutional investors and borrowers with-recourse factoring  the factor company can recover future accounts receivable bad debts from the firm working capital  finance required by a firm to fund its day-to-day operations World Bank  created along with the International Monetary Fund (IMF), the World Bank is an organisation of 189 member countries tasked with reducing poverty in developing countries World Federation of Exchanges  trade association representing 64 publicly regulated stock, futures and options exchanges Yankee bond  a foreign bond issued into the US capital markets; issued in USD by a foreign borrower value date  the FX contract date at which delivery of a currency and financial settlement occur yield  the total rate of return on an investment; comprises investment income and capital gains (or losses) vanilla swap  a swap of a series of fixed interest rate payments for variable interest rate payments yield curve  a graph, at a point in time, of yields on a particular security with a range of terms to maturity variable interest rate  an interest rate on a loan that changes from time to time; based on a specified reference interest rate yield to maturity (YTM)  the return received on an investment held until its maturity date; expressed as a percentage of the sum invested 711 vin22943_glo_691-711.indd 711 01/04/19 04:41 PM www.freebookslides.com Index A ACCC see Australian Competition and Consumer Commission (ACCC) acceptance (bill of exchange), 46 acceptor, 293 accounting ratios, 230 account service fees, 45 accounts receivable, 289 financing and factoring, 306–307 accumulated value of an annuity (future value), 283 accumulation funds, 105 accumulation index, 212 active FX strategy, 541 active investment, 194 ADIs see Authorised Deposit Taking Institutions ADRs see American Depositary receipts (ADRs) advanced internal ratings based approach (AIRB), 61 AFMA see Australian Financial Markets Association (AFMA) agency problem, 135 agent bank, 353 age pension, 101 AIRB see advanced internal ratings based approach (AIRB) All Ordinaries Index, 212 American Depositary receipts (ADRs), 366–367 American-type options, 579, 628 amortised loan, 317 amortised loan instalments, 49 annuity, 109 accumulated value, 276–277 present value, 272–276 annuity due, 272 AOFM see Australian Office of Financial Management (AOFM) APRA see Australian Prudential Regulation Authority (APRA) arbitrage, 437, 491, 671 arbitrageurs, 491 (futures market), 604–605 ARBL gap, 459 ascending triangles, 237 Asian financial crisis, 527 ASIC see Australian Securities and Investments Commission (ASIC) ask price, 496 asset allocation, 196 asset and liability portfolio restructuring, 474 asset and liability re-pricing, 474 asset management, 43 asset portfolio, asset price, future (option strategy) long asset and bearish, 646–647 short asset and bullish, 647–648 assets re-priced before liabilities principle (ARBL), 459 asset test, 184 asset transformation, 18–19 ASX see Australian Stock Exchange (ASX) ASX trade, 148, 574 ASX Trade 24, 148 ATO see Australian Taxation Office (ATO) at-the-money, 642 audit and review procedures (treasury FX operation), 544 Austraclear, 395 Australian Cash Distribution Exchange System, 406 Australian Competition and Consumer Commission (ACCC), 57 Australian Financial Markets Association (AFMA), 291, 318, 394 Australian Financial Services (AFS) licence, 371 Australian Office of Financial Management (AOFM), 393, 396, 413–414 Australian Paper Clearing System, 406 Australian Payments Network (AusPayNet), 406 Australian Prudential Regulation Authority (APRA), 107, 115, 407, 476 bank supervision, 42, 57 High Quality Liquid Assets (HQLA), 67–68 life insurance offices, 107 liquidity prudential standard, 69–70 operational risks, 62 superannuation funds, 102, 106–107 and VaR model, 64–65 Australian Securities and Investments Commission (ASIC), 57, 97, 152, 328, 371–372 Australian Stock Exchange (ASX), 82, 133, 137, 394 buying and selling of shares, 148–150 Clearing House Electronic ­ Sub-register System (CHESS), 149 listing rule requirements, 183–188 Australian Taxation Office (ATO), 104 authorisations (FX risk policy), 542 Authorised Deposit Taking Institutions (ADIs), 42, 56–57, 115 automatic teller machines (ATMs), 20, 49 availability period, 353 B back office (investment banks), 89 back office support, 541 bailment, 306 balanced growth funds, 97 balance of payments, 419 balance of payments current account, 227–228 bank-accepted bill, 292 bank assets, 51–52 bank bill, 46 bank bill swap rate (BBSW), 50, 290, 318–319 Bank for International Settlements (BIS), 59, 62, 486, 665 Banking Executive Accountability Regime (BEAR), 476 bank overdrafts, 290–291 bank regulation, 56 barrier option, 655–656 base currency, 495 Basel Committee on Banking Supervision, 58, 65–68 Basel II capital accord, 58 Basel II structural framework Pillar 1: credit risk component, 60–61 Pillar 3: market discipline, 66–67 Pillar 1: market risk component, 63–65 Pillar 1: operational risk component, 61–63 Pillar 2: risk management and supervision, 65–66 Basel III capital accord, 58 basis points, 64, 318, 352, 455, 666 basis risk (futures contracts), 456, 614 basis swap, 583, 666 basket warrants, 640 BBSW see bank bill swap rate (BBSW) bearer bonds, 360, 392 bearish, 646 bear market, 212 behavioural finance hypothesis, 245–249 beneficiary, 107 beta, 194 beta coefficient, 206 bid, 355, 598 bid and offer, 149 bid price, 496 bill acceptance liabilities, 46 bill line, 296 bill of exchange, 46, 292 bills market, 23 Bills of Exchange Act 1909 (Cwlth), 293 BIS see Bank for