Introduction to Financial Markets and Hedge Funds, Schemi e mappe concettuali di Management Analysis And Systems

Scarica Introduction to Financial Markets and Hedge Funds e più Schemi e mappe concettuali in PDF di Management Analysis And Systems solo su Docsity! FMA Lezione 6 Feb INTRODUCTION TO FINANCIAL MARKETS We have 3 major concepts: financial assets, financial markets, and financial agents. A financial asset is the object, the market is the place where financial assets are exchanged and agents are those who exchange those assets on the market. Financial VS Real Assets A real asset is something material that we can touch and is available because we can do something, instead financial assets are intangible things; differently from real assets, financial assets, such as bonds and stocks, do not have an intrinsic value. Financial assets are intangible assets which provide holders with a claim on real assets and the income such real assets generate. Financial assets are contracts between issuers (corporations, financial institutions, governmental agencies) and investors (households, mutual and pension funds), which transfer the rights on part of the income generated by real assets from the former to the latter. Bond and Stocks Fixed-income securities promise a given stream of income determined according to a specific formula. Common stock or equity represents an ownership share of a given corporation. The holders are not promised a particular payment, but receive payments in form of dividends payout of the corporation’s earnings. Derivative securities, such as futures, options and swaps, provide the holders with payments which depend on the prices of other assets, like options (call option, pull option). Preferred stock, convertibles and warrants combine characteristics of bonds and equity (hybrid bonds). A stock is a residual claim on the income generated by the company, if you own a stock you own a fraction of the corporation and you own a fraction of its profit. A bond is also called fixed-income because a bond is a contract where payments are sure (we already know when we’re going to receive a stream of cash), while asset payments are not sure. Interest rates are unpredictable. Stocks are way riskier than Assets imply 2 side: someone who wants to buy financial assets and someone who wants to sell financial assets, they can meet in the financial market. We don’t know how to price financial assets, my idea of the stock depends on my idea of its possible profit (that the company is able to generate). We have to find an agreement. The price becomes real when I find someone who wants to pay my evaluation of the stock means that the price is real(?). The market is a place where peple agree on the assets price. Financial markets are not always perfect, a perfect market supposed that there is a proper amount of securities, Forward markets are We don’t know how firms behave, You have to be sure to have all the material you need, you can be sure of this thanks to financial market. Firm before were not able to forecast in advance. There is a market for every type of stock. There is a primary market for primary stock (IPO), this is a primary market that means that securities Secondary market means that the securiety is already issued. Over the counter market means that we agree to market exchange because we don’t won’t to be regulated. There is an authority that gives u an insurance. In Italy the authority responsible to the market is […] Markets are places where resources are traded, firms need money because they want to invest Roll-over debt: I create a new debt to pay my old ones. Financial institutions provide different type of services: financial intermediation (intermediation means making sure that the demands is …)  Securities trading, you have a portfolio of your financial asserts, u can do it on your own account, to increase your personal wealth.  Securities underwriting: big firms need a lot of money that they do not have, so they have to borrow money, they go to banks and ask for money, the bank goes to investors and say are you interest to buy this debt?  M&A: the bank need to evaluate how much a corporation values  Private banking: you have a person that manage your wealth and tells you how to invest.  Portfolio management: is a collective portfolio, I collect money from all of you and I invest in a portfolio, you all have part of it. The two most common work are portfolio management and investment banking. Intermediaries Receive the request for the transfer from your account to the bank account. Intermediaries need to have an automated system to manage all of this. Investment companies They collect funds that they then invest in portfolios: the more they collect money the more they can invest those in riskless investments. Unit investment units Are passive investments, the investment strategy is passive they you buy units of this portfolio, I fraction the investment and I sell those units. Managed investment companies Open-end funds: you buy your partecipations and you can then sell it to the companies. Close-end funds you cannot sell your partecipation, you need to find another investor to sell your share, and the price could be different. Close-end funds are a bit riskier and are for professional investments. To joing this kind of funds there are requisites about how much Puttable means that if you’re not able to pay the stream of income you promised I’ll change the stocks from common stocks to preferred stocks, becoming a part of the corporation and having a claim on interest income. Derivative contracts A derivative is a secuirity whose value depends on the value of another underlying variable. 