8/6/2019 Nadeem S.f

1/24

Hamdard Institute of management and

sciences (HIMS)

Subject: - Types of securities

Group Members Name

Nadeem Ul Haq Khan

Mirza Affan Baig

Samit Zafar

Submitted to: Prof. Aun Ali

8/6/2019 Nadeem S.f

2/24

LETTER OF TRANSMITTAL

18-05-2011

Prof. Aun Ali

Course Instructor, Methods of Business Research,

Hamdard University,Karachi.

Dear Sir,

Our report was on the topic, Type of securities. We find all the data oninternet thats why we makes no representation concerning and does notguarantee the source, originality, accuracy, completeness or reliability ofany statement, information, data, finding, interpretation, advice, opinionor View presented. We have got great benefit of on working over thiscourse report. It helped us widening our vision, improving our quality ofwork, building self reliance work and gives a vital experience in order toimprove our analytical skills. We hope its up to your expectations andfulfils all the requirements given by you.

Obediently,Nadeem Ul HaqMirza AffanSamit Zafar

8/6/2019 Nadeem S.f

3/24

LETTER OF ACKNOWLEDGE

18-05-2011

First and foremost, we would like to thanks ALLAH Almighty for

giving us capability and strength to complete this report on time.

I am extremely grateful to my course instructor Mr. Aun Ali for

imparting the knowledge and giving us guidance at every stage of our

report, without which our report will be incomplete.

Obediently

Nadeem Ul Haq

Mirza Affan

Samit Zafar

MBA-3

HIMS

8/6/2019 Nadeem S.f

4/24

CONTENT Page

BONDS

y Corporate bonds

y Money market instruments

y Euro debt securities

y Bearer and Registered Bonds

y General Obligation and Revenue Bonds

y Treasury Bonds

y Treasury Notes

y Treasury Bills

y Participating Bonds

y Convertible Bonds

y Zero Coupon Bonds

y High Yield (Junk) Bonds

y Warrant Bond (Bonds with warrants)

y

Indexed Bondsy Sinking Bond Funds

y Commercial Paper

y Mortgaged backed Securities

EQUITIES

y Common Stock

y Preferred Stock

y Par Value

y Book Value

y

Classes of Stock

y Stock Splits

y Dividends

y Ex-Dividend

y DRIPS

y Treasury Stock

y Depository Receipts

y COMMODITIES

DERIVATIVES

y

Futuresy Options

y Covered calls

y Uncovered calls

y Index options

y Warrants

y Swaps

y Repurchase Agreements

8/6/2019 Nadeem S.f

5/24

Bonds

This market trades in the debt instruments issued by governments,government agencies, such as municipalities, and corporations. The

bond market usually attracts more interest from professional andinstitutional investors than from the general public. Institutionalinvestors include pension funds, insurance companies, bank trustDepartments and collective investment schemes. A bond is a long-termloan issued in the form of a negotiable security by a corporation,

government, or government agency. Bonds are loans from thebondholder (buyer) to the issuer (seller). A bond is a promise by theissuer to pay back the amount loaned to it (called principal)plus anagreed to amount of interest on or before a stated date. The interest may

be paid periodically during the life of the loan or all at once when theloan is paid back. Bonds are also called fixed income instruments,

because the amount of income that the bond will generate is fixed by thestated interest rate of the bond. The date when the loan becomes due is

called the maturity date of the bond. The loan is represented by aphysical piece of paper and if it pays interest periodically during the lifeof the loan, the certificate may also consist of coupons. Coupons aredetachable from the bond certificate itself, usually by a perforation, andare presented to the paying agent of the issuer, usually a commercial

bank, for payment. For this reason they are called coupon bonds. Whilecoupon bonds are no longer widely used, the amount of interest that a

bond pays is still known as the coupon rate and the bond is still known

as a coupon bond.