International Settlements (BIS) Black–Scholes option pricing model, 657–658 board of directors, 134, 540 bonds, 14, 49, 51, 325 straight corporate, 147 bonus share issues, 209 book-entry USCP, 365 borrowers in international money markets, 490 borrowing hedge, 605–607 forward rate agreement (FRA), 617–619 bottom-up approach, 230 breakout (reversal patterns), 239 broker, 16 budget deficit, 390 budget surplus, 390 building societies, 115 Bulk Electronic Clearing System, 406 bullet repayment, 361 bullish, 647 bull market, 212 business continuity management, 62 business continuity risk management, 77–82 business cycle, 419 business cycle peak, 421 business cycle trough, 421 business flotation, 170 business impact analysis, 571 business overheads insurance, 109 business risk, 166 C call bull spread, 650 call option, 144, 376, 579, 628 call or demand deposits, 45 cap, 644 capital adequacy, 569 capital adequacy standards, 57–58 capital budgeting, 162 capital gains, 198 capital guaranteed funds, 97 capital markets, 24–27 capital plus warrants, 640 capital risk, 569 capital stable funds, 97 capital structure, 201 capped warrants, 640 carded rate, 228 cash-flow timing, 474 cash management trusts (CMT), 98 cash rate, 400 cash settlement, 600–601, 680 CBOE see Chicago Board Options Exchange (CBOE) CBOT see Chicago Board of Trade (CBOT) CDS see credit default swaps (CDSs) CDS cash settlement, 680 CDS physical settlement, 680 CDS protection buyer, 679 CDS protection seller, 679 CDS reference entity, 679 central bank, 22–23, 489 central bank and exchange rates, 525–528 central borrowing authority, 399 centralised FX operation, 542 CFD see contract for difference (CFD) CGS see Commonwealth Government Securities (CGS) charting, 235–239 continuation patterns, 237–238 712 vin22943_idx_712-718.indd 712 01/11/19 10:26 AM www.freebookslides.com Index reversal patterns, 239 support and resistance lines, 236–237 trend lines, 235–236 CHESS sponsor, 150 Chicago Board of Trade (CBOT), 595, 597, 604, 636 Chicago Board Options Exchange (CBOE), 636 Chicago Mercantile Exchange (CME), 599, 608, 636 chief executive officer (CEO), 540 clean float, 489 clean price, 597 clearing house, 574, 599 Clearing House Electronic Sub-register System (CHESS), 149 close out, 600 CME see Chicago Mercantile Exchange (CME) CMT see cash management trusts (CMT) coincident indicators, 422 co-insurance clause, 110 Cold War, 350 collar, 645 collateral, 291 collateralised floating charge, 46 co-managers, 353 combined-options risk management strategies, 648–656 commercial banks, 22, 25, 28 Basel II, 59–68 Basel II structural framework Pillar 1: credit risk component, 60–61 Pillar 1: market risk component, 63–65 Pillar 1: operational risk component, 61–63 Pillar 2: risk management and supervision, 65–66 Pillar 3: market discipline, 66–67 Basel III, 67–68 call deposits, 45 capital adequacy standards, 57–58 commercial lending, 50–51 commitments, 52 corporate governance and ethics, 82–84 credit risk, 59 current account deposits, 44–45 debt liabilities, 46–47 foreign currency liabilities, 47 housing finance, 48–49 lending to government, 51 liquidity management, 69–70 loan capital, 47–48 main activities, 43–44 negotiable certificates of deposit, 45–46 off-balance sheet business, 52–55 other bank assets, 51–52 personal finance, 48–49 regulation and prudential supervision, 56–57 shareholders’ equity, 47–48 sources of funds, 44–48 term deposits, 45 commercial bills, 50, 292 advantages, 296–297 establishing financing facility, 295–296 features of, 292–294 flow of funds and financing, 294–295 commercial lending, 50–51 commercial paper, 23, 302 commercial property finance, 25 commitments, 53–54 commitment fee, 319, 352 commodity price index, 525 commodity warrants, 639 common stock, 11, 133, 171, 540 Commonwealth government borrowing requirement, 390 within financial year, 391 full financial year, 390–391 Commonwealth Government Securities (CGS), 22, 392–399 communication (FX management), 543 company-issued equity warrant, 179 company-issued option, 178 comparative advantage, 667 lowering net cost of funds, 670–671 comparative advantage net differential, 668 compounding interest, 228 compound interest accumulated value of annuity, 276–277 accumulation, 269–271 effective rates, 277–278 present value, 271–272 present value of annuity, 272–276 compound interest period, 504 comprehensive insurance, 111 compulsory superannuation, 103 compulsory third-party insurance, 111 confirmations, settlements and reconciliation, 542 conglomerate takeover, 91 consequential risks, 569 consumer price index (CPI), 124, 228, 401 contingency plan, 69 continuation patterns, 237 continuous disclosure, 151, 186–187 contract for difference (CFD), 143 contract note, 149 contractual savings institutions, 9 convertible bonds, 376 convertible note, 147, 178 convertible preference shares, 177 convexity of interest rate risk measurement, 470–473 corporate bond, 327 corporate bond market, 326 corporate debt market, 24–25 corporate governance, 82–84, 136, 187–188 corporate mission, 231 corporate superannuation fund, 103 corporations, 134 advantages, 135 disadvantages, 135–136 nature of, 134 corporations issuing equity in share market, 161 equity-funding alternatives for listed companies, 174–179 financing decision: equity, debt and risk, 166–169 initial public offering, 169–172 investment decision: capital budgeting, 163–166 listing business on stock exchange, 172–173 correlation, 195 correlation coefficients, 549 cost-benefit analysis, 572 counter-trade, 557 country risk, 368 coupon, 147, 327 coupon payment, 392 