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ADNEOM BENELUX

FINANCIAL MARKETS


Risks

Definition of Risk

Risk is the exposure to an event in which the outcomes are uncertain and at least one of the outcomes is undesirable relative to at least one other outcome.

Measure of risk

In finance, the measure of the performance of an investment is made by the standard deviation.


Risks

Risk Management strategies

- Avoidance : not taking the risk

- Acceptance : simply taking the risk without managing it

- Risk reduction : identification, analysis, protection and prevention

- Transfer : - financial : by taking an insurance or hedging it

- operational : subcontractors


Risks

Risk typology

1. Default or Counterparty Risk

- Credit Default Risk : when an obligor is unlike to pay its credit obligations.

- Concentraion Risk : group of exposure with the potential to produce large losses.

- Sovereign Risk : default of a sovereign state.


Risks

2. Market Risks

- Equity Risk : risk of value depreciation due of the stock market dynamics.

- Interest Rate Risk : the risk of value depreciation of an interest bearing asset. (value of bonds when Interest rates raise)

- Exchange Rate Risk : risk of value change of the exchange rate of a currency in relation to another.

- transaction risk : exchange rate unfavourable.

- translation risk : exchange rate over time can render a reporting inaccurate

- Inflation Risk : real value depreciation due to the difference between the increased value of assets and reduced purchasing power due to inflation.


Risks

3. Liquidity Risk

- Market Liquidity : the risk of not have the possibility of selling or buying an asset due to a lack of liquidity in the market. (ex Exotic bonds)

- Funding Liquidity : the risk that liabilities cannot be met when they fall due or at an inaccurate price.


Risks

4. Operationl Risk

Arise from the execution of the company’s business functions, from people, systems, processes through which company operates. It includes fraud, legal risks, physical or environmental risks. (ex. Fukushima)

5. Reputation Risk

Related to the trustworthiness of business (ex Arthur Andersen, Goldman Sachs)

6. Volatility Risk

Change of price of a portfolio as a result of changes in the volatility of a risk factor. Usually applies to portfolios of derivatives instruments where volatility of its underlying is a major influencer of prices.


Risks

7. Settlement Risk

Risk that a counterparty does not deliver a securityor its value in cash when it was traded after the other counterparty have paid for it. (ex Lehman Brothers)

8. Systemic Risk

The risk of collapse of an entire system. Comes from interdependencies in a system where the failure of a single entity can cause a cascading failure which can potentially destroy the whole system. (ex Fortis)


Risks

How to reduce risks

- Risk based pricing : more charges for borrowers who are more likely to default (rating companies)

- Covenants : stipulations on the borrower : periodic financial reports, refrain from paying dividends, etc.

- Credit Insurances : hedging credit risks by purchasing credit insurances or derivatives => transfer risk to the insurance

- Tightening : reduce the amount of credit extended or payment delays

- Diversification : diversifying the borrower pool to reduce concentration risks

- Collateral : borrowers give assets inguarantee to hedge the loan (mortgage, cash deposit, financial assets deposits, etc.)


Risks

Business Communication in Risk

Listed companies have to inform the public about their risks. The financial communications is required by the Market Authorities.


Stocks & Indexes

Definition

- Stock is a share in property, a fraction of the capital of a company.

- The shareholder is the owner of stocks

- Rights of a shareholder :

- Right to assets : as he owns a part of the company

- Right to profits : dividends or coupons

- Right to vote : shareholders control the company

- Right to information : companies have an obligation of communication to the shareholders.


Stocks & Indexes


Stocks & Indexes


Stocks & Indexes


Stocks & Indexes


Stocks & Indexes

Stock pricing

Depends on :

-Health of the economy

-Health of the enterprise (cost of raw material, health of the sector, strategies, etc.)

-Panic or euphoria from the part of market players

-The portion of the stock in circulation (float)

Market capitalization : Nb of stocks x stock price

Corporate events : stock splits


Stocks & Indexes

PER : Price Earnings Ratio

PER = Quote/Benefits by stock

Is used to compare enterprises from the same sector. PER should be equals

PER is raising when quote is raising and/or Benefits are decreasing.

PER is often high for startups or ICT companies.


Stocks & Indexes

Gordon – Shapiro Model

Stocks value is based on the net present value of the future dividends.

- P is the current stock price. - g is the constant growth rate in perpetuity expected for the dividends.- r is the rate expected by the shareholder.. - D1 is the value of the next year's dividends.


Stocks & Indexes

Indexes

Definition :An index is an indicator, made up of a basket of instruments that reflects the upward or downward trend in the price of a set of instruments at a given time with respect to a reference price.

Each instrument can have the same weight or a different weight in this average.

The composition of an Index may change in time.

Ex : BEL20, CAC40, Dow Jones, Nikkei, FTSE


Stocks & Indexes

BEL20

Conditions to be eligible in the BEL20 Index :

-at least 15% of its shares must be considered free float in order to qualify for the index.

-a candidate for inclusion must possess a free float market capitalization (in Euros) of at least 300.000 times the price of the index on the last trading day of December.

-the minimum requirement for an existing constituent to remain in the index is a market cap of 200.000 times the index value.

-the annual free float velocity should at least be equal to 30% (= the percentage of volume exchanged during the year, compared to the total of shares)


Stocks & Indexes

Trackers

Definition :A tracker "tracks" the performance of indexes and basket of shares such as market indexes or Industry field indexes. With a single transaction, the investor buys several shares.


Stocks & Indexes

Trackers combine the advantages of both stocks and mutual funds:

-Prices are updated continuously during the trading day. At any given time, the investor knows the price of his tracker

-Buying and selling transactions are done immediately

-No entry or exit charges

-Tracker holders receive dividends from the companies that make up the underlying index.

- Based on baskets of shares, so less volatile instrument than the shares of which it is composed


Stocks & Indexes

SICAVs (Société d'Investissement à Capital Variable)

A SICAV is a company that aims to pool the risks and benefits of investing in securities (stocks, bonds, etc..) Debt securities, repos and other financial instruments authorized either by regulation or by the statutes of the SICAV.

Advantage :- Risk diversification for a small amount of money

Disadvantage :- Subscription rights- Management fees can be high- Most of the SICAVS are not traded in stock exchanges. The price given correspond to the value of the fund divided by the number of parts of the SICAV adjusted from operating expenses.- A subscription to an unknown price (net asset value is only known the next day)- It is possible to negotiate a SICAV only once a day.


Stocks & Indexes

SICAFI

A SICAFI is like a SICAV but it is composed of real estate assets. The company owns, manages and develops properties


Stocks & Indexes

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