Objectives <ul><li>At the end of the session you will be able to  </li></ul><ul><li>Explain general banking operation </li...
Why do Banks exist? <ul><li>To Provide Financial products and Services </li></ul>
Who are clients Banks Corporate Individuals Deutsche Bank Citibank ABN Amro Deutsche Asset Management Fund Managers Multin...
Banking as a Whole Clients <ul><ul><li>Includes Auto Finance, Consumer Banking, Home Finance, Insurance and Small Business...
International Banking  Locations North America  Latin America  EMEA Asia Pacific
Banking and Banking operations Bank is a commercial institution licensed as a receiver of deposits.  Banks  are mainly con...
Role of Banks <ul><li>Intermediary role between lenders and borrowers </li></ul><ul><li>Lenders – Deposits funds with Bank...
Different types of Banks Types of Banks Central Bank (RBI) Non Banking Finance Companies (NBFCs) Commercial Banks Term Fin...
Broad Categories <ul><li>Retail Banking </li></ul><ul><li>Whole Sale Banking </li></ul>
<ul><ul><li>Accepting deposits from Public </li></ul></ul><ul><ul><li>Lending money to public </li></ul></ul><ul><ul><li>R...
Capital Markets Overview <ul><li>Markets  – A place where exchange of goods and services happen </li></ul><ul><li>Capital ...
Financial Markets
<ul><ul><ul><li>Regulator </li></ul></ul></ul><ul><ul><ul><li>Underwriters </li></ul></ul></ul><ul><ul><ul><li>Merchant Ba...
SEBI – Securities Board of India SEC – Securities & Exchange commission (USA) FSA – Financial Services Authority (UK) Capi...
<ul><li>Underwriter </li></ul><ul><ul><li>Who underwrites the issue in case of under-subscription; takes the stock in its ...
<ul><li>Brokers </li></ul><ul><ul><li>An individual or firm that charges a fee or commission for  executing buy and sell o...
Custodian An agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual fund's, ...
<ul><li>Depositories </li></ul><ul><li>An institution which facilitates the clearing of securities between the stock excha...
<ul><li>Market Participants </li></ul><ul><li>Various persons / entities that indulge in buying & selling Examples: </li><...
<ul><li>Primary Market   </li></ul><ul><li>Sell (float) new stocks and bonds to the public for the first time. In the prim...
Banking Treasury Products Foreign Exchange <ul><li>What is an FX trade </li></ul><ul><li>How does it work </li></ul><ul><l...
Products:  Foreign Exchange Definition: Buying (or selling) of a currency and paying for it with another at an agreed pric...
Products:  Foreign Exchange Trade Date Receipt Instructions Payment Instructions 2 Counterparties Broker Booked Right Way ...
Different Trades <ul><li>Spot trade:  Value date = trade date + 2 </li></ul><ul><li>Cash trade:  value date = trade date <...
Products:  Foreign Exchange Example BMW Munich Gear Box Supplier USA Citibank Supplies gear boxes at agreed price. BMW nee...
Speculation Example JPMC Microsoft USA Microsoft speculates that GBP price will increase from $1.7 to 1.9 in 3 months time...
Currencies What currencies do you know? Have a name: Eg United States Dollar, Japanese Yen Have a 3 figure code Eg, USD an...
Price of a currency <ul><li>Factors that affect the price of a currency </li></ul><ul><li>-Economic e.g. Interest rate, in...
WHY FX <ul><li>For personal requirement </li></ul><ul><li>For business requirement </li></ul><ul><li>For speculation </li>...
Commodities What are Commodities? Commodities Categories Example of a trade Products:  Commodities
Products:  Commodities What are Commodities?  Review cards and put them into 4 categories Put a name to the 4 categories
Banks trade in Commodities just as they do in currencies. Commodities are split Into 4 groups: <ul><li>Energy  – e.g. Gas,...
What Precious metals do banks trade in?  XAU XAG XPT XPD Gold Silver Platinum Palladium (In place of currency codes the ch...
Example: SWISS Tony’s Gold watch Company JPMorgan Watch maker requires gold to manufacture watches Finds a company selling...
Products:  Commodities Settlement <ul><li>Use depositories </li></ul><ul><li>Allocated </li></ul><ul><li>Un allocated </li...
Products:  Bonds Bond Trades What is a Bond? How does it work? What role does JPMorgan play?
What is a Bond? Our Products:  Bonds A certificate of debt (usually interest-bearing) that is issued by a government or co...
