Professional Documents
Culture Documents
UBS Training #1
UBS Training #1
Spencer Morris
London
+44 20 7568 8938
spencer.morris@ubs.com
1
This class
♦ Introduction
♦ Issuers & Investors
♦ Equities and Indexes
♦ Fixed Income Markets
♦ Foreign Exchange Markets
♦ All About UBS
2
Markets
3
Markets: the buyer, the seller & the price
4
Value and price – the official definition
♦ Fair market value. Fair market value is the price that [property] would sell
for on the open market. It is the price that would be agreed on between a
willing buyer and a willing seller, with neither being required to act, and both
having reasonable knowledge of the relevant facts.
5
A market price
6
A stock market, then
“Sshh!”
7
And now (the information processor)
8
Who are the players?
9
And what do they do?
10
Financial Markets – a model
Liabilities
Asset Managers
-pension funds
-insurance companies
-mutual funds / unit trusts (CIVs)
Assets
11
What is a Bank?
12
Products: Banking Finance
♦ Loans
– term loans
– revolving facilities
13
Products: Money and securities Markets
♦ Cash
♦ Treasury Bills
♦ Commercial paper
♦ Government Bonds
♦ Corporate Bonds
♦ Ordinary shares
♦ Preference shares
♦ Convertible Bonds and other ‘Equity-linked’
♦ Structured Products
14
‘Hedging’ markets
♦ Foreign Exchange
– spot
– forward
– options
– exotics
♦ Interest rates
– FRAs, futures and swaps
– interest rate options
– bond forwards, futures and options
♦ Equities
– equity swaps
– stock options
– index swaps
– index options
15
Financial markets: Who are the players?
16
Issuers & Investors
Financial Markets Education
Introduction
♦ Issuers ♦ Investors
♦ Those who want to raise ♦ They are “lending” or investing
capital are the issuers
♦ They buy
♦ They “issue” – Money market instruments
– Loans – Bonds, share etc DIRECTLY and
– Bonds – Through funds – pools of money
– Preferred Stock
♦ They are concerned with
– Equity
– Return
– Convertible Bonds
– Preservation of capital
♦ They are concerned with – Risks
– Amount – Market
– Maturity for loans and bonds – Credit
– Cost
– Fraud
– Market value
– Share price
– Credit rating
– Investor base
1
Issuers - Companies
What do companies do?
Bond Debt
holder Assets
capital
Share Share
holder capital
Profits
3
Corporate clients - Shareholder value
Shareholder Value
Shareholder
– measures business activities by the Value
value they add to the owners of
the company
– framework for analysing our own Return on
activities and those of our clients Cost of Capital
Capital
– other business drivers serve to
achieve this one
5
Example - M & A
6
Example - Selling a Company
7
From Debt to Equity
Debt Equity
Senior debt
8
Source: UBS DCMG
Debt equity Spectrum
♦ In a bankruptcy, holders of subordinated debt are repaid after the senior bank
lenders
Secured Debt
Unsecured Debt
Subordinated Debt
Seniority
Cost
Hybrid
Preferred Shares
Common Shares
9
Disney Bonds
10
Disney Bond
11
High-Yield Ford Bond
12
Ford Bond
13
Why do people issue equity?
Funding M&A /
major expansion
Selling stakes in
companies
they own (privatisation)
Giving a
subsidiary autonomy
Exit from a
financial or strategic
investment
14
Initial Public Offering (IPO)
15
Initial Public Offering (IPO)
16
Equity issuance
Follow-on
IPO
(Marketed)
Block /
Equity-linked Accelerated
trades
17
Tesco - Case Study
Case Study - TESCO
19
TESCO
20
TESCO Strategy
21
UK Business
22
Market Rewards Performance
23
TESCO Shares are a Popular Investment
24
Lend £ to TESCO?
25
Debt Financing
O n B a la n c e S h e e t D e b t M a t u r it ie s
T h is in f o r m a t io n w a s c o r r e c t a s a t 2 6 t h F e b r u a r y 2 0 0 5
800
700
600
500
Millions (£)
400
300
200
100
0
6
2
-0
-0
-1
-1
-1
-1
-1
-2
-2
-2
-2
-2
-3
-3
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
F
F
Y e a r to F e b ru a ry
D e b t M a tu r i n g i n Y e a r C ash
26
TESCO’s Credit Rating
27
Investors - Funds
The theory behind
29
What is Equity Risk?
30
Diversification – How to earn an asset premium
♦ The higher the number of different stocks in the portfolio, the more company-
specific risks are eliminated
Risk
Company-
specific risk
Market Risk
Number of Stocks Owned
31
The FTSE 100 Index
32
Diversification
33
SECTION 4
35
Some Possibilities
36
Some Fund types
37
Spoilt for Choice
38
Many Alternatives
39
Funds
40
Investment Funds
41
Investment Funds
♦ Traditional Funds
– try to minimise fees and costs to stay competitive
42
Case Study: UBS (Lux) Equity Fund
♦ Investment objective
– Achieve high growth and adequate earnings
– Due considerations to capital security and liquidity of assets
– Minimum investment in equities: 70%
43
Example UBS (Lux) Equity Fund - Legal
♦ Fund assets are separate from the assets of the Management Company.
♦ Assets of subfund can only be used to offset liabilities of subfund
♦ Assets are managed by the Management Company in the interest and for the
account of the unitholders.