co-variance, 195 covered bonds, 325 covered option, 634–635 CPI see consumer price index (CPI) crawling peg, 488 credit card, 49 credit channel, 402 credit default swaps (CDSs), 678–680, 683–684 credit enhancements, 343, 365 credit foncier loan, 317 credit rating, 16, 304, 367 credit rating agency, 326, 367–370, 670 credit risk, 59, 569, 678 associated with swaps, 681–682 standardised approach, 74–77 credit risk component (Pillar 1, Basel II), 61–63 credit risk transformation, 19 credit unions, 116 credit watch, 369 cross-border lease, 336 cross-commodity hedging, 614–615 cross-currency swaps, 541, 584–586, 673–676 rationale for existence, 676–678 cross-rate, 497 crowding out, 25 crowding-out effect, 327, 391 crystallise, 327 cum-dividend share prices, 208 cumulative preference shares, 177 cumulative prospect theory, 247 currency demand for, 526 supply of, 527 currency diversification, 556 currency offsets, 557 currency swap, 54 current account deficit, 228 current exposure method, 61 current ratio, 201 custodial services, 342 D dark pools, 241 DAX (Germany), 212 day-to-day liquidity, 391 dealer, 16 dealer panel, 303 debentures, 25, 46, 147, 327–329 debenture trust deed, 328 debt, 12 see also international debt markets; medium-to long-term debt; short-term debt debt instruments, 12 debt liabilities, 46–47 debt servicing, 202–203 debt-to-equity ratio, 167–168 decentralised FX operation, 542 deep discount debentures, 328 default risk, 17, 438 defensive FX strategy, 541 deferred-interest debentures, 328 deferred repayment loan, 318 defined benefit fund, 105 definitive notes, 355 delisted, 173 delisting, 152 deposit insurance, 57 depository financial institutions, 8 depository share, 366 depreciation, 228 derivative(s), 12–13, 141, 596 derivative instrument, 12 derivative products, 458 derivatives and risk management forward contracts, 576–578 futures contract, 574–576 option contracts, 579–582 process, 570–573 swap contracts, 582–586 understanding risk, 567–569 derivatives market, 26 descending triangles, 237 detachable warrant, 179 direct credit substitutes, 53 direct finance, 350 benefits and disadvantages, 16–17 definition, 16 direct finance lease, 336 direct interest rate risk, 456 direct investment, 197 directors’ interests, 151 direct quote, 497 direct risks, 569 direct swap, 582, 666 dirty float, 489 disaster recovery planning process, 77–78 disaster recovery response process, 78–79 discount broker, 197 discounted debentures, 328 discounter, 294 713 vin22943_idx_712-718.indd 713 01/11/19 10:26 AM www.freebookslides.com Index discount securities, 23, 267 calculation discount rate, 301 where discount rate is known, 301 where issue price and yield are known, 299 where yield is known, 297–299 yield, 299–300 discount security pricing, 460 dishoarding, 426 diversified investment portfolio, 194 dividend, 11, 151 dividend imputation, 199 dividend reinvestment scheme, 138, 176–177 documentary letters of credit (DLCs), 53 domestic bond, 358 domestic economy, 225 Dow Jones Industrial Average (USA), 212 downtrend line, 236 drawer, 293 dual listing, 173 dummy variable, 529 duration, 465 duration of interest rate risk measurement, 464–470 E earnings attributable to ordinary shares, 167 earnings before interest and tax (EBIT), 203 earnings per share (EPS), 203 EBIT see earnings before interest and tax (EBIT) economic FX exposure, 539–540 economic indicators, 421, 454 economic recession, 391 economies of scale, 20 efficient market hypothesis, 243–245 EFTPOS see electronic funds transfer at point of sale (EFTPOS) electronic funds transfer at point of sale (EFTPOS), 20, 49, 406 electronic sub-register, 150 electronic trading, 240–241 eligible termination payment (ETP), 105 Elliott wave theory, 239 embargo, 526 embedded options, 124 endorser, 294 endowment warrants, 640 EPS see earnings per share (EPS) equilibrium exchange rate, 515–518 demand for currency, 515 supply of currency, 515–517 equity, 11–12 equity contracts, 54 equity-funded takeover, 176 equity market, 24 equity options, 638 equity trust, 99 escrow, 185 establishment fee, 291, 319 ethics, 82–84 ETP see eligible termination payment (ETP) EURIBOR, 584 euro, 361, 505 eurobond, 359 eurobond market calculating price of fixed-interest securities, 362–363 eurobond, 358–359 issue and trading, 359–360 types, 361–362 eurocommercial paper (ECP), 356 eurocurrency market medium-to long-term bank loans, 353 short-term bank advances, 352 standby facilities, 352–353 euro floating rate note (FRN), 362 euromarket instruments, 25 euromarkets, 47, 349–351 euromarket transaction, 349 euro medium-term notes, 357–358 euronote issuance facility (NIF), 354–355 euronote market, 354–357 calculating price of NIF and ECP, 356–357 eurocommercial paper (ECP), 356 issuance facility, 354–355 European Central Bank (ECB), 33 European Monetary Union (EMU), 505–506 European-type options, 579, 628 eurozone crisis, 33 exception report, 543 exchange rates, 515 measuring sensitivity to changes in economic variables, 528–530 movements, influencing factors central bank or government intervention, 525–528 equilibrium, 515–518 expectations, 524–525 relative inflation rates, 518–520 relative interest rates, 521–523 relative national income growth rates, 520–521 exchange rate regimes, 487–488 exchange settlement accounts, 407–408 exchange-traded contracts, 142, 574, 597 exchange-traded funds (ETFs), 142–143 ex-dividend share prices, 208 exercise price, 145, 579, 628 expectations theory, 433–435, 447–449 expected return of a portfolio, 195 expected utility, 246 experimental economics, 246 export(s), 225 Export