Stock Exchange & Related Terms & Financial Derivatives

8/21/2019 Stock Exchange & Related Terms & Financial Derivatives

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St ock Ex change & Relat ed T er ms

P r esent ed By : Anum Ir f an



Stock Exchange

0 It is an organied and regulated !nancialmarket "here securities #$onds% notes%shares are $ought and sold at 'ricesgo(erned $y the forces of demand andsu''ly)



Ar$itrage

0Ar$itrage is $asically $uying in one market andsimultaneously selling in another% 'ro!ting from atem'orary di*erence) This is considered riskless 'ro!t

for the in(estor+trader)0E,A-P.E

0An in(estor may $uy a stock on a foreign exchange"here the 'rice has not yet ad/usted for theconstantly uctuating exchange rates) The 'rice of

the stock on the foreign exchange is thereforeunder(alued com'ared to the 'rice on the localexchange% and the trader makes a 'ro!t from thisdi*erence)



Ask & Bid

Ask Bid

0 The lo"est 'rice a

seller is "illing toacce't for a security%also kno"n as the o*er'rice)

0 An exam'le of an ask inthe stock market "ould

$e 12 x 3000 "hichmeans that someone iso*ering to sell 3000shares for 12)

0 The highest 'rice a

$uyer is "illing to'ay for a security)

0An exam'le of $idat the stock market"ould $e 14 x 200

"hich means thatan in(estor is "illingto $uy 200 shares ata 'rice of 14)



Basis Point0A unit is e5ual to 3+300

th

of 36% and is usedto denote the change in a fnancialinstrument) The $asis 'oint is commonlyused for calculating changes in interestrates, equity indexes and the yield o afxed-income security.

0An interest rate of 76 is 70 $asis 'ointsgreater than an interest rate of 8)76) Thedi*erence $et"een 39)26 and 39)226 is!(e $asis 'oints)

0 The relationshi' $et"een 'ercentage

changes and $asis 'oints can $e summaried



Bear market <S Bull

-arket0A market condition in

"hich the 'rices ofsecurities are alling%and "ides'read'essimism causes thenegati(e sentiment to$e self=sustaining) Asin(estors antici'ateslosses in a $earmarket and sellingcontinues% 'essimismonly gro"s)

0A market in "hichthe 'rices ofsecurities are

rising) It ischaracteried $yo'timism% in(estorcon!dence and

ex'ectations thatstrong results "illcontinue)



Blue >hi' Stocks

0Stocks of "ell=esta$lished and !nanciallysound com'anies that ha(e demonstratedtheir a$ility to 'ay di(idends in $oth goodand $ad times)

0 These stocks are usually less risky than otherstocks)

0E,A-P.E:

0?eneral -otor >or'

0@au/i @ertiliers

0Pakistan il !eld

0nited Bank



>all o'tion

0An o'tion "hich gi(es the holder the right% $ut not theo$ligation% to $uy a !xed amount of a certain stock at as'eci!ed 'rice "ithin a s'eci!ed time) >alls are 'urchased$y in(estors "ho ex'ect a 'rice increase)

0 In(estors use o'tion to s'eculate and to hedge risks)

0E,A-P.E:

0 IB- stock is currently trading at a 1300 'er share) Anin(estor 'urchases one call o'tion contract on IB- "ith a300 strike and at a 'rice of 19)00 'er contract) The actual

cost of this o'tion "ill $e 1900 #300 shares x 19)00 ; 1900)0After a "eek IB- starts trading at 1307 'er share) This is the

right time for the in(estor to sell the shares in order to gain'ro!ts from 'rice di*erence)



>ommission

0 The fee charged $y an in(estment ad(isor or $roker for$uying or selling securities as an agent on $ehalf of aclient)

0E,A-P.E:0 Cou "ould like to 'urchase 300 shares of >om'any ,CD

at 17 'er share% and your $roker charges a 96commission to make the trade)

0 The shares themsel(es "ould cost 1700 #17 x 300

shares% $ut the $roker "ould also need to $e 'aid for!nding someone to sell the shares to you) @or theirser(ices% they "ould charge 10 #1700 x 96) The totalcost of the transaction "ould $e 1700 F 10 ; 170)



