The document discusses various financial instruments and valuation methodologies. It provides background on Nobel prize winners such as Scholes, Merton, and Black who developed the Black-Scholes options pricing model. It then discusses various derivatives like options, forwards, futures, and swaps. It explains how these instruments can be used for hedging, speculation, and gaining exposure to markets. It also discusses how concepts like volatility and yield curves are important for pricing derivatives.
Introductory presentation on commodity tradingPradeep Sahoo
An introduction to Commodities Markets, Futures and other derivatives. Comparison of commodities with other asset classes and why commodity trading is indispensable for any country.
Introductory presentation on commodity tradingPradeep Sahoo
An introduction to Commodities Markets, Futures and other derivatives. Comparison of commodities with other asset classes and why commodity trading is indispensable for any country.
IABF Education Institute gives to you details about Stock Market details, How to know about stock markets, What is Stock Market, Who is broker, What is D/Mat A/C, Functions of Brokers, Know about NIFTY,
This document explains the basics of financial analysis. It explains financial statements, financial ratios/comparables, and capital markets. This training presentation has been adopted from the ones used at global consulting firms.
http://flevy.com/browse/business-document/Finance-and-Valuation-Basics-90
IABF Education Institute gives to you details about Stock Market details, How to know about stock markets, What is Stock Market, Who is broker, What is D/Mat A/C, Functions of Brokers, Know about NIFTY,
This document explains the basics of financial analysis. It explains financial statements, financial ratios/comparables, and capital markets. This training presentation has been adopted from the ones used at global consulting firms.
http://flevy.com/browse/business-document/Finance-and-Valuation-Basics-90
Implied and Local Volatility for South African DerivativesAntonie Kotzé
Talk on implied and local volatility surfaces for traded index options and listed USDZAR FX options. There is a bit of history on where the Black-Scholes partial differential equation (PDE) originated as well.
Want to start BPO industry or want to be part of it. Need a Expert Advice. Explore Facts of BPO with a professional and experienced personality Malcolm Sobers.
Stochastic Local Volatility Models: Theory and ImplementationVolatility
1) Hedging and volatility
2) Review of volatility models
3) Local volatility models with jumps and stochastic volatility
4) Calibration using Kolmogorov equations
5) PDE based methods in one dimension
5) PDE based methods in two dimensions
7) Illustrations
Options on the VIX and Mean Reversion in Implied Volatility Skews RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
This presentation will discuss the following topics:
Objectives
Introduction
What is a Financial Instrument?
Understanding Financial Instrument
Types of Financial Instrument
Financial Markets
Role of Financial Markets
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
How to get verified on Coinbase Account?_.docxBuy bitget
t's important to note that buying verified Coinbase accounts is not recommended and may violate Coinbase's terms of service. Instead of searching to "buy verified Coinbase accounts," follow the proper steps to verify your own account to ensure compliance and security.
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
2. Before I came here I was confused
about the subject. Having listened to
your lecture I am still confused. But on
a higher level.
Enrico Fermi (1901-1954)
Niels Bohr
and
Albert Einstein
3. What’s in the 1997 Nobel prize?
Myron Scholes (1941 - )
Robert Merton (1944 - )
Fischer Black (1938 - 1995)
Along the way, it changed the way investors
and others place a value on risk, giving rise to
the field of risk management, the increased
marketing of derivatives, and widespread
changes in the valuation of corporate
liabilities.
The theory "is absolutely
crucial to the valuation of
anything from a company
to property rights“. In my
view, financial
economics deals with
four main phenomena:
time, uncertainty, options and
information.