Finance and Insurance Corporation Act 1991 (Cwlth), 117 export finance corporations, 116–117 exposure management systems definition, 456 forecasting, 457 management reporting, 458 strategies and techniques, 457–458 exposure reporting systems (FX transactions), 543 F factor company, 307 factoring, 307 Federal Reserve, 33 final basis risk, 614 finance companies, finance companies and general financiers sector structure, 114 sources and uses of funds, 113–114 finance lease, 335 Financial Claims Scheme (FCS), 57 financial institutions Australian assets, financial instruments, debt, 12 derivatives, 12–13 equity, 11–12 financial markets capital markets, 24–27 corporate debt market, 24–25 derivatives market, 26 direct finance, 16 equity market, 24 flow of funds relationship, 27–28 foreign exchange market, 25–26 government debt market, 25 intermediated finance, 17–20 matching principle, 14 money markets, 20–23 retail markets, 20 wholesale markets, 20 financial news (case study), 28–29, 71–72, 117–118, 154–155, 180–181, 215–216, 249–250, 279–280, 337–338 financial risk, 167, 568–569 Financial Sector (Shareholdings) Act 1998 (Cwlth), 71 financial system, 6, 419, 420 financial system liquidity, 394 financing decision, 166 fiscal constraint, 390 fixed charge, 327 fixed-coupon treasury bonds, 413–414 fixed interest rate, 318 fixed interest securities calculation bond price/yield relationship, 330 price of fixed-interest bond at coupon date, 330–332 price of fixed-interest bond between coupon dates, 332–333 fixed interest security pricing, 461 fixed-interest trust, 100 fixed-term loan, 49 flags (continuation patterns), 238 flash trading, 241 floating charge, 327 floating exchange rate, 487, 515 floating rate note (FRN), 147 FRN call option, 362 FRN put option, 362 floor, 644 floor plan finance, 306 flotation of a business, 170 flow of funds definition, financial markets, relationship, 27–28 forecasting interest rate risk, 457 forecasting share price movements, 223 behavioural finance hypothesis, 245–249 efficient market hypothesis, 243–245 electronic trading, 240–241 fundamental analysis: bottomup approach, 230–232 fundamental analysis: top-down approach, 224–230 random walk hypothesis, 242–249 technical analysis, 232–240 foreign bond, 358–359 foreign currency, hedging a transaction, 608–609 foreign currency liabilities, 47 foreign exchange internal hedging techniques, 555–558 market-based hedging techniques, 551–554 measuring transaction exposure, 545–551 risk policy formulation, 540–544 foreign exchange channel, 402 foreign exchange contracts, 54 foreign exchange (FX) markets, 25–26 equilibrium exchange rate, 515–518 European Monetary Union (EMU), 505–506 exchange rate regimes, 487–488 factors that influence movements, 518–528 forward market quotations, 500–504 operation, 492–493 participants, 488–491 spot and forward transactions, 493–494 spot market quotations, 494–499 foreign exchange risk, 226, 350, 368, 569 714 vin22943_idx_712-718.indd 714 01/11/19 10:26 AM www.freebookslides.com Index forward contract(s), 13 forward foreign exchange contracts, 578 forward rate agreements, 576–578 forward discount, 501 forward exchange contract, 54, 502, 551–553, 578 forward exchange rate, 500 forward market quotations forward points and forward exchange contracts, 500–502 real-world complications, 502–504 forward points, 500–502 forward premium, 501 forward rate agreement (FRA), 54, 458, 576, 615–619 using for borrowing hedge, 617–619 forward transactions (FX markets), 493–494 FRA agreed rate, 576, 615, 616 FRA contract period, 576, 616 franked dividends, 199 franking credit, 199 FRA settlement date, 576, 616 FRN call option, 362 FRN put option, 362 front office, 89 FTSE (UK), 212 full-service advisory broker, 197 full-service lease, 335 fully fluctuating basis, 291 fundamental analysis, 194 bottom-up approach, 230–232 definition, 194 top-down approach, 224–230 funds commercial banks, sources of, 44–48 futures contracts, 12, 144–145, 574–576 hedging using, 596–597 main features of transactions, 597–561 options, 637–638 futures market instruments, 601–602 futures market participants arbitrageur, 604–605 hedgers, 603 speculators, 603–604 traders, 604 futures transactions closing out contract, 600 contract delivery, 600–601 margin requirements, 599–600 orders and agreement to trade, 598–599 FX brokers, 489 FX dealers, 489 FX dealing room, 492, 541 FX markets, 488, 515 FX movements, 530–531 FX open position, 543 FX risk management, 558 FX smoothing, 526 G G-10, 58 gearing ratio, 168 general financiers, 9, 113–114 general insurance offices, 110–112 general market risk, 63 global financial crisis (GFC), 32, 56, 65, 327, 390–391, 527, 569, 639 global industry classification standard (GICS), 212 global notes, 355 government debt market, 25 government intervention and exchange rates, 525–528 grey market, 360 gross domestic product, 419 grossed-up amount, 199 H Hang Seng (Hong Kong), 212 hard currency, 506 head, 239 head and shoulders pattern, 239 hedge, 142, 350 hedge funds, 112–113 hedgers (futures market), 603 hedging risk management using futures hedging against volatility, 610–611 hedging foreign currency transaction, 608–609 hedging the cost of funds (borrowing hedge), 605–607 hedging value of share portfolio, 609–610 hedging yield on funds (investment hedge), 607–608 techniques, 546 using futures basis risk, 614 cross-commodity hedging, 614–615 margin payments, 613 standard contract size, 612–613 high-frequency trading (HFT), 241 High Quality Liquid Assets (HQLA), 67 High Value Clearing System, 406 high-value payments, 406 horizontal