8/6/2019 Nadeem S.f

6/24

Corporate bonds

Corporate bonds represent the debt of commercial or industrial entities.Debentures have a long maturity, typically at least ten years, whereas

notes have a shorter maturity. Commercial paper is a simple form ofdebt security that essentially represents a post-dated check with amaturity of not more than 270 days.

Money market instruments

Money market instruments are short term debt instruments that mayhave characteristics of deposit accounts, such as certificates of deposit,

and certain bills of exchange. They are highly liquid and are sometimesreferred to as "near cash". Commercial paper is also often highly liquid.

Euro debt securities

Euro debt securities are securities issued internationally outside theirdomestic market in a denomination different from that of the issuer'sdomicile. They include Eurobonds and euro notes. Eurobonds arecharacteristically underwritten, and not secured, and interest is paidgross. A euro note may take the form of euro-commercial paper (ECP)or euro-certificates of deposit.

Government bonds

Government bonds are medium or long term debt securities issued bysovereign governments or their agencies. Typically they carry a lowerrate of interest than corporate bonds, and serve as a source of finance for

8/6/2019 Nadeem S.f

7/24

governments. U.S. federal government bonds are called treasuries.Because of their liquidity and perceived low risk, treasuries are used tomanage the money supply in the open market operations of non-UScentral banks.

Sub-sovereign government bonds

Sub-sovereign government bonds, known in the U.S. as municipalbonds, represent the debt of state, provincial, territorial, municipal orother governmental units other than sovereign governments.

Supranational bonds

Supranational bonds represent the debt of international organizationssuch as the World Bank, the International Monetary Fund, regionalmultilateral development banks and others.

Bearer and Registered Bonds

Bearer and Registered Bonds are also identified by the way they areowned. Bearer bonds, for example, belong to the person who holds themand ownership is not otherwise recorded.Eurobonds are issued in this format. While this form of ownershipcarries the risk of losing the certificate, it offers the highest degree ofanonymity and that is why in some countries, the United States forexample, they are no longer allowed. The other common type of formatis a fully registered bond, either in certificate form or in book entry. Theowners name is recorded with a transfer agent and interest payments are

made either by check or electronic credit. The book entry method, whereno certificate is issued and ownership is merely recorded in a ledger, isgrowing in popularity because it reduces transfer costs, simplifieshandling, and decreases the probability of losing the certificate or havingit stolen.The reason a bond is called a debt instrument is because thereare no ownership rights in a bond. The promise to pay is what

8/6/2019 Nadeem S.f

8/24

distinguishes bonds from stocks. The holder of a bond is a creditor, theholder or a stock is an owner. Although the holders of corporate bondslack voting rights and have no participation in net profits, they maydemand full payment of their bonds even if it means forcing the

company into bankruptcy. Owners of stock have no such claim. In thecase of liquidation or bankruptcy of the issuer, the bondholders are paid

before shareholders. Bondholders are said to have a superior claim onthe assets of the issuer. They are superior creditors in the eyes of thelaw.

General Obligation and Revenue Bonds

General obligation bonds usually refer to government bonds and arebacked by the full faith and credit of the taxing power (country,municipality, etc.) that issues them. Revenue bonds are payable onlyfrom some specific source of taxes (highways tolls, water bills, etc.) andare not subject to the general taxing power of the issuer.

Treasury/GovernmentB

onds

A countrys long term financing needs are met by issuing bonds thatmature from anywhere after one year up to essentially as long as acountry wants and to which the public is willing to commit its money.Average lengths run to 20 or 30 years and are called long-term bonds.These long-term bonds are watched closely by the market as anindication of where long-term interest rates will be heading. Long -term

bonds may be subject to being called before they mature. Callablemeans that the issuer has the right to pay off the bond sooner than thematurity date. If a bond is subject to being called before it matures, bothdates are mentioned in its listing. Thus a bond that pays 5% and maturesin June 2010, but is callable after June of 2005 is referred to as the 5% ofJune 2005-2010. Treasurys usually issue split-date callable bonds

8/6/2019 Nadeem S.f

9/24

during periods of high interest rates in order to have the opportunity topay them off sooner if interest rates drop The government would thenissue new bonds at a lower rate.