William F. Sharp
4. Drivers of the markets
• Only two emotions drive the market – GREED
and FEAR
• Two types of traders – SPECULATORS and
HEDGERS
5. DERIVATIVES: why?
Derivatives expanded the
universe of instruments
available for trading and
hedging
• Speculators use derivatives to
expose portfolios to some
market risk
• Hedgers use derivatives to
reduce the market risk they
are exposed to
6. Benefits of derivatives
• part of universe of instruments – bigger choice
• basic instruments – used to construct others
• participation in price moves – gearing or leverage
• used as hedges
• can buy or sell underlying at more favourable prices
• can earn premium income
• derivatives give options
• tailor your position to your situation or risk tolerance
• position yourself to your market expectation
• limited influence on underlying market
7. Hedging
• Transfer risk
• Risks more precisely tailored to risk preferences and
tolerances
• Those willing to bear risk must be compensated
• Most transactions still for speculating and not hedging
• Speculators provide liquidity
8. Rapid growth
• Rapid growth and development
• Emergence of international financial institutions who
intermediate bulk of international capital flows in the
financial markets
• Increase capacity of the financial system to bear and
price risk and allocated capital
•
10. The Financial Market
• Financial markets are mechanisms that link surplus and
deficit investors
• Participants: borrowers, lenders, financial intermediaries
and brokers
• Financial Market: interaction between the players in
setting a price on financial instruments fulfilling demands
and requirements
11. Time value of money
• The notion that money has a time value is one of
the basic concepts in the analysis of any
financial instrument
• Money has time value because of the
opportunities for investing money at some
interest rate
• Interest is a fee for having the use of money
12. Zero coupon bond
• A zero-coupon-bond is a bond that makes no
interest payment over its lifetime
• The face value is the amount paid at maturity
• Most money market instrument are zero-coupon
• Value
Cash invested
Cash + interest
13. Coupon bond
These are bonds with regular interest payments
e.g. R153, R157
The value of the bond is given by its net present
value (NPV)
14. Pricing SA bonds
Use Makeham’s formula: basically the NPV with a
few twists to make it practical
16. The bond pricing formula
Settlement on coupon date; more than 6 months
Settlement on coupon: less than 6 months
Ex-coupon: more than 6 months
Ex-coupon: less than 6 months
Cum-interest: more than 6 months
Cum-interest: less than 6 months
17. Bond Trading
• Debt probably oldest financial product stemming from
origins of mankind
• Governments have been issuing public debt since 16th,
17th century?
• First majour default: British Crown (Edward III) in 1345
• Bond trading also quite old – 1800’s
• Derivatives on interest rate instruments are quite new
18. The zero coupon yield curve
• There is no single interest rate for an economy
• Factors: term of loan; credit
• Government best credit – can borrow at best
rates
• A yield curve is a graphical representation of the
term structure of interest rates for instruments of
a similar credit rating
20. The forward rate
• Can invest money today for a certain date
• Question: if we receive money in the future, can
we invest it at that point in time but fix the
interest rate today?
• Yes, by using forward rates
• Forward rate determined by arbitrage argument
22. The Interest Rate Swap
• A swap is an agreement between two parties to
exchange cash flows in the future according to a
prearranged formula
• There is a fixed rate payer and a floating rate
payer
• Only the net interest differential is exchanged
First swap done in 1981 between the World Bank and IBM
Size of market: more than $150 trillion notional outstanding
24. Swaps: an example
• Two companies agree the following:
• company B lends company A R100 million at the 3 month Jibar rate;
• Company A lends company B R100 million at a fixed rate of 9.5%
25. Value of a swap
Value of a swap using yield curve
• Fixed leg: NPV
• Floating leg:
26. Forwards/Futures
A person holding a futures contract has the right to
buy a certain underlying asset at a future date at
a pre-determined price
Payoff
27. What is an option?
• Call option: gives the holder the right, BUT NOT
the obligation to buy the underlying asset on a
future date at a pre-determined price
• Put option: gives the holder the right, BUT NOT
the obligation to sell the underlying asset on a
future date at a pre-determined price
Payoff
28. The Black-Scholes formula
If you buy an option, you buy a RIGHT without any
OBLIGATION – when the option expires, you can
decide to exercise or not. This costs money – the
premium of the option
29. The Black-Scholes world
• Stock prices follow a continuous random walk – Brownian motion
• The efficient market hypothesis holds
• Investors live in a risk-neutral world
• Delta-hedging is done continuously
In general, Black & Scholes assumed that
the financial market is a system that is in
equilibrium – without outside or exogenous
influences, the system is at rest; everything
balances out and supply equals demand.
Any distortion or perturbation is thus
quickly handled by the market players and
equilibrium restored
30. Misconception
A common misconception about option pricing models is that
their typical use by option traders is to indicate the “right”
price of an option.