takeover, 91 host bond, 376 hostile takeover, 92 house and contents insurance, 110–111 housing finance, 48 HQLA see High Quality Liquid Assets (HQLA) humped yield curve, 432, 433, 435 hybrid securities, 11, 368 I implicit forward interest rates, 447–449 income effect on interest rates, 420 income protection insurance, 109 index funds, 195 index warrants, 639 indicators of economic activity, 421–422 indirect interest rate risk, 456 indirect investment, 198 indirect quote, 497 industry sectors, 224 industry superannuation fund, 103 inflation, 8, 226 inflation component, 200 inflation effect on interest rates, 420 inflation rates, exchange rates and, 518–520 information memorandum, 328 information role of stock exchange, 150–151 infrastructure fund, 144 initial basis risk, 614 initial margin, 574, 599 initial public offering (IPO), 138, 170 inscribed stock, 360, 392 instalment receipt, 171 instalment warrants, 640 institutional investor, 20 inter-bank market, 23 interest capitalised, 334 interest cover, 319 interest cover ratio, 202 interest rate(s) borrowing and lending, 503 different year conventions, 503 implicit forward, 447–449 risk structure, 441–443 term structure, 431–440 interest rate determination loanable funds approach to, 423–431 macroeconomic context of, 419–423 interest rate futures contracts, 54 interest rate market, 146 interest rate options contracts, 54 interest rate parity, 500 interest rate risk(s), 227, 455, 569 interest rate risk measurement, 455–456 assets re-priced before liabilities principle (ARBL), 459 convexity, 470–473 duration, 464–470 exposure management systems, 456–458 management techniques, 473–475 external, 475 internal, 474–475 pricing financial securities, 460–462 re-pricing gap analysis, 462–464 interest rate sensitivity, 462 interest rates, exchange rates and, 521–523 interest rate swap, 583–584, 666–669 credit and settlement risk associated with, 681–682 rationale for existence, 670–673 intermediated finance benefits, 18 definition, 16 intermediated swap, 582, 666 internal hedging techniques, 555–558 counter-trade and currency offsets, 557 creating natural hedge, 555–556 currency diversification, 556 invoicing in home currency, 555 leading and lagging FX transactions, 556–557 mark-ups, 557 internal rate of return (IRR), 165–166 internal ratings-based approach to credit risk, 61 international debt markets, 348–349 credit rating agencies, 367–370 eurobond market, 357–363 eurocurrency market, 351–354 euromarkets, 349–351 euronote market, 354–357 international economies, 225 International Monetary Fund (IMF), 28 in-the-money, 642 intrinsic value, 641–642 inventory finance, 306 inverse or negative yield curve, 433, 434 inverse relationship, 456 investment banks, cash management trusts (CMT), 98 managed funds, 94–98 mergers and acquisitions, 91–94 off-balance-sheet business, 90–91 public unit trusts, 99–101 sources of funds and uses of funds, 89–90 investment component, 108 investment decision, 163 investment grade, 368 investment hedge, 607–608 investment property finance, 49 investors in international money markets, 490 investors in the share market, 192 buying and selling shares, 196–198 financial performance indicators, 201–206 pricing of shares, 206–211 published share information, 211–215 share-market investment, 193–196 stock-market indices, 211–215 taxation, 198–200 invoice, 289 Issuers and Acquirers Community (IAC), 406 issue-specific credit rating, 368 715 vin22943_idx_712-718.indd 715 01/11/19 10:26 AM www.freebookslides.com Index J M junk bond market, 366 maintenance margin call, 574 managed float, 487 managed funds, 94–98 balanced growth funds, 97 capital guaranteed funds, 97 capital stable funds, 97 managed growth funds, 97 sources and uses of funds, 95–96 managed growth funds, 97 management group, 359 management reporting, interest rate risk, 458 management structure (FX risk policy), 541–542 margin, 290 marginal rate of tax, 199 margin payments (futures contracts), 613 marked-to-market, 574, 600 market-based hedging techniques forward exchange contracts, 551–553 money-market hedge to cover FX risk, 553–554 market capitalisation, 141, 212 market convention, 262 market indicator index, 212 market liquidity, 141 market-makers, 360 market order, 598 market-rate-related contracts, 54 market risk, 59 mark-to-market, 61 mark-ups, 557 matched swap, 668 matching principle, 14 mathematics of finance, 260 compound interest, 269–271 simple interest, 261–268 maturity structure, 457 maturity transformation, 19 mean, 549 medium-term note (MTN), 357–358, 377–378 medium-to long-term debt, 316 bond market, 325–329 calculations: fixed interest securities, 330–333 debentures, 327–329 fully drawn advances, 317–321 leasing, 333–337 mortgage finance, 322–324 subordinated debt, 329 term loans, 317–321 unsecured notes, 327–329 memorandum of information, 176 mergers and acquisitions, 91–94 middle office, 89 MINIs, 639 modern portfolio theory, 231 monetary channel, 402 monetary policy, 8, 22–23, 227, 400–403, 455 impacts on financial system liquidity, 404–405 open market operations, 403–404 money-laundering transaction, 392 money-market hedge, 553–554 K kangaroo bonds, 359 L lagging, 556–557 lagging indicators, 422 LCR see Liquidity Coverage Ratio (LCR) leading, 556 leading indicators, 421 lead manager, 303, 353 lease, 50 lease arrangements, 25 lease manager, 337 leasing, 123, 333–334 structures, 336–337 types, 334–336 leasing guarantee, 336 left shoulder, 239 lending to government, 51 LEPO see low-exercise-price options (LEPO) lessee, 333 lessor, 333 leveraged finance lease, 336–337 liability