Go"ntick

0A transaction on an exchange that occurs at a'rice $elo" the 're(ious transaction)

0 In order for a do"ntick to occur% a transaction

'rice must $e follo"ed $y a decreased 'rice) Thisis commonly used in reference to stocks% $ut itcan also $e extended to commodities and otherforms of securities)

0E,A-P.E:0Stock AB> 're(iously traded at 130) If its next

trade occurs at a 'rice $elo" 130% then AB> "ill$e on a do"ntick)



E5uity o'tions

0An o'tion contract on a stock)

0 The holder of an e5uity o'tion has the a$ility

to $uy or sell some num$er of stocks in acertain com'any at a gi(en 'rice on or $eforethe ex'iration date)



Insider Trading

0A trade one makes $ecause one has rele(antinformation on a com'any that has not $eenreleased to the 'u$lic)

0E,A-P.E:

0A director may ha(e access to a com'anyHs!nancial state #high rate of di(idend 'rior toits ocial announcement% and then $uy orsell that com'anyHs stock accordingly)

0 Insider trading is a serious crime "hen it isdone "ithout 'ro'er authoriation)



Issued and utstanding

Securities0 The situation "here the num$er of issued

securities e5uals the num$er of outstandingsecurities)

0Stock currently held $y com'any% includingrestricted shares o"ned $y the com'anyHsocers and insiders Shares that ha(e not$een re'urchased $y the com'any are not

considered outstanding stock)0 The num$er of authoried shares that is sold

to and held $y the shareholders of acom'any% regardless of "hether they are

insiders)



ST>J -ARJET



Khat is stock marketL

0-arket in "hich shares of listed com'aniesare issued and traded either throughexchanges or o(er the counter market)

0 It is also kno"n as MENITC -ARJETO



To' $rokers

0JASB securities

0AJG securities

0B-A trade

0I?I trade0S>S trade

0 Taurus securities

0-- securities

0@oundation securities

0Arif a$i$ securities

0Sunrise ca'ital

0Bur/ ca'ital

0 In(est ca'ital

0Elixir securities



-a/or 'artici'ants

0.ocal in(estors)

0@oreign in(estors

0-utual funds

0 Institutions

0Banks



GI@@EREQT ST>J PRI>E

IQGI>ES0JSE ?EQERA. IQGE, #37;3000

0JSE 300 Index #33;3000

0JSE=0 Index0SBP ?EQERA. Index

0BR #BSIQESS RE>RGER



@ inancial Ger i( at i( es



Khat are theyL

0A deri(ati(e is a !nancial instrument "hichderi(es its (alues from the (alue#'erformance of underlying entities% such asan asset% index or interest rate)

0 In 'ractice% it is a contract $et"een t"o'arties that s'eci!es conditions #es'eciallythe dates% resulting (alues and de!nitions of

underlying (aria$les% the 'artiesH contractualo$ligations% and the notional amount under"hich 'ayments are to $e made $et"een the'arties)



0 The most common underlying asset include:

0>ommodities% stock% $onds% interest rates andcurrencies)

0?enerally used as an instrument to hedgerisks% $ut can also $e used for s'eculati(e

'ur'oses)0Each time a deri(ati(e is traded% one of the

t"o 'arties is $ound to su*er a loss #erosum game



Ty'esL

'tions

• >all 'tion• Put 'tion

@utures

• >ommodity@utures

• @inancial@utures

S"a's

• Interest rate

s"a'• >ommoditys"a'

• >redit defaults"a'

• >urrency s"a'• E5uity s"a'

Geri(ati(es



'tions Trading

0An option is a contract "hich gi(es theo"ner the right% $ut not the o$ligation% to $uyor sell an underlying asset or instrument at as'eci!ed strike 'rice on or $efore a s'eci!cdate)

0 T"o ty'es:

0 = >all o'tions

0 =Put o'tions



@utures

0A !nancial contract o$ligating the $uyer to'urchase an asset #or the seller to sell anasset% such as a 'hysical commodity or a!nancial instrument% at a 'redeterminedfuture date and 'rice)