Products:  Bonds Key Terms of a Bond  <ul><li>Face Value </li></ul><ul><li>Coupon </li></ul><ul><li>Maturity </li></ul><ul...
Bond Issuer e.g. A Corporation or Government Investor Receives Bond Products:  Bonds Conceptual Example Pay $1,000,000 Mak...
Big Company Ltd 2. Raising capital: In this example, Big Company A looks to borrow money 3. Raising capital: It borrows mo...
Big Company Ltd Investor(s) Investors hold  the Bond until Maturity Coupons of 5% are paid semi annually by Big Company to...
Role of banks in bonds Products:  Bonds BMW Want to start design and produce a new model car Estimate they need EURO 5 mil...
Products:  Equities Equity Trades What is an Equity trade? How does it work? What role does JPMorgan play?
Products:  Equities Big Company Ltd Big Company is now looking to expand its operation again and needs to raise cash in or...
Big Company Ltd Bank Products:  Equities <ul><li>Bank will: </li></ul><ul><li>Assist with company valuation </li></ul><ul>...
Current Share holders Investor Investor Investor Investor Investor Investor Investor Investor Products:  Equities Secondar...
Investor Investor Investor Investor Investor Investor Investor Investor Products:  Equities Stock Exchange (Including  Sto...
Products:  Equities How do banks participate in the Equities market? Client A Client A, wants to buy shares in Big Company...
Share name Number of shares Price of share Buying or Selling Currency paying Trade date Value date Payment details Product...
Products:  Settling through clearing house Payments: How do they get made? JPMorgan Current  Shareholder BNP  Frankfurt Ci...
Types of Shares <ul><li>Ordinary Share  – These shares give the investor the right to a dividend, if declared. </li></ul><...
Differences  <ul><li>Bonds Vs Equities </li></ul>
Derivative Trades What is a Derivative? How does it work? What role does JPMorgan play? Products:  Derivatives
Products:  Derivatives Definition A security, such as an Option or Futures contract, whose value depends on the performanc...
Futures What is a Future? How does it work? Products:  Derivatives
Products:  Derivatives Futures Definition Standardised exchange-traded contract to buy or sell a commodity at an agreed pr...
Products:  Derivatives Futures UK Potato Farmer <ul><li>Has crop of potatoes </li></ul><ul><li>Ready to sell in 6 months <...
Products:  Derivatives Futures What can happen in the 6 months before the potatoes are ready? <ul><li>Risks: </li></ul><ul...
Products:  Derivatives Futures Futures  Exchange Supermarket UK Potato Farmer Farmer enters into a Futures contract Using ...
Products:  Derivatives Futures <ul><li>June 5 th  2005 </li></ul><ul><li>Farmer will deliver potatoes to Supermarket throu...
Products:  Derivatives Options What is an Option? How does it work?
Products:  Derivatives The buyer has the right, but  not  the obligation to buy or sell the underlying product at an agree...
FX Option Products:  Derivatives Big Company  USA Computer R Us UK (CRUUK) Big Company has ordered a supply of computer co...
FX Option Products:  Derivatives What choices does Big Company Ltd have? <ul><li>Buy the £’s via a forward FX trade (arran...
FX Option Products:  Derivatives Big Company Ltd decide to use an FX Option Why? <ul><li>Want to know state of cash flows ...
FX Option Products:  Derivatives How does it work? Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP:  1,000...
FX Option Products:  Derivatives Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP:  1,000,000 Put: USD:  1,...
Products:  Derivatives FX Option Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP:  1,000,000 Put: USD:  1,...
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP:  1,000,000 Put: USD:  1,500,000  Strike Price  1.5 Expiry...
‘ In’, ‘At’ or ‘Out Of’ the Money? Cost  in  USD Foreign Exchange Spot Rate 1.3  1.5  1.7 $1,700,000 $1,500,000 $1,300,000...