Options pricing models do not necessarily give the “right”
price of an option. The “right” price is what someone is
willing to pay for a particular option.
An efficient market will give the best and truest prices for
options. Many individuals trade warrants and some of
them do not know what an option is nor do they have a
pricing model.
31. Benefits of having a model
• the concepts behind the formula provided the framework
for thinking about option valuation and dynamics;
• Due to research within the Black-Scholes framework many
new insights into the market dynamics have come to light
• such research led to an expanded universe of financial
instruments encompassing more complex option
structures;
• quantitative risk management, stress testing and scenario
analysis became possible;
• hedging of derivatives were easier;
• The market has progressed and expanded.
32. Types of options
• European – can only exercise on expiry date;
• American – can exercise any time on or before expiry
• Exotics;
– Barrier option: option either disappears or is created when certain
market levels are breached
– Asian: use averages to determine the final payoff value
– Exchange one asset for another option
– Cliquet
– Ladder
– Reset
– Lookback
New types of options are created nearly every day
33. Value of an option: risk management
• The concept of delta-hedging:
If we purchase an option we can trade in the cash instrument (called
``trading spot" or ``trading the cash") to hedge the option. By buying
the option we pay the premium upfront. As the underlying's share
price changes with time, the Delta will show us that we have to buy
the cash at the lows and sell at the highs - we thus make money by
delta hedging. In theory, if we hedge continuously we should make
exactly what we paid for the option.
On the other hand, if we sell the option, we earn the premium. The
Delta will then show us to buy the cash at the highs and sell it at the
lows - we thus loose money by delta hedging. By doing this
continuously we should loose exactly what we earned with the
premium.
Hedging costs = value of derivative
34. Valuation: American options
• No closed-form formula
• Use numerical procedures like binomial trees
• The discrete version of normal distribution is the binomial
distribution
• The binomial model models the time to expiration as a very large
number of time intervals, or steps. Using probability theory a
tree of stock prices is produced.
• At each step it is assumed that the stock price will move up or
down by an amount calculated using probabilities. This produces
a binomial distribution, or recombining tree, of underlying stock
prices. The tree represents all the possible paths that the stock
price could take during the life of the option
36. Factors affecting option prices
First 3 are known. Last 3 needs to be estimated
• The spot price
• The strike price
• The time to expiry
• The risk-free interest rate
• The dividends/cash flows expected during the life of
the option
• The Volatility during the life of the option
37. Volatility
• The most important of the three uncertain parameters, is
the volatility.
• The importance of the volatility parameter was highlighted
by Black & Scholes through their model. Practitioners now
needed to estimate only one parameter, the volatility, and
input it into a relative simple formula to find the price of an
option. Of the three uncertain parameters, changing
volatility has the biggest impact on the price of an option.
• Volatility measures variability, or dispersion about a central
tendency — it is simply a measure of the degree of price
movement in a stock, futures contract or any other market.
• Standard Deviation
39. New listed option
• Safex listed a lookback option
• Investors know it is near impossible to get the timing
right. The floating strike lookback option comes to the
rescue.
• This path-dependent option is described as the portfolio
manager’s “best friend”. This option will always let the
investor have the best possible strike price thus
maximising his payoff!
• Very expensive!
• To cheapen a lookback, one can limit the time in which
the strike is set. One can even discretise the lookback
feature to only include certain pre-determined dates.
40. New listed option
Price
• Continuous lookback: Black-Scholes type closed-
form equation
• Discrete lookback: value using numerical procedures
like Monte Carlo simulation
41. Monte Carlo simulation
• This is a difference equation
• Through simulation of this
equation we can obtain share
prices at expiry and thus
option prices by their payoff
functions
ttdSS ttt
2
exp
2
1
• If we assume stock prices follow Brownian motion we
can describe their behaviour with
42. Derivative Strategies
• If a fund manager wants to hedge a portfolio against
market moves, is buying a put the only option?
• NO
• Options are very versatile and, used in combination
with the underlying instruments give powerful
strategies that can help you to hedge a portfolio, get
synthetic exposure to the market or gear a position.