0 The 'rimary di*erence $et"een o'tions andfutures is that o'tions gi(e the holder the

right to $uy or sell the underlying asset atex'iration% "hile the holder of a futurescontract is o$liged to ful!ll the terms ofhis+her contract)



0 The contracts are negotiated at a uturesexchange% "hich acts as an intermediary

$et"een the t"o 'arties) The 'arty agreeingto $uy the underlying asset in the future% theM$uyerO of the contract% is said to $e MlongO%and the 'arty agreeing to sell the share in thefuture% the MsellerO of the contractH is said to

$e MshortO)0 T"o ty'es:

0 >ommodity @utures: are mostly grains suchas "heat% metals such as gold% sil(er and

minerals like oil)0@inancial futures: include currency% $onds and

stocks and can also $e intangi$le assets orreferenced items% such as stock indexes and

interest rates)



0 In !nance% a orward contract or sim'ly aorward is a non=standardied contract

$et"een t"o 'arties to $uy or sell an asset ata s'eci!ed future time at a 'rice agreed u'ontoday)



Gi*erence $et"een @or"ard >ontracts and@uture >ontracts

@or"ard >ontracts@uture >ontracts

3) Qegotiated directly $ythe $uyer and seller

9) >ustomied to thecustomer needs)

sually no initial'ayment re5uired)sually used forhedging

3. High counter'artyrisk

8) Qot regulated

3) Nuoted andtraded on theExchange

9) Standardied)

Initial margin'ayment re5uired)sually used forspeculation

3. Low counter'arty

risk8) ?o(ernment

regulated market#the >ommodity@utures Trading

>ommission or>@T> is the



SKAPS

0An exchange of streams of 'ayments o(ertime according to s'eci!ed terms) The mostcommon ty'e is an interest rate s"a'% in

"hich one 'arty agrees to 'ay a !xed interestrate in return for recei(ing a ad/usta$le ratefrom another 'arty)



Interest Rate S"a'



@oreign Exchange S"a's



>ommodity S"a's

0A s"a' in "hich exchanged cash o"s arede'endent on the 'rice of an underlyingcommodity) A commodity s"a' is usuallyused to hedge against the 'rice of

commodity)



>redit Gefault S"a'

0 The $uyer of a credit default s"a' recei(escredit 'rotection% "hereas the seller of thes"a' guarantees the credit "orthiness of the

de$t security) In doing so% the risk of defaultis transferred from the holder of the !xedincome security to the seller of the s"a')



Geri(ati(e -arket In

Pakistan0 In Pakistan deri(ati(e market "as de(elo'ed in 9003

and is currently regulated $y the SBP)

0 In Pakistan% the deri(ati(es market is in the nascent

stage) It has /ust started to emerge "ith fe" contractsof for"ard trade agreements% 'lain (anilla s"a's andcurrency o'tions) The total (olume of transactions isaround Rs7 $illion)

0Geri(ati(e market is dee'ly regulated $y the SBP) It

regulates the T> market for• @oreign currency o'tions

• @or"ard rate agreements

• Interest rate s"a's




Pakistan0All deri(ati(e agreements re5uire formal a''ro(al of

the central $ank% gi(en on a case=to=case $asis%considering the concerned $ankHs 'otential of risk

management)0Authoried deri(ati(e dealers only include:

• >ity $ank

• Geutsche Bank

• @aysal Bank

• B.

• S>B

• B.




Pakistan0@inancial deri(ati(es are designed to manage

o(erall risk 'ro!le and 'ro!ta$ility of any$usiness) But there are risks in(ol(ed in the

deri(ati(e 'roducts themsel(es "hichtranslates into Mthe grain of one is the loss ofthe otherO) That is the ma/or reason "hy SBPhas $een highly cautious of the deri(ati(e

market)0 The ma/or im'lications for SBP ha(e $een to

ensure that the risks of deri(ati(es are fullyunderstood $y local !rms and $anks $efore

o'ting for a full=$lo"n ex'ansion in deri(ati(emarket)



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Stock Exchange & Related Terms & Financial Derivatives

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