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Banking presentation

  1. 1. Objectives <ul><li>At the end of the session you will be able to </li></ul><ul><li>Explain general banking operation </li></ul><ul><li>Demonstrate general understanding on IB products </li></ul><ul><ul><li>Foreign Exchange </li></ul></ul><ul><ul><li>Securities </li></ul></ul><ul><ul><li>Commodities </li></ul></ul><ul><ul><li>Derivatives </li></ul></ul>
  2. 2. Why do Banks exist? <ul><li>To Provide Financial products and Services </li></ul>
  3. 3. Who are clients Banks Corporate Individuals Deutsche Bank Citibank ABN Amro Deutsche Asset Management Fund Managers Multinational Small / Mid size firms High Street Banking (Chase Bank) US Only High Net Worth Individuals (Millionaires / Billionaires)
  4. 4. Banking as a Whole Clients <ul><ul><li>Includes Auto Finance, Consumer Banking, Home Finance, Insurance and Small Business Banking </li></ul></ul><ul><ul><li>Provides mutual fund, insurance & home finance and workplace banking products to consumers and small businesses </li></ul></ul><ul><ul><li>One of the world’s leading investment banks </li></ul></ul><ul><ul><li>Services provided: Advice on corporate strategy and structure, raising and placing capital, making markets in financial instruments and offering sophisticated risk management services </li></ul></ul><ul><ul><li>Provides investment & wealth management services to institutional investors, high net worth individuals & retail customers </li></ul></ul><ul><ul><li>Provides personalized advice and solutions to wealthy individuals </li></ul></ul><ul><ul><li>Global leader in transaction processing and information services to wholesale clients </li></ul></ul><ul><ul><li>Three Businesses: Institutional Trust Services, Investor Services(WSS) and Treasury Services </li></ul></ul><ul><ul><li>Major provider of financial services including corporate finance, cash management, & credit </li></ul></ul><ul><ul><li>Comprises of five national business segments: Middle Market Banking, Mid-Corporate Banking, Commercial Real Estate, Asset Based Lending and Commercial Leasing </li></ul></ul><ul><ul><li>Delivers credit card and other related payment products to cardholders and merchant outlets </li></ul></ul><ul><ul><li>Aims to be the preferred payment card in existing customers wallets and to increase access to new customers </li></ul></ul>Investment Bank Treasury and Securities Services Card Services Asset and wealth Management Retail Financial Services Commercial Banking
  5. 5. International Banking Locations North America Latin America EMEA Asia Pacific
  6. 6. Banking and Banking operations Bank is a commercial institution licensed as a receiver of deposits. Banks are mainly concerned with making and receiving payments as well as supplying short-term loans to individuals. Exists to help you make the most of your money Assist you with your monetary requirements and promote savings How do they do it ?? By offering different products and Services Banking Services Deposits Loans Services Capital Market Short Term Long Term Retail Institutional Fund based activities, greater market risk Fee based activities, lesser market risk E.g. Savings Current Fixed E.g. Overdraft E.g. Auto Loan Home Loan E.g. DDs Lockers Bill Pay E.g. Bank Guarantee Trade Finance E.g. DP Custodian Merchant Banking Debenture Trustees
  7. 7. Role of Banks <ul><li>Intermediary role between lenders and borrowers </li></ul><ul><li>Lenders – Deposits funds with Banks </li></ul><ul><ul><ul><li>Liability products (Liability for Banks) </li></ul></ul></ul><ul><li>Borrowers – Borrows funds from Banks </li></ul><ul><ul><ul><li>Asset Products (Assets for Banks) </li></ul></ul></ul>
  8. 8. Different types of Banks Types of Banks Central Bank (RBI) Non Banking Finance Companies (NBFCs) Commercial Banks Term Financial Institutions State Finance Corporations (SFCs) Indian Financial Institutions E.g. IFCI NABARD SIDBI Public Sector Private Sector Foreign Co-operative Banks Regional Rural Banks E.g. SBI PNB BOB E.g. HDFC Bank UTI Bank ICICI Bank E.g. Citibank ABN Amro HSBC State/Central Private Primary Credit Societies
  9. 9. Broad Categories <ul><li>Retail Banking </li></ul><ul><li>Whole Sale Banking </li></ul>
  10. 10. <ul><ul><li>Accepting deposits from Public </li></ul></ul><ul><ul><li>Lending money to public </li></ul></ul><ul><ul><li>Remittances/Collection Business </li></ul></ul><ul><ul><li>Keeping valuables in safe custody </li></ul></ul><ul><ul><li>Government business </li></ul></ul><ul><ul><li>Acting as trustee </li></ul></ul><ul><ul><li>Treasury services </li></ul></ul><ul><ul><li>Capital Market activity </li></ul></ul>Activities of a Bank