Treasury/Government Notes

Notes usually have a maturity of from 2 to 10 years and are known asintermediate term investment instruments. Notes are not callable beforetheir maturity date. Notes usually pay interest semiannually.

Treasury/Government Bills

T-bills, or bills, are the shortest term Treasury security and usuallymature in 3, 6, 9 or 12 months. T-bills carry no coupon rate of interest

but are sold at a discount from par. Par is the face amount of the bond.This means that the price paid for a T-bill is less than its value atmaturity. Thus a 12 month T-bill yielding 5% would be sold at a 5%discount from the face value of the bond.

Participating Bonds

These bonds not only bear a fixed rate of interest, but also have a profit-sharing feature. The bondholder is entitled to participate along with

shareholders in earnings of the corporation to the extent described in thebond contract. These are used widely in Europe and are usually issuedby weak companies as an added inducement to attract buyers.

8/6/2019 Nadeem S.f

10/24

Convertible Bonds

Usually all that the bondholder is promised is the principal and interest.

There is an exception to this rule and it is called a convertible bond. Thisis a bond that at its maturity, or some other stated date, may beconverted to a stated number of common shares in a corporation. A newcorporation without much money or track record for paying off bonds ora corporation with a low credit rating might offer convertible bonds

because the borrowing costs of straight bonds would be prohibitive.Convertible bonds rank below conventional bonds but ahead of anyequity in their claim on the assets of a company.

Zero Coupon Bonds

Zeros, as they are frequently referred to, are issued at a discount fromtheir par value. Unlike a conventional bond, zeros pay no interest

between issuance and redemption but only at maturity. Although thebondholder forfeits immediate income from the zero, the yield tomaturity is computed on the assumption that the coupon interest isreinvested at the prevailing rate when received. Consequently, as interestrates fall the reinvestment is presumed to be at the lower rate, reducingthe yield but increasing the price of the bond. Likewise, if interest ratesrise, the bonds price will fall, but the coupons are reinvested at thehigher rate, raising the yield to maturity. With no cash flow from coupon

payments to act as a cushion, zero prices swing rapidly up and down inresponse to even minor changes in the interest rate. In times of highinterest rates, zeros are very popular in order to lock in those high rates.

8/6/2019 Nadeem S.f

11/24

High Yield (Junk) Bonds

The top four rankings of any rating service are usually known as

investment grades. Bonds in these categories may generally be boughtfor fiduciary accounts unless specifically restricted. Fiduciary accountsinclude pension plans and some bank trust accounts. Any bond belowinvestment grade is referred to as a junk bond. But, in the terms of themarket, it is called a high-yield bond. It is called junk, because itdescribes the quality of the bond. Brokers and dealers prefer the termhigh yield because it sounds better and also because it describes theyield. The yield is how much a bond pays, or the interest rate. The bondmust pay a high level of interest because of its low rating. The risk of the

issuer not being able to pay off the bonds is high, so the potential returnto the investor must also be high in order to justify taking the risk. Thelow rating is a result of the rating service determining that the issuer isnot in sound financial shape and may not be able to honor itscommitment to pay off the bonds.

Warrant Bonds or Bonds with Warrants

These bonds contain the right (warrants) to purchase shares of commonstock at a specified price. Usually the warrant price is higher than thecurrent market price.

Indexed Bonds

These bonds are used in periods of high inflation. The interest payments

are indexed to the inflation rate.