diversification, 457 liability management, 19, 43–44 LIBOR, 291, 318, 319, 352, 584 life insurance offices, 107 policy types, 108–109 limited liability company, 134, 171 limited recourse lending, 123 limit order, 598 line fee, 319 lines of credit, 334 linked exchange rate regime, 488 liquidation, 11, 334 liquidator, 151 liquidity, 7, 69, 201–202 Liquidity Coverage Ratio (LCR), 67 liquidity effect on interest rates, 420 liquidity management strategy, 69 liquidity premium, 438 liquidity premium theory, 438–440 liquidity risk, 569 liquidity transformation, 19–20 liquid ration, 202 listed trust, 100 listing rules, 151, 173 loanable funds demand for, 425 equilibrium in market, 427–428 expected increase in level of economic activity, 428–429 inflationary expectations, 429–430 supply of, 426–427 loan capital, 47–48 loan covenants, 168, 319–320 loan-to-valuation ratio, 76, 323 London Stock Exchange, 137 long-call party, 629 long position, 491, 599 long straddle, 653–654 low-exercise-price options (LEPO), 638–639 money markets, 20–23, 267, 292 money-market submarkets, 22–23 money supply, 426 mortgage, 48, 322 mortgagee, 322 mortgage finance, 322–324 calculating instalment on loan, 323–324 securitisation, 324 mortgage insurance, 323 mortgage originators, 49, 323 mortgage trust, 100 mortgagor, 322 motor vehicle insurance, 111 moving-averages model (MA), 233 MTN tap approach, 358 mutual funds, 94 mutually exclusive projects, 166 N naked call option, 635 naked warrant, 376 NASDAQ, 133, 148 national income growth rates, exchange rates and, 520–521 natural foreign currency hedge, 351 natural hedge, 547 neckline, 239 negative correlation, 195, 549 negative covenants, 320 negative yield curve, 433 negotiable certificates of deposit (CDs), 23, 45–46, 305 negotiable debt instrument, 12 net cash flows, 546–548 net lease, 335 net present value (NPV), 163–165 Net Stable Funding Ratio (NSFR), 67 net stable funding ratio (NSFR), 288 new float, 138 new payments platform (NPP), 406, 410–411 news analytics, 240 New York Stock Exchange (NYSE), 133, 240 Nikkei 225 (Japan), 212 no liability company, 134, 171–172 nominal rate of interest, 228, 523 non-bank financial institutions, 88 building societies, 115 credit unions, 116 export finance corporations, 116–117 finance companies and general financiers, 113–114 general insurance offices, 110–112 hedge funds, 112–113 investment banks, 89–94 life insurance offices, 107 superannuation funds, 101–106 non-completion covenants, 125 non-conventional cash flows, 166 non-executive board members, 71 non-notification basis, 307 non-recourse lending, 123 non-renounceable right, 175 normal or positive yield curve, 434 notification basis, 307 notional principal amount, 583, 664 novation, 375, 599 NPV decision rule, 164 NSFR see Net Stable Funding Ratio (NSFR) NYSE see New York Stock Exchange (NYSE) O objectives and policies, 134, 540 obligor, 367 off-balance sheet business, 44, 52–53 commitments, 53–54 direct credit substitutes, 53 foreign exchange contracts, 54 interest rate contracts, 54 market-rate-related contracts, 54 trade-and performance-related terms, 53 volume of, 54–55 offer, 355, 597 offer price, 496 official interest rate, 401 official reserve assets, 489 on-exchange transactions, 394 open market operations, 403–404 operating account, 290 operating FX exposure, 539 operating lease, 334–335 operational liquidity, 394 operational risks, 61 option(s) company-issued, 178 cost-minimisation strategy, 644–645 futures contracts, 637–638 nature of, 628–629 profit and loss payoff profiles, 629–635 call option profit and loss payoff profiles, 629–632 covered and naked option, 634–635 put option profit and loss payoff profiles, 632–634 option contracts, 13, 144–145, 579–582, 628 call option profit and loss payoff profiles, 580–581 premium, factors effecting, 641–645 cap, floor and collar: cost-minimisation strategy, 644–645 interest rate levels, 644 intrinsic value, 641–642 price volatility, 642–643 time value, 642 put option profits and loss payoff profiles, 581–582 option risk management strategies combined-options, 648–656 single-option, 645–648 options market, 636–641 Australian, 637–640 international, 636–637 ordinary share, 11, 133, 171, 540 716 vin22943_idx_712-718.indd 716 01/11/19 10:26 AM www.freebookslides.com Index original exposure method, 61 out-clause, 170 out-of-the-money, 642 outright forward purchase agreements, 54 overdraft, 50 overdraft facility, 14, 290 overseas currency account, 556 over-the-counter contract, 142, 552, 615, 618 over-the-counter markets, 640 over-the-counter transactions, 394 P participating banks, 353 participating preference shares, 177 passive investment, 195 pay anyone, 406 payee, 293 paying agents, 362 payments system, 406–407 exchange settlement accounts, 407–408 real-time gross settlement, 408 repurchase agreements (repos), 409 pennants (continuation patterns), 238 performance benchmark index, 212 performance evaluation (FX management), 543–544 performance guarantees, 53 physical market, 141, 579, 596, 628 physical settlement, 680 Pillar 1, 60 placement, 138, 175 point, 496 pole (pennants and flags), 238 policyholder, 107 portfolio structuring, portfolio variance, 195 positive correlation, 195, 549 positive covenants, 320 positive yield curve, 432 posted rate (euronotes), 355 preference share, 11, 147, 174 convertible, 177 cumulative, 177 non-convertible, 177 non-cumulative, 177 non-redeemable, 177 participating, 177 redeemable, 177 premium, 107, 145, 579, 629 present value, 163, 465 price-maker, 496 price risk, 456 price series, 232 price to earnings ratio (P/E), 