  11. 11. Capital Markets Overview <ul><li>Markets – A place where exchange of goods and services happen </li></ul><ul><li>Capital Market </li></ul><ul><ul><li>Place where capital (fund) requirements of the issuers are met; i.e. Issuers (Corporate, Government, etc) raise funds </li></ul></ul><ul><ul><li>Trades in these markets are for debt, equity securities or other instruments </li></ul></ul><ul><ul><li>Organized, as they are governed by regulatory bodies [Securities & Exchange Board of India, RBI] </li></ul></ul>
  12. 12. Financial Markets
  13. 13. <ul><ul><ul><li>Regulator </li></ul></ul></ul><ul><ul><ul><li>Underwriters </li></ul></ul></ul><ul><ul><ul><li>Merchant Banker / Investment Bank – JPM </li></ul></ul></ul><ul><ul><ul><li>Brokers </li></ul></ul></ul><ul><ul><ul><li>Exchanges </li></ul></ul></ul><ul><ul><ul><li>Custodians </li></ul></ul></ul><ul><ul><ul><li>Banks </li></ul></ul></ul><ul><ul><ul><li>Depositories </li></ul></ul></ul><ul><ul><ul><li>Depositary Participants </li></ul></ul></ul><ul><ul><ul><li>R & T Agents </li></ul></ul></ul><ul><ul><ul><li>Market Participants </li></ul></ul></ul>Capital Markets intermediaries
  14. 14. SEBI – Securities Board of India SEC – Securities & Exchange commission (USA) FSA – Financial Services Authority (UK) Capital Markets – Regulators
  15. 15. <ul><li>Underwriter </li></ul><ul><ul><li>Who underwrites the issue in case of under-subscription; takes the stock in its books </li></ul></ul><ul><li>Merchant Banker / Investment Bank </li></ul><ul><ul><li>An underwriter or agent for corporations and municipalities issuing securities </li></ul></ul><ul><ul><li>Maintain broker/dealer operations mostly, maintain markets for previously issued securities </li></ul></ul><ul><ul><li>Offer advisory services to investors </li></ul></ul><ul><ul><li>Large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring </li></ul></ul><ul><ul><li>Do not accept deposits from and provide loans to individuals (Investment Banks, especially) </li></ul></ul>Capital Markets intermediaries
  16. 16. <ul><li>Brokers </li></ul><ul><ul><li>An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. </li></ul></ul><ul><ul><li>The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services. </li></ul></ul><ul><li>Exchanges </li></ul><ul><ul><li>A market in which securities, commodities, options, or futures are traded. </li></ul></ul><ul><ul><li>Although you will mostly trade stocks through a broker </li></ul></ul><ul><ul><li>NSE, BSE, NYSE, NASDAQ, LSE </li></ul></ul>Capital Markets intermediaries
  17. 17. Custodian An agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual fund's, or investment company's assets for them. Bank An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks. Capital Markets intermediaries
  18. 18. <ul><li>Depositories </li></ul><ul><li>An institution which facilitates the clearing of securities between the stock exchange & depository participants; holds assets in electronic form on behalf of ultimate beneficiaries </li></ul><ul><li>Depository Participant </li></ul><ul><ul><li>Any institution like a bank that maintains the dematerialized accounts of beneficiaries, provides services of settling securities traded on the exchange; Agent of Depository </li></ul></ul><ul><li>Registrar and Transfer Agents </li></ul><ul><li>maintain the records of members (shareholders) for the issuer company </li></ul>Capital Markets intermediaries
  19. 19. <ul><li>Market Participants </li></ul><ul><li>Various persons / entities that indulge in buying & selling Examples: </li></ul><ul><li>Qualified Institutional Buyers </li></ul><ul><ul><ul><ul><li>Foreign Institutional Investors, Foreign Venture Capital </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Domestic Institutional Investors - Banks, Financial Institutions, Insurance Companies, Mutual Funds, Venture Capital </li></ul></ul></ul></ul><ul><li>Non - Institutional - High Net worth Clients (E.g. NRI, HUF, Government & Private Corporate bodies) </li></ul><ul><li>Retail Individual Investors </li></ul>Capital Markets intermediaries
  20. 20. <ul><li>Primary Market </li></ul><ul><li>Sell (float) new stocks and bonds to the public for the first time. In the primary market the security is purchased directly from the issuer </li></ul><ul><ul><ul><li>Secondary Market </li></ul></ul></ul><ul><ul><ul><li>Secondary market is where investors trade among themselves. An investor purchases a security from another investor rather than the issuer. Auction market forms a part of this market. </li></ul></ul></ul>Primary and Secondary Capital Markets