Sinking Bond Funds

This is not technically a separate category of bonds. Any bond issue mayhave a sinking feature. With this feature, the issuer agrees to set aside

8/6/2019 Nadeem S.f

12/24

a certain amount of money each and every year for the eventualretirement of the bond issue. A bond issue is retired when it is fully paid.After a specified period, redemptions may begin and bonds may becalled. This results in the shortening of the life of the issue so that even

if an issue was originally offered with a 20-year maturity, the bondsmight be called after 10 or 15 years. Because the sinking fund depositsare to be used only for the retirement of a specific outstanding issue, theexistence of a sinker increases the bonds safety and marketability.Payments by the issuer to a sinking fund are mandatory and the failure tomake them in a timely manner could threaten the issuer with default.Bondholders should not assume that a sinking fund absolutely protectsthem from loss, although it may help increase the level of confidence

that the bonds will be fully paid.

Commercial Paper

Commercial paper is short- term debt issued by a corporation.Commercial paper has a maturity date of less than one year, sometimes

just a few months. It is an unsecured promissory note and may be issuedat a discount to the par value. Interest on commercial paper is usually

paid only at the maturity date.

Mortgage backed securitiesMortgages are a conveyance of title to property that is given as securityfor the payment of a debt. When a person obtains a mortgage on a househe or she actually signs two instruments. The first is the note that is asimple promise to pay, like any other note. The mortgage document is

the document that transfers title of the house to the name of theinstitution or person lending the money as security for the note. Thehouse is put up as security in order that the lender will have an asset

behind the note in case the debtor defaults on the payments. If the debtordoes default, the lender has the right to sell the house in order to coverthe debt.Mortgages are combined with other mortgages to create what is

8/6/2019 Nadeem S.f

13/24

called mortgage backed securities. These securities are backed by themortgages attached. The payments are passed through from the debtor tothe investor. These mortgages can then be sold in the open market anddo not have to be held until the entire debt is paid off. The process of

converting assets into a negotiable security for resale in the financialmarkets is known as securitizing the asset. Mortgage backed securitiesmay be sold with the principal and interest, principal only, or interestonly being passed through to the buyer.

EQUITIES

The principal focus of securities regulation is on the equities marketbecause it attracts much more interest from the general public which isusually less sophisticated than professional or institutional investors.This market trades shares of common stocks issued by corporations.

Common Stock

All corporations issue a stock that has the last claim on the corporationsassets. The most frequently used term for this kind of stock is commonstock, although in the United Kingdom and Australia they are calledordinary shares. It is the first security to be issued and the last to beretired. Common stock represents the chief ownership of a corporationand usually is the only issue that has a vote in managing the corporation.Should a company go bankrupt, holders of senior securities like bondsand preferred stock will be paid first. Common stock owners, therefore,

may receive nothing for their shares in the event the corporationbecomes bankrupt or is forced into liquidation. Common stock is alsousually the only stock that can vote for the members of the board ofdirectors of a corporation, although there are exceptions, such as someissues of preferred stock.

8/6/2019 Nadeem S.f

14/24

Preferred Stock

The term preferred stock is almost a misnomer. This type of stockusually does not have any voting rights and is often retired after a certainperiod of time, usually about 10 years. The preference comes in thatthese shares are entitled to dividend payments or claims on assets in thecase of bankruptcy before any payment to the common stock holders,

but still only after all bondholders have been paid. Dividends areusually, but not always, cumulative. Dividends are a distribution tostockholders declared by a corporations board of directors based upon

profits. Dividends may be declared either in cash or additional stock.Cumulative means that if a dividend payment is missed because thereare no profits to pay the dividend, the preferred stock holders must be

paid all missed dividends before the common stock holders can be paidanything. Preferred stock may also be issued in a form known asconvertible preferred stock. This means that the preferred stock may beconverted into common stock (much like a convertible bond). When aconvertible preferred stock is issued it usually has voting rights equal tothe terms of convertibility.