3 kinds of derivaives: Forward and futures contracts Option contracts Swap contracts The price of this asset derives from other assets Deriviative markets are: Organized markets: characterized by standard contracts and without credit risk Over the counter markets, it means no standard rules, is really risky. The functions of derivative contracts Forward contracts Forward contracts are agreements to purchase (or sell) an asset at a future date at a pre-determined price, known as the delivery price. When you but spit market you physically take the asset and take it home. Forward are traded on over the counter markets, in future market the asset is the same but it is exchanged in organized market (ruled). Delivery price is chosen in such a way that the value of the contract is null for both counter-parties at the outset. Option contracts The options is the right call option to purchase and a pull option to sell. The idea is that we decide today to sell the right to buy my option just next Monday at 10 euros, if you give you pay me 10 euros I give you the right to sell it. This trade is profitable if next Monday the value of the stock is higher. SWAP I have a debt with a variable interest rate, I am afraid it’s too risky because the market can change as so the variable interest rate, I come to you and we agree that I’ll pay you a little more than the actual interest rate because you’re taking the risk that the interest rate can change. Interest rate is the cost of money, the money cost a lot when I don’t trust you. How firms issue securities If I issue stocks I lose ownership of my own firm nut I won’t pay the stream I can issue stocks in 2 way: IPO public offering (everyone can join) and the shareholder don’t change but they put more capital in the company. In the market the price is the market price, instead in the deal we decide the price together. There are some company Risk and return Holding period return (HPR) Capital Gain is the return that we make because the price of the stock change Dividend is the residual claim by the income generated by the contract Dividend Yield Future returns depend just on the dividend yield. How do we compute this performance? In 3 ways 1. he arithmetic average sum of the returns for the giving period, this is not a good measure fo the performance 2. The geometric average is better than the arithmetic one because it compounds (you reinvest) the returns. 3. Dollar-weighted average return this is most used by firms when they have to value future returns, it is basically the internal rate of return. There are also 2 different rates of return: 1. Annualizing Rates of Return, (APR-Annual Percentage Rate) don’t consider compounding 2. Effective Annual Rate (EAR): consider compound (we reinvest the returns that we made) The compounding is the only difference between the 2 rates Nominal interest rate and real interest rate The real interest is about quantitative When periods are expecting a monetary wage they are nominal The first motive to invest is to protect my wage from inflation Fisher equation Real interest rate and expected interest rate, this nominal interest rate depends on inflation rate Risk and risk premiums Covariance tells about how random variable moves toghether, this is very important because not all variables could be observed, Safe investment pay good returns when other investments pay bad are going bad Procyclical, the investment pay well when the stock market performe good. The portfolio construction is about finding the good investments, we select really risky assets that when the market goes well they outperforme the market, and then we take some standard investments they don’t change even we and we also have some protection (anticyclical investments). A weigheted average of the return of the risk part of the portfolio plus the part of our portfolio invested in the risk-free assets. He standard deviation of the portfolio is just the standard deviation of the risky assets of the portfolio because the risk free assets have a0 standard deviation. The capital allocation is the relationship between the returns and the risk of an asset. I we want to have more return we have to risk more. 27 Febbraio The midterm will be a multiple choice on the personal computer (or class’ computers). DIVERSIFICATION We don’t put all of our eggs in the same basket Risk: systemic and idiosyncratic The systemic risk is systematic, a market risk There are riskier businesses that other We refuse the risk, from a mathematical point of view, If we have a lot of stocks that are losing value we want some other stocks that are increasing value, we want asset that covaries negatively, they move in opposite direction. In financial point of view, to perform good when the market goes bad [anticyclical behaviour]. We take historical data and we assume that our stocks will performe in the future as in the past, we see when the market moves. When we have 2 stocks and a limited number of scenarios it’s possible to do the covariance by hand, instead when we have a lot of stocks we cannot do it by hand. Expected return: How muck you invest in stock 1 * how much return you espect + how much you invest in stock 2 * return of investment 2 The expected return is just the linear combination, in the variance there isn’t a linear combination. If 2 stocks are perfect correlated you’re not diversificating the risk. To reduce risk we need stocks that are not perfectly correlated. How to compute the espected return of single stock Spreadsheet 1 Bond fund and stock fund, for both w need to define some scenario, in this case 4 different scenario (severe recession, mild recession, normal growth, boom), we need to do for each different scenario assume the rate of return, then we compute for the expected return of the single scenario (probability of the scenario times the value that our random variable […]. We do this for all the scenarios and computed the expect value (just a sum). We can notice that basically there is what we said last time about the average, on average the expected return in possible, and on the long run it will be