204 pricing financial securities, 460–462 primary market, 138 primary market transactions, 393–394 prime rate, 290, 318 principal, 261 private equity market, 153–154 product controls, 572 profitability, 203 profit and loss payoff profiles, 580, 629–635 profit test, 184 program trading, 240 project completion, 123 project finance, 121–123 project sponsors, 122 promissory notes (P-Notes), 302, 354 establishing program, 303 non-underwritten issues, 304 underwritten issues, 304 promoter, 170 property trusts, 99 pro-rata offer, 174 prospect theory, 247 prospectus, 139, 170, 328 protection buyer, 679 protection seller, 679 proxy, 171 prudential liquidity, 394 prudential supervision, 56 commercial banks, 56–57 public liability insurance, 111 publicly listed corporation, 134, 169, 540 public sector borrowing requirement, 425 public sector superannuation fund, 103 public unit trusts, 99–101 purchasing power parity (PPP), 519–520, 533–535 put bear spread, 652 put option, 144, 579, 628 Q quasi-equity, 329 quite bearish, but with some risk of a price rise, 652–653 quite bullish, but with some risk of a price fall, 649–651 quota, 526 quoting two-way prices, 358 R random walk hypothesis, 243 rate of return, rating symbols, 368 RBA see Reserve Bank of Australia (RBA) real estate investment trust (REIT), 144 real-time gross settlement (RTGS), 408 redeemable preference shares, 177 redemption yield, 395 red herring, 359 reference entity, 679 reference interest rate, 50, 290, 318, 352 reference rate, 576 regression analysis, 528 regression coefficient, 529 regulation commercial banks, 56–57 stock exchange, 152–153 superannuation funds, 106 reinvestment risk, 455 renounceable, 210 renounceable right, 175 re-pricing gap analysis, 462–464 repurchase agreements, 54 Reserve Bank Information and Transfer System (RITS), 22 Reserve Bank of Australia (RBA), 22, 56, 400, 402, 406–408, 443–444 resistance lines, 236 responsible entity, 94 retail markets, 20 retail superannuation funds, 104, 112 return line, 236 return on equity, 203 return or yield, reversal patterns, 239 revolving credit, 352 revolving facility, 303 right of foreclosure, 322 right shoulder, 239 rights issue, 138, 174 pro-rata, 210–211 risk, 7, 166, 205–206, 567 risk component, 108 risk-free rate of return, 441 risk management internal hedging techniques, 555–558 market-based hedging techniques, 551–553 risk management and supervision (Pillar 2, Basel II), 65–66 risk management using hedging hedging against volatility, 610–611 hedging foreign currency transaction, 608–609 hedging the cost of funds (borrowing hedge), 605–607 hedging value of share portfolio, 609–610 hedging yield on funds (investment hedge), 607–608 risk structure of interest rates, 441–443 risks using futures contracts for hedging basis risk, 614 cross-commodity hedging, 614–615 margin payments, 613 standard contract size, 612–613 RITS see Reserve Bank Information and Transfer System (RITS) rollover facility, 50, 295 rollover fund, 105 RTGS see real-time gross settlement (RTGS) S sale and lease-back arrangement, 335 same-day funds, 408 Samurai bonds, 359 SEC see Securities and Exchange Commission (SEC) secondary market, 267, 356, 394–395 sectorial flow of funds, 27 secured debt, 12 securities, 16 Securities and Exchange Commission (SEC), 328, 364 securities portfolio, 69, 394 securitisation, 9, 10, 25, 49, 324, 341–344, 457 segmented markets theory, 435–437 self-managed superannuation funds, 104–105 sell-down provision, 375 semi-government securities (SEMIS), 400 semis, 325 semi-strong form efficiency, 244 serial offering technique, 358 service fee, 319 settlement risk, 150, 682 shareholders’ equity, 47–48 share options, 136 share portfolio, hedging value of, 609–610 share price, 203–205 share price index, 212 share price movements, forecasting behavioural finance hypothesis, 245–249 efficient market hypothesis, 243–245 electronic trading, 240–241 fundamental analysis: bottomup approach, 230–232 fundamental analysis: top-down approach, 224–230 random walk hypothesis, 243 technical analysis, 232–240 share price pattern, 232 share price to net tangible assets ratio, 204 share purchase plan, 175 shares bonus issue, 209 buying and selling, 196–198 cum-dividend and ex-dividend prices, 208 electronic trading, 150–151, 197 investment in, 193–196 preference, 11, 177 pricing of, 206–211 published information, 211–215 splits, 209–210 taxation, 198–200 share splits, 209–210 shelf registration, 366 short-call party, 632 short position, 491, 600 short straddle, 654–655 short strangle, 655 short-term bank advances, 352 short-term debt, 288, 289 accounts receivable financing and factoring, 306–307 bank overdrafts, 290–291 calculations: discount securities, 297–299 717 vin22943_idx_712-718.indd 717 01/11/19 10:26 AM www.freebookslides.com Index short-term debt—Cont commercial bills, 292–297 inventory finance, 306 negotiable certificates of deposit, 305 promissory notes, 302–305 trade credit, 289–290 SIBOR, 352, 584 simple interest accumulation, 262–263 calculation of yields, 266 holding period yield, 267–268 present value, 263–265 single-option risk management strategies, 645–648 SMART performance objectives, 544 Society for WorldWide Interbank Financial Telecommunications (SWIFT), 486 sole purpose test, 106 sovereign debt crisis, 33 sovereign risk, 368 S&P 500 (USA), 212 SPAN see Standard Portfolio Analysis of Risk (SPAN) S&P/ASX 200 (Australia), 212 S&P/ASX 200 Index, 619–620 S&P Dow Jones Indices, 212 special-purpose vehicle (SPV), 324, 341 specific market risk, 63 speculative transactions, 490–491 speculators (futures