Par Value

Common stock is issued with a par, face or stated value. These terms areof more concern to the accountants than they are to the investor. Par

value is usually arbitrarily fixed based upon some financial or taxcriteria. Par value is usually set as low as possible. Some stock carries nopar value. If there is a listed par value for a stock, the only significanceto the investor is that the stock cannot be issued by the corporation forless than its par value. Any stock issued below the par value is known aswateredstock. Depending upon the laws of each country, an investor

8/6/2019 Nadeem S.f

15/24

who purchases watered stock may be liable to the corporation for thedifference between the par value and what the investor actually paid. Parvalue for stock is only relevant with respect to the original issue by thecompany. The stock may sell at any price above or below the stated par

value in subsequent trades in the secondary market.Unlike stock, par value for bonds is very important and is the faceamount of the bond.

Book Value

Book value is the stated value of the assets of the corporation behindeach share of common stock. It is determined by adding the par value,

capital surplus and retained earnings, subtracting any intangible assetsand dividing by the number of shares outstanding. The importance of

book value is not universally agreed upon. Some believe that it isimportant as a test to determine the investment value of the stock. If themarket value, the price at which the stock is selling on the open market,is less than the book value, speculators believe that some raider may

purchase the company and sell it off in pieces. The value of the separatepieces is known as its breakup value and in this case the breakup value

would be more than the book value. Others believe that the book value isnot a very accurate value. They believe that since the assets of acorporation are carried on the books at cost less depreciation, the actualreplacement costs of these assets, or their value if sold, may not be fairlyreflected.

Classes of Stock

Sometimes a corporation will issue more than one class of commonstock. The difference between the classes is usually based upon theirvoting rights. Some classes have superior (called weighted) votingrights. Some classes have no voting rights at all. Different classes areusually labeled by letters such a class A or class B.

8/6/2019 Nadeem S.f

16/24

Stock Splits

A stock split occurs when a company divides its shares. The split has noeffect on the companys net worth or the value of the shareholdersinvestment. A split just spreads the investment over more shares. Forexample, if a corporation with 1 million shares outstanding shouldincrease that number to 2 million, then it would be said that thecorporation split the shares 2 for 1 and the price of the share would bedivided by 2.Therefore, the owner of 100 shares of this company that were priced atUS$10.00 would, after the split, own 200 shares priced at US$5.00.

Corporations usually split a stock in order to lower the price andincrease the potential number of owners by making the stock moreaffordable. A company usually wants to broaden ownership in order tomeet some exchange rule or to make itself more visible to theinvestment community. By being owned by a larger number of investorsand being more affordable, it is easier for a broker to sell those shares toothers.A reverse stock split, on the other hand, reduces the number of shares

and increases the price of the stock. Some exchanges require a minimumstock price to be listed and a reverse split may be done to comply withthis requirement. Very low priced shares are frequently referred to aspenny stocks, even though they may be selling for more than that andare not very well regarded by the investment community. A reversestock split would raise the price of the stock and perhaps the profile ofthe company in the market place. Reverse stock splits may indicate thata company is in financial trouble.

8/6/2019 Nadeem S.f

17/24

Dividends

Dividends, earnings from stocks, are declared by the board of directors

and usually paid in either cash or additional shares. A corporationsdividend policy depends upon such factors as cash position, growthprospects, stability of earning, capital spending needs and reputation.Many investors buy stocks because of the companys dividend historyand rely on the cash distributions for income. Generally, the larger andolder companies pay dividends in cash and the smaller and newercompanies pay dividends, if they pay them at all, in additional shares.Since cash dividends are paid out of current earnings of the company,the smaller and newer companies that find it necessary to retain the cash

for future growth cannot afford to pay cash dividends. Dividends mayalso be paid in the form of other property, such as shares in anothercompany such as a subsidiary.

Ex-Dividend

A stock is said to be selling ex-dividend when the dividend declared bythe company is not available to the purchaser of the stock. The dividendis usually not available to the purchaser because the stock was boughttoo late for the purchaser to be the recordholder of the security on thedate necessary to receive the dividend (the record date). On days when astock trades ex-dividend, its market price is reduced by the amount ofthe dividend. The purchaser buys at the price of the stock minus the

price of the dividend.