  21. 21. Banking Treasury Products Foreign Exchange <ul><li>What is an FX trade </li></ul><ul><li>How does it work </li></ul><ul><li>Why are banks in the in the FX Market </li></ul>
  22. 22. Products: Foreign Exchange Definition: Buying (or selling) of a currency and paying for it with another at an agreed price (exchange rate) for settlement on an agreed date Complete the grid of descriptions using the following words <ul><li>Payment Instructions </li></ul><ul><li>Receiving / receipt Instructions </li></ul><ul><li>Currencies </li></ul><ul><li>2 Counterparties </li></ul><ul><li>Broker </li></ul><ul><li>Value date </li></ul><ul><li>Booked the right way round </li></ul><ul><li>Amount </li></ul><ul><li>Exchange rate </li></ul><ul><li>Trade Date </li></ul>
  23. 23. Products: Foreign Exchange Trade Date Receipt Instructions Payment Instructions 2 Counterparties Broker Booked Right Way Round Value date Exchange rate Amount Currencies Component The day the deal was agreed Where we are receiving our currency to? Where are we paying the currency to? The entities involved in the trade Helps to arrange a trade on behalf of others Shows which currency we are paying and receiving. The day the trade will settle. i.e. the funds will be debit / credit from / to your account The price of one currency expressed in another A numerical figure that shows the value of the trade Has to be two of these for the exchange to be possible Explanation
  24. 24. Different Trades <ul><li>Spot trade: Value date = trade date + 2 </li></ul><ul><li>Cash trade: value date = trade date </li></ul><ul><li>Tom trade: Value date = trade date +1 </li></ul><ul><li>Forward trade: Value date = trade date + </li></ul><ul><li>3(or more) </li></ul>
  25. 25. Products: Foreign Exchange Example BMW Munich Gear Box Supplier USA Citibank Supplies gear boxes at agreed price. BMW need to pay in USD BMW need to import gearboxes that have been made in the US. Cost $5,000,000 BMW now need to pay in USD but only have a EURO account The Solution: Do a Foreign Exchange Trade Contact Citibank: Want to Buy $5,000,000. Will pay for it in EURO’s. JPMorgan will ask what date they want the currency (Value Date) JPMorgan will advise the Exchange rate. (How much will $5mio cost in EURO) Rate is 1.27 (Euro 1 = $1.27) Pay EURO 3,937,008. Pay USD 5,000,000 to BMW (for Gear Box Supplier)
  26. 26. Speculation Example JPMC Microsoft USA Microsoft speculates that GBP price will increase from $1.7 to 1.9 in 3 months time Contact JPMorgan: Want to Buy GBP 1,000,000. Will pay for it in JPMorgan will ask what date they want the currency (Value Date) JPMorgan will advise the Exchange rate. (How much will GBP5mio cost in USD) Rate is 1.7 (GBP 1 = $1.7) sell 1.7M USD buy GBP1M Citibank USA Sell GBP 1 M Rec $1.9 M
  27. 27. Currencies What currencies do you know? Have a name: Eg United States Dollar, Japanese Yen Have a 3 figure code Eg, USD and JPY
  28. 28. Price of a currency <ul><li>Factors that affect the price of a currency </li></ul><ul><li>-Economic e.g. Interest rate, inflation rate </li></ul><ul><li>Political </li></ul><ul><li>Strong currency </li></ul><ul><li>Weak currency </li></ul>
  29. 29. WHY FX <ul><li>For personal requirement </li></ul><ul><li>For business requirement </li></ul><ul><li>For speculation </li></ul>
  30. 30. Commodities What are Commodities? Commodities Categories Example of a trade Products: Commodities
  31. 31. Products: Commodities What are Commodities? Review cards and put them into 4 categories Put a name to the 4 categories
  32. 32. Banks trade in Commodities just as they do in currencies. Commodities are split Into 4 groups: <ul><li>Energy – e.g. Gas, Oil </li></ul><ul><li>Base Metals – e.g. Copper, Aluminium </li></ul><ul><li>Precious Metals – e.g. Gold, Silver </li></ul><ul><li>Soft Commodities – e.g. Coffee, Sugar, paper </li></ul>Products: Commodities
  33. 33. What Precious metals do banks trade in? XAU XAG XPT XPD Gold Silver Platinum Palladium (In place of currency codes the chemical elements of the metal are used to identify the metal) Products: Commodities
  34. 34. Example: SWISS Tony’s Gold watch Company JPMorgan Watch maker requires gold to manufacture watches Finds a company selling gold Agrees how much Gold Agree on the price Agree on Delivery Want to buy 1,000 oz Price is $300 per oz Total Price is $300,000 Deliver Gold Pay $300,000 Products: Commodities
  35. 35. Products: Commodities Settlement <ul><li>Use depositories </li></ul><ul><li>Allocated </li></ul><ul><li>Un allocated </li></ul>
  36. 36. Products: Bonds Bond Trades What is a Bond? How does it work? What role does JPMorgan play?