market), 603–604 spin-off, 91 spot market quotations asking for, 494–495 calculating cross-rates, 497–498 transposing, 497 two-way quotations, 495 spot quotations, 497 spot transactions (FX markets), 493–494 spread, 496 standard contract size (futures contracts), 612–613 standard delivery, 600–601 standard deviation, 548, 549 standardised approach to credit risk, 61 Standard & Poor’s credit rating definitions, 379–381 Standard Portfolio Analysis of Risk (SPAN), 599 standby facility, 352–353 state government securities, 399–400 stockbroker, 197 stock exchange, 137–138 information role, 150–151 interest rate market role, 146 managed product and derivative product roles, 141–146 primary market role, 138–139 secondary market role, 140–141 stock exchange, 152–153 trading and settlement roles, 150–151 stock liquidity, 212 stock-market index, 211 stock-market indices, 211–215 straight bond, 365, 392 straight corporate bond, 147 straight eurobonds, 361 Straits Times (Singapore), 212 strategic asset allocation, 196 strike price, 579, 628 strip of FRAs, 618 strong form efficiency, 244 structured finance, 124–125 subordinated debt, 25, 329 subordinated junior debt, 124 subparticipation, 375 sub-prime mortgages, 32 subscribers to an issue, 359 superannuation, 101 superannuation funds accumulation funds, 105 Australian assets, 102 defined benefit funds, 105 regulation, 106 sources of funds, 101–106 superannuation guarantee charge (SGC), 103 Superannuation Industry (Supervision) Act 1993 (Cwlth), 106 supply of loanable funds, 426–427 support lines, 236 surplus units, swap contracts, 13 cross-currency swaps, 584–586 interest rate swaps, 583–584 swap rate, 583 SWIFT see Society for WorldWide Interbank Financial Telecommunications (SWIFT) symmetrical triangles, 237 syndicated loans, 123, 353 systematic risk, 194, 231 system being down, 405 system liquidity, 22–23 system surplus, 405 T T + 2, 150 tactical asset allocation, 196 takeover issues, 176 tariff, 526 taxation income tax, Australia, 199 selling of shares, 200 share investment, 192–193 technical analysis, 194 charting, 235–239 definition, 194 moving-averages models, 232–240 techniques, interest rate risk, 473–475 tender panel, 355 tender system, 393 term deposits, 45 term-life policy, 108 term loans, 25 interest calculation, 320–321 loan covenants, 319–320 structures, 317–319 terms currency, 495 term structure of interest rates, 433, 457 expectations approach versus segmented markets approach, 437–438 expectations theory, 433–435 segmented markets theory, 435–437 terrorist attacks, 530–531 third party, fire and theft policy, 111 third-party policy, 111 Tier capital, 60 Tier capital (lower), 60 Tier capital (upper), 60 time-pattern of cash flows, time value of options, 642 tod value transactions, 494 tombstone, 360 tom value transactions, 494 top-down approach, 224 total and permanent disablement insurance, 109 tradable benchmark index, 212 trade-and performance-related terms, 53 trade bill, 292 trade credit, 289–290 traders (futures market), 604 tranches, 356 transaction FX exposure, 539, 545 currency correlations, 549–551 currency variability, 548–549 net cash flows, 546–548 transferable loan certificates (TLCs), 376 translation FX exposure, 539 transparency, 187 trauma insurance, 109 Treasury bond(s), 51, 392 Treasury bond pricing, 395–396 treasury division, 542 Treasury notes (T-notes), 51, 392, 396–397 pricing, 397–398 trend lines, 235–236 triangles (continuation patterns), 237 trust deed, 94 trust fund, 94 trust indenture, 364 two-way FX quotations, 503 two-way prices, 489, 496–497 U uncertificated securities, 149 underwriter, 90, 359 underwriting, 170 underwriting banks, 354 underwriting facilities, 54 underwriting syndicate, 304 unit of the quotation, 495 unit trusts, unlisted trust, 100 unpledged assets, 327 unsecured note, 46 unsecured notes, 25, 327–329 unsystematic risk, 194, 231 uptrend line, 236 USA, markets in, 364–367 US commercial paper (USCP), 291, 364–365, 584 US dollar (USD), 349, 350 US foreign bonds, 358–359, 365–366 US medium-term notes, 377–378 US Securities and Exchange Commission (SEC), 371 USSR, 350 V value at risk (VaR), 64 value date, 493 vanilla swap, 583, 666 variable interest rate, 318 variable-rate debt, 667 venture capital, 91 verbal quotations, 495 vertical bear spread, 651 vertical bull spread, 649 vertical takeover, 92 very bearish about future price of asset, 651–652 very bullish about future price of asset, 649 volume of off-balance-sheet business, 54–55 W wages growth, 229 warrant, 145, 376, 639–640 warrant issuer, 145 weak form efficiency, 244 wealth channel, 402 weighted average issue yield, 393 whole-of-life policy, 108 wholesale markets, 20 with-recourse factoring, 307 working capital, 125 World Federation of Exchanges, 138 Y Yankee bonds, 359, 365 yield, 264, 431 calculation of, 266 holding period, 267–268 to maturity, 267 yield curve, 433, 447–449 Z zero-coupon debentures, 328 718 vin22943_idx_712-718.indd 718 01/11/19 10:26 AM ... technology and competition has encouraged enormous innovation and change within financial institutions, instruments and markets Think of a financial system as a number of financial institutions and markets. .. companies and unit trusts The financial system and financial institutions A financial system comprises a range of financial institutions, financial instruments and financial markets which interact to... supply and demand 1.1 LEARNING OBJECTIVE 1.1 Understand the basic frameworks that underlie the facts that characterise financial institutions, financial instruments and financial markets Theory and