DRIPS

Dividend Re-Investment Plans, or DRIPS as they are commonly known,are plans that are sponsored by most large companies. These plans allow

8/6/2019 Nadeem S.f

18/24

the shareholder to reinvest all cash dividends directly into the purchaseof additional shares of the corporation.These shares are purchased directly from the corporation in the primarymarket. The reinvestment is automatic and handled by the corporation.

No share certificates are issued, the shares are book entry holdings, andusually include fractional shares that could not be purchased in thesecondary market.

Treasury Stock

Shares that have been issued to the public in the primary market and

then repurchased by a company from its own shareholders in thesecondary market are referred to as treasury shares because they arereturned to the treasury of the company. These shares have no votingrights, receive no dividends and are not used in the computation ofearnings per share in the corporations financial records. The corporationmay use treasury stock for employee stock purchase plans, to fundexecutive stock options or bonuses, as a vehicle to acquire the assets ofanother corporation through an exchange of stock tender offer, or simply

as an investment because the board of directors believes that the stock isunder priced and may even be below book value.Treasury stock, or the acquisition of treasury stock, may also be used asa defense against a raid on the company. By taking a large amount ofstock out of the market, the management would have greater control

because treasury stock cannot be voted against management.

Depository Receipts

Depository receipts evidence shares of a corporation that is incorporatedoutside the country in which the receipts are traded. So, for example, acompany domiciled inJapan (SONY) could list on the Jakarta StockExchange through the useof Indonesian depository receipts and be traded on the Jakarta market.

8/6/2019 Nadeem S.f

19/24

8/6/2019 Nadeem S.f

20/24

stock indexes are two other of the most recently introduced subjects ofcommodity contracts.Since some commodities cannot be delivered (interest rates) and mostcommodity traders dont want the commodity delivered, (pork bellies),

commodity contracts may also be settled for cash rather than theunderlying commodity that is the subject matter of the contract. The

price of the settlement is determined by the difference in the cost of thecommodity at the time of purchase or sale and the cost of the commodityat the time of the expiration of the contract.Commodity positions may also be closed out by purchasing the opposite

position, rather than the commodity or cash. For example, if a trader hasbought a commodity he or she will sell the same amount of the same

commodity before the expiration of the contract.Likewise, a seller will buy back the contract in order to avoid having todeliver. Both traders are speculating, of course, that they will make a

profit between the first and second action.

DERIVATIVES

The word derivative means taken from something else. In securities, itusually means taken from a direct security such as a bond or stock.These securities are direct obligations or investments. Everything else isderived from one of these instruments.Financial products that were once called hedging instruments are nowcalled derivatives but are still widely used for the purpose of hedging.

The most common derivatives are futures, options, warrants, swaps andrepurchase agreements.

8/6/2019 Nadeem S.f

21/24

Futures

Futures are contracts that create an obligation to buy or sell another

security on or before a specified future date. For example, you may holda futures contract to buy or sell a specified stock, bond or commodity.Futures markets in particular and derivatives markets in general, aremore for the sophisticated investor or trader. A trader who has bought afutures contract and has agreed to accept delivery is known as beinglong.The trader who has sold the futures contract and has agreed to make thedelivery is known as being short. The difference between the cash price(called spot price) for a commodity and the price listed in the futures

contract is called the basis orspread.The futures market is very sophisticated and carries with it great risk.Mostly this risk comes from the concept of leveraging made possible bythe existence of margins.Leveraging means that a trader may acquire for a small initial outlay(the margin) a much larger position than that amount of money wouldotherwise purchase if the entire position would have had to be paid for infull. For example, a trader may be required to place a 10% margin on a

position. That means that the trader only has to pay 10% of the price thatthe whole position would otherwise costs. Because of margins andleverage, large profits and losses are possible in relatively smallvariations in price.Because of the highly speculative nature of futures,most exchanges place both a position limit on the number of contracts anaccount may hold and a limit on the amount that the price of a contractmay fluctuate in any one day.