  37. 37. What is a Bond? Our Products: Bonds A certificate of debt (usually interest-bearing) that is issued by a government or corporation in order to raise money The issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal Effectively it is a loan. The company who receives the money, issues a Bond with terms and conditions stating when they will pay back interest and principle amount to the lender of the money (Investor)
  38. 38. Products: Bonds Key Terms of a Bond <ul><li>Face Value </li></ul><ul><li>Coupon </li></ul><ul><li>Maturity </li></ul><ul><li>Issuer </li></ul>Nominal Amount What the Bond is worth when redeemed at maturity Amount of interest paid to Bond Holder during the life: (e.g. 5% = 5% of Face Value of investment) Date for coupon payments. Usually 6 monthly (does depend on terms of issuance) Date the principle amount is paid back to the investor. Activity: Lets Look at a practical example. Who Issued the Bond. (Received the money)
  39. 39. Bond Issuer e.g. A Corporation or Government Investor Receives Bond Products: Bonds Conceptual Example Pay $1,000,000 Makes regular payments (Coupons) Bond maturity pay back $1m
  40. 40. Big Company Ltd 2. Raising capital: In this example, Big Company A looks to borrow money 3. Raising capital: It borrows money by issuing a BOND. 4.Raising capital: An Investor buys the bond. (can be a bank, corporation, Individual etc etc) Products: Bonds Conceptual Example Investor(s) 5. End Result Big Company Ltd can now finance its purchase of Small Company Inc and will pay the Investors back. How much depends on the bond (loan) terms. Small Company Inc 1. Big Company Ltd want to buy Small Company Inc. In order to do so it needs to raise capital. The purchase price is $1,000,000 Pays $1,000,000 Issues Bond(s) to Investors
  41. 41. Big Company Ltd Investor(s) Investors hold the Bond until Maturity Coupons of 5% are paid semi annually by Big Company to Investors. Products: Bonds Conceptual Example Coupon payments made every 6 months for term of bond 10 Year Bond = 20 payments Pay back principle amount (e.g. $1,000,000) at maturity Paid $1,000,000
  42. 42. Role of banks in bonds Products: Bonds BMW Want to start design and produce a new model car Estimate they need EURO 5 million to do this They chose to raise this capital by issuing a Bond BMW Contact JPMorgan and appoint them as Lead Manager on Bond Issue JPMorgan Pay BMW EURO 5 Million and receive Bonds Issue Bonds into the market Investors Bond Buyer Investors Bond Buyer JPMorgan Example EURO 5 M Bonds Bonds EURO 5 M Bond Market Pay cash Pay cash Pay cash Receive Bonds Receive Bonds Receive Bonds Investors Bond Buyer
  43. 43. Products: Equities Equity Trades What is an Equity trade? How does it work? What role does JPMorgan play?
  44. 44. Products: Equities Big Company Ltd Big Company is now looking to expand its operation again and needs to raise cash in order to do this. The company decides it will raise the cash by selling shares Will Issue IPO. Bank It uses a bank to advise how to do this
  45. 45. Big Company Ltd Bank Products: Equities <ul><li>Bank will: </li></ul><ul><li>Assist with company valuation </li></ul><ul><li>Can under-write shares </li></ul><ul><li>Advise on timing </li></ul><ul><li>Advise on how much of company to sell </li></ul>Advertise the IPO Potential investors contact bank and register their interest Investors
  46. 46. Current Share holders Investor Investor Investor Investor Investor Investor Investor Investor Products: Equities Secondary Market Stock Exchange (Including Stock Brokers)
  47. 47. Investor Investor Investor Investor Investor Investor Investor Investor Products: Equities Stock Exchange (Including Stock Brokers) Big Company Ltd Secondary Market
  48. 48. Products: Equities How do banks participate in the Equities market? Client A Client A, wants to buy shares in Big Company Ltd JPMorgan (JPMSL) They contact JPMorgan with the details of their requirements Stock Exchange JPMorgan trader contacts Stock Exchange. Wants to Buy 500 shares Current Shareholder Stock Broker JPMorgan and Stock Broker agree price and terms through the Stock Exchange Through Stock Exchange JPMorgan will source a seller of the Shares. A price will be agreed € 20 per share
  49. 49. Share name Number of shares Price of share Buying or Selling Currency paying Trade date Value date Payment details Products: Equities What are we looking to confirm? Big Company Ltd 500 EURO €20 Buying Shares EURO 13 th October 2005 15 th October 2005 (T +2) Where to pay shares and cash to (from both parties) Activity