43. Payoff profiles
• A payoff profile shows the payoff that would be received if
the underlying is at its current level when the option
expires
• It highlights the risks associated with the strategy in a
simple diagram: a future has unlimited profit potential, but
such a diagram also shows the potential losses
• It is easy to work with payoff profiles - they are additive
meaning that we can add or subtract them from one
another ---
• useful in constructing more complex financial instruments
or strategies
44. Derivatives as simple diagrams
a future has unlimited profit potential, but such a diagram also
shows the potential losses
P/L
Short
Future
K K’
Long
Future
46. The put strategy
• Buying a put is also a strategy
• In general investors buy a put as a hedge
when they are long the underlying stock
• A bearish strategy
48. Valuation of optionality in transactions
• Most BEE deals have inherent optionality
• SBSA: partial American option. Black shareholders
obtain a put option on SBK to protect them against any
downside. The European put turns into an American put
on 1 January 2015. The strike is R40.50
put + long shares = synthetic call
• Absa: variable strike partial American option where the
American date is 2 July 2007 and the strike is
00.10000.69
00.10000.70,0maxint70.000.48
RSifR
RSifRSRR
K
A
AA
Binomial Model
49. The zero cost collar strategy
• Fund manager has a portfolio of shares
he/she needs to hedge
• Fund manager buys an ATM put from risk
taker – this costs money (premium)
• Risk taker buys an OTM call from the fund
manager
• Strike of OTM call is determined by ensuring
that the call premium is equal to the premium
of the ATM put
Value = Put - Call
50. Advantages
• Hedge down side market moves with zero
upfront premium
• Participates in upward moves
• Tailor-made in terms of strike and expiry e.g.
important for unit trust’s quarterly reports
• Generally OTC and not Safex
• Mostly done on the Alsi Top 40 index
• Also suited to single stocks, Indi, Fini, Resi
or a tailor- made index
51. The zero cost collar: graphically
S
Long
stock
K
Short
call
Floor
Ceiling
Long
put
52. Employee stock options
• Companies issue these to employees
• A particular structure:
– Options are granted on certain dates.
– 20% of the granted options vests 2 years after the grant date
and 20% vests every year thereafter for the next 4 years.
– No rights can be taken up until the vesting date of a
particular tranche.
– Employees have until 1 year after the last vesting date to take
up the vested option rights. Vested options can be taken up
on any date from the vesting date.
– The option is a delayed delivery option.
– Option strikes are set on the grant date.
53. Employee stock options
Experts believe Black-Scholes is not appropriate:
• There is usually a vesting period - options cannot be exercised.
This vesting period can be as long as four to five years.
• Options are very long dated – up to 10 years.
• When employees leave their jobs during the vesting period they
forfeit unvested options.
• When employees leave after the vesting period they forfeit
options that are out of the money and they have to exercise
vested options that are in the money immediately.
• Employees are not permitted to sell their employee stock options
in the open market – this means there is no efficient discovery of
prices. They must exercise the options and sell the underlying
shares in order to realize a cash benefit or diversify their
portfolios. This tends to lead to employee stock options being
exercised earlier than similar regular options.
54. Employee stock options
• A lattice structure, such as the binomial or
trinomial model, incorporates assumptions about
employee exercise behaviour over the life of each
option grant. This results in more-accurate option
values and compensation expense.
• This is set out in IFRS 2
55. An equity linked note: guarantees
• The fund manager now has cash and not a
portfolio of shares
• An interest rate play
• Invested funds are guaranteed at expiry +
there is potential upside if the share market
performs well
56. Example
• Investor invests R100 million with risk taker for 1
year
• Risk taker guarantees R100 million after 1 year –
credit risk
• Risk taker invests R90,497,737.56 in money
market – 10.5% NACA
• This leaves R9,502,262.44 to buy exposure to
market
57. Equity linked note structure
Buy ATM
call
Cost = R13,040,447.90
Need R3,538,185.46 to
make zero-cost
Sell OTM
call
Value = Call1 – Call2 + money market
58. Contact
Dr Antonie Kotzé
Email: consultant@quantonline.co.za
Phone: 082 924-7162
Disclaimer
This article is published for general information and is not intended
as advice of any nature. The viewpoints expressed are not
necessarily that of Financial Chaos Theory Pty Ltd. As every
situation depends on its own facts and circumstances, only specific
advice should be relied upon.