Options

Options are contracts that give the owner the right, but not theobligation, to buy or sell a specified asset (the underlying asset orunderlying) at a specified price on or before a specified date. The holderof an option is not obligated to buy or sell (exercise) the financial

8/6/2019 Nadeem S.f

22/24

instrument that is the subject of the option. Options for the purchase of asecurity are known as call options orcalls. Options for the sale of asecurity are known as put options orputs. The price at which the optioncan be exercised is known as the strike price orstrike. The price paid for

the option is known as the premium. If an option is not exercised by thedue date it is said to lapse.The buyer of an option is sometimes called the taker and the seller of anoption is sometimes called the writer. It makes no difference whether theoption is a put or a call.The intrinsic value of an option is the difference between the exercise

price of the option and the market value of the underlying security. Anoption is also said to have a time value that represents the volatility of

the value of the underlying stock during the time that the option iseffective.Call options on stocks that are currently trading below the strike priceare said to be underwater or out-of-the-money. Call options onstocks that are currently trading above the strike price are said to be in-the-money. Conversely, put options that are currently trading above thestrike price are out-of-the-money and those that are trading below thestrike price are in-the-money.Covered Calls are call options sold against the holdings of commonstock owned by the seller of the call. That is, the seller of the optionagrees to sell stock that he or she already owns at a fixed price at afuture date. If the price of the stock goes above the strike price, the

buyer of the option will exercise it and the seller will have to sell thestock. If the price of the stock goes below the strike price the buyer ofthe option will most likely not exercise the right to buy and the owner ofthe stock, who is also the seller of the option, will keep the stock as wellas the money received for selling the option.

Uncovered calls, also known as naked calls, are calls against stock thatthe seller of the option does not own. If the option is exercised, the sellerof the option must go into the market and buy the stock to cover the call.In some countries, this is not legal.Index options are contracts that permit the investor to focus on majormarket moves without actually having to choose individual stocks. All

8/6/2019 Nadeem S.f

23/24

investment purchases involve a risk, some risks are greater than others.If you choose an individual stock you run a stock specific risk that thestock will not act in the same manner as the entire market. The marketmay go up, but your stock may go down. Stock index options allow the

investor to buy (or sell) the whole market. Index options are used as apopular hedge against a broad market rise or fall.To complicate thematter even more, it is possible to buy a derivative of a derivative of asecurity. For example, you can purchase an option on a future of a stock,

bond, commodity or an index.In Asia, options either follow the American style or the European style.The American style is that the option may be exercised at any time up toand including the expiration date. The European style means that an

option may only be exercised on the expiration date.

Warrants

Warrants are standardized options but typically with a more distantexpiration date.There are warrants on bonds, equities, commodities, and currencies.Warrants are frequently issued as part of a bond. These bonds act much

like a convertible bond and to a large degree the price of the bondreflects the performance of the underlying equity. The warrants allow forthe bondholder to purchase a certain stated amount of common stock.

Swaps

Swaps are contracts whereby two parties agree to make periodic

payments to each other. For example, an interest rate swap wouldinvolve one party paying interest at a fixed rate, while the other party tothe contract would pay interest at a floating rate (such as the prime ratein effect at the payment date). In a currency swap, one party agrees to

pay a certain amount in a stated currency and the other party makes itspayment in a different currency. Both sides, of course, are betting that

8/6/2019 Nadeem S.f

24/24

the value of their method of payments will decrease and the other sidewill increase. For example, in a currency swap, two parties agree toswap HK$1million for the equivalent amount of Singapore dollars onthe date the contract is made. The party paying on the payment date in

HK$ is betting that the value of the HK$ will fall and be worth lesswhen the payment is due and the value of the S$ that he will receive will

be worth more.

Repurchase Agreements

Repurchase agreements, or repos, are contracts where the party selling asecurity to another party agrees to buy back that security at a future dateat a specified amount.The party selling, therefore, is betting that thesecurities will be worth more than the specified amount on the date ofthe repurchase and the party buying is betting that the securities will beworth less.