  50. 50. Products: Settling through clearing house Payments: How do they get made? JPMorgan Current Shareholder BNP Frankfurt Citibank Frankfurt JPMorgan and Client send instructions to their Agents. Details of the trade and when to settle The trade will then settle across the Kassenverein Central Depository. Delivery versus Payment (DVP) € 10,000 € 10,000 500 500 Trades can settle over a central depository Before Payment After Payment The Shares are now transferred to JPMorgan’s a/c within Kassenverein They will hold shares on behalf of their client Original Big Company Share Holder, now has €10,000 Central Depository e.g. Kassenverein Share A/C EURO Cash a/c JPMorgan a/c Current Shareholder a/c
  51. 51. Types of Shares <ul><li>Ordinary Share – These shares give the investor the right to a dividend, if declared. </li></ul><ul><li>Should the company go into liquidation, then holders of this class of share holds the lowest priority of repayment. </li></ul><ul><li>Deferred Ordinary share - These give shareholders additional voting rights or the right to higher dividends. Often these shares will not qualify for dividend until a particular date has been reached or the company profit has reached a pre- determined. </li></ul><ul><li>Golden Shares – These shares are designed to allow the shareholders the right to a casting vote. In cases of privatization, the government often held golden shares. This allowed them to have the casting vote if required, as a form of control, during take-over bids or other serious matters. These shares are normally used in UK. </li></ul><ul><li>Preference Shares – These shares form part of the share capital of the company. They pay fixed dividend and in the event of liquidation they hold preference </li></ul>
  52. 52. Differences <ul><li>Bonds Vs Equities </li></ul>
  53. 53. Derivative Trades What is a Derivative? How does it work? What role does JPMorgan play? Products: Derivatives
  54. 54. Products: Derivatives Definition A security, such as an Option or Futures contract, whose value depends on the performance of an underlying product. Derivative in itself is not a product, it does however rely on an underlying product for its market value. For this course we will look at 3 derivative examples <ul><li>Futures </li></ul><ul><li>Options </li></ul><ul><li>Single Currency Interest Rate Swap </li></ul>
  55. 55. Futures What is a Future? How does it work? Products: Derivatives
  56. 56. Products: Derivatives Futures Definition Standardised exchange-traded contract to buy or sell a commodity at an agreed price for settlement or delivery on an agreed future date How does it work
  57. 57. Products: Derivatives Futures UK Potato Farmer <ul><li>Has crop of potatoes </li></ul><ul><li>Ready to sell in 6 months </li></ul>What can happen in the 6 months before the potatoes are ready? <ul><li>Potato Supplies worldwide except UK could fail </li></ul><ul><li>In 5 months time there is a scare about effect of potatoes on health </li></ul><ul><li>Supply remains stable with no impact on current prices </li></ul>
  58. 58. Products: Derivatives Futures What can happen in the 6 months before the potatoes are ready? <ul><li>Risks: </li></ul><ul><li>Crop could fail </li></ul><ul><li>Price movement </li></ul><ul><li>Controls: </li></ul><ul><li>Insurance </li></ul><ul><li>Agree buyer now at agreed price (Future trade) </li></ul>
  59. 59. Products: Derivatives Futures Futures Exchange Supermarket UK Potato Farmer Farmer enters into a Futures contract Using the Futures Exchange Agree to sell potatoes Agree to buy potatoes Finds a buyer for potatoes Agrees a price Agrees a delivery date Seller: UK Potato Farmer Buyer: Supermarket Product: Grade A Potatoes Price: £5 / sack Quantity: 5,000 Sacks Delivery: 5 th June 2005 Total Price: £25,000 Future Contract
  60. 60. Products: Derivatives Futures <ul><li>June 5 th 2005 </li></ul><ul><li>Farmer will deliver potatoes to Supermarket through Exchange </li></ul><ul><li>Supermarket will pay Farmer through Exchange </li></ul><ul><li>Farmer has guaranteed income (providing crop doesn’t fail – insurance would cover this) </li></ul>This agreement means the Farmer has an obligation to deliver potatoes on this date and Supermarket has an obligation to pay farmer the agreed price. All this happens via Exchange
  61. 61. Products: Derivatives Options What is an Option? How does it work?
  62. 62. Products: Derivatives The buyer has the right, but not the obligation to buy or sell the underlying product at an agreed price on an agreed date The buyer pays a premium to the seller have this right . Definition Let’s look at an FX Option Options Page 45-49 in Workbook
  63. 63. FX Option Products: Derivatives Big Company USA Computer R Us UK (CRUUK) Big Company has ordered a supply of computer components from CRUUK (Computer R Us UK) Computer R Us UK will deliver the computer equipment in 3 months time This will cost Big Company Ltd GBP 1,000,000. in 3 months What needs to happen To Pay for this order Big Company will have to do a Foreign Exchange trade. They need to buy GBP 1,000,000 (to pay CRUUK) And pay for it with USD Have to pay £1,000,000 Deliver Computer Components in 3 months Page 45-49 in Workbook
  64. 64. FX Option Products: Derivatives What choices does Big Company Ltd have? <ul><li>Buy the £’s via a forward FX trade (arrange today value 3 months) </li></ul><ul><li>Buy the £’s in 3 months – spot trade (exchange rate unknown until 3 months) </li></ul><ul><li>Do an FX Option </li></ul>Page 45-49 in Workbook
  65. 65. FX Option Products: Derivatives Big Company Ltd decide to use an FX Option Why? <ul><li>Want to know state of cash flows (now and future) </li></ul><ul><li>FX Option will limit any exchange rate movements </li></ul>Page 45-49 in Workbook
  66. 66. FX Option Products: Derivatives How does it work? Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 Put: USD: 1,500,000 Strike Price 1.5 Expiry Date 5 th March 2004 Delivery date 7 th March 2004 Premium: $5000 Big Company (USA) JPMorgan On January 5 th 2004 Big Company contact JPMorgan Big Company agree to buy an FX Option from JPMorgan. This Option gives them the right but NOT the obligation to use this trade on the delivery date The FX Option Bought By To have this right but not obligation Big Company pay JPMorgan a premium Page 45-49 in Workbook
  67. 67. FX Option Products: Derivatives Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 Put: USD: 1,500,000 Strike Price 1.5 Expiry Date 5 th March 2004 Delivery date 7 th March 2004 Premium: $5000 Big company now have the right to use [exercise] this trade for settlement on March 7th The FX Option What are the key dates? Expiry Date: Date that Big Company have to decide whether to exercise the Option Delivery Date: Date that transfer of funds would occur if Big Company Ltd exercise this Option Other FX Option Components Call: Currency that the buyer of the Option would receive Put: Currency that the buyer of the Option would sell Strike: Exchange Rate that would be used if Option is exercised Page 45-49 in Workbook
  68. 68. Products: Derivatives FX Option Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 Put: USD: 1,500,000 Strike Price 1.5 Expiry Date 5 th March 2004 Delivery date 7 th March 2004 Premium: $5000 The FX Option How do Big company know whether to exercise the Option? <ul><li>On 5 th March </li></ul><ul><li>Look at current FX [Spot] rate </li></ul><ul><li>If they used the spot rate (Not the Option Strike rate) how much would it cost to buy the £1,000,000? </li></ul><ul><li>Would it be cheaper to use the Spot rate and let the Option expire or… </li></ul><ul><li>Use the Option because the spot price in market would cost more in USD. </li></ul>Lets look at possible choices Big Company Could make Page 45-49 in Workbook
  69. 69. Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 Put: USD: 1,500,000 Strike Price 1.5 Expiry Date 5 th March 2004 Delivery date 7 th March 2004 Premium: $5000 The FX Option Products: Derivatives FX Option RATE Would COST in USD To buy £1,000,000 on Spot Market 1.3 1.7 Exercise Option If SPOT Rate If SPOT Rate $1,300,000 $1,700,000 5 th March To Buy £1,000,000. using the FX Option would cost:? $1,500,000 NO YES Remember: Big Company bought the Option 3 months ago So wouldn’t know what the rates would be today. Buying the Option limits the cost of the Computer purchases to a maximum of $1,500,000. (plus the $5000 premium) Page 45-49 in Workbook
  70. 70. ‘ In’, ‘At’ or ‘Out Of’ the Money? Cost in USD Foreign Exchange Spot Rate 1.3 1.5 1.7 $1,700,000 $1,500,000 $1,300,000 Products: Derivatives FX Option: To buy £1,000,000 Out of the Money At the Money In the Money Page 45-49 in Workbook

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