44
UBS (Lux) Equity Fund – EURO STOXX 50
♦ Dividends reinvested
♦ All-in fee: 1.2% p.a.
45
UBS (Lux) Equity Fund - the structure
46
The Structure
Money Service
Fund Manager
Money
Administrative Portfolio
Custodian Bank
Agent Management
47
Performance Measures – the numbers
48
Performance Measures – the pictures
49
Mutual Funds & Banks – the services
♦ research
– equity research
– quantitative research
– credit research
– strategy
– economic research
♦ advice
– portfolio advice
– execution advice
– risk management advice
50
How do we make money?
51
Hedge Funds
Why hedge funds are in vogue …
53
European hedge fund industry
♦ Growth rate of the European hedge fund industry between 1995 and 2002 was around
50% (but from a very low base)
♦ United Kingdom is the dominant location
– Market share of around 73% based on assets under management
– Market share of around 62% based on number of managers.
♦ The median manager in Europe has a 1.5% management fee and a 20% performance
fee.
♦ Europe’s market share in fund of funds land is around 40%
54
Hedge funds and traditional funds
♦ Traditional Funds are organised around ♦ Hedge Funds are organised around
styles: strategies:
– sectors – convertible arbitrage
– growth – equity long/short
– value – equity market neutral
– large, small, mid cap – event driven
– relative value
– global macro
♦ Hedge Funds
♦ Traditional Funds – charge aggressive fees - although their ability
– try to minimise fees and costs to stay to do this may diminish
competitive
♦ Hard to get information
♦ Are easily accessible and mostly open to – close quickly
new investors
55
Long Google / short Yahoo
♦ Google has just gone public ♦ Systematic versus company specific risk
♦ You like Google and you think that Market
Leverage
Google should do better than Yahoo Exposure
0 0%
♦ Why not just buy the difference between ♦ Returns will be correlated to the market
Google & Yahoo only because of the “non-hedged”
♦ Buy Google & Sell Yahoo exposure
♦ Likely to under-perform in strong bull
markets
56
Long / Short Equity Historical Returns 94 – 04
Market
Exposure
0%
75% 25%
25%
50%
Long Short
57
Comparison to traditional strategies
58
Hedge Fund industry – Not only equity
6% 3% 8%
8%
8% 3 8%
10%
19 %
Lon g / Short Equity Eve n t Drive n G loba l Ma cro Con ve rtible A rbitra g e
Equity Ma rk e t Ne utra l Fixe d In com e A rbiutra g e Ma n a g e d Future s Othe rs
Composition in 2002
59
Case Study: Man Multi-Strategy Fund
60
What do they do and why?
61
Investment Allocation
62
Performance
63
Banks & Hedge Funds - Prime Brokerage
64
Equity Financing - Short Selling Example
Collateral
Hedge Fund AFund
10,000 IBM
Short
10,000 US$850,000
sale IBM
Market
65
Closing Trade
Collateral
Hedge Fund AFund
10,000 IBM + Fee
Close
10,000 US$845,000
short IBM
Market
66
Equity & Equity Indices
Financial Markets Education
Types of Products
1
Shares
Price
2
Share Characteristics
Economic
Exposure
3
Being long and being short
Trader starts with no position, and:
Value of position
Value of position
LONG SHORT
4
Being long and being short – financing position
Trader starts with no position, and:
5
Tesco benefits – Dividend History
Source: Bloomberg
6
TESCO - description
7
Preferred Shares
9
Stock Exchange
10
NYSE: We Are There
11
London Stock Exchange listing requirements
12
Exchange
Clearing Mechanism
13
Over The Counter (OTC)
– Client negotiates the price and the other
Bank A characteristics of a product with a bank
directly
Client needs a
specific
– Might involve brokers
product
Bank B
♦ tailor made
♦ often no secondary market (more difficult to close position)
♦ no transparency
♦ credit risk
14
Depositary Receipt
15
US Invests in Europe Through ADRs
16
BASF ADR
17
TESCO: A Good Investment Anywhere!
18
SECTION 3
World Indices
Indexes
20
World Equity Indices
21
P/E of World Equity Indices
22
They all seem to be similar but …
♦ Nikkei 225
– Index for the Tokyo stock market
– 225 Stocks in Index
– Price-weighted index
– Price change of a small company has same effect as a price change of a large
company
– Index includes many old-line manufacturing firms, which are less important for the
economy than they used to be. Name % Weight
– Record high of 38,915 (Dec 29 1989) in the Index
1 Advantest Corp 3.156
2 TDK Corp 2.72
3 Kyocera Corp 2.72
4 Fanuc Ltd 2.522
5 Tokyo Electron Ltd 2.182
6 Honda Motor Co Ltd 2.006
7 Canon Inc 1.962
8 KDDI Corp 1.915
9 Takeda Pharmaceutical Co Ltd 1.794
10 Softbank Corp 1.79
11 CSK Corp 1.713
12 Trend Micro Inc 1.71
13 Shin-Etsu Chemical Co Ltd 1.497
14 Toyota Motor Corp 1.486
15 Secom Co Ltd 1.486
23
Dow Jones industrial average
24
S&P500 Index
25
Nasdaq
26
Nasdaq Indices
27
Nasdaq Index Composition
28
Nasdaq Composite versus Nasdaq 100 - Volatility
29
Nasdaq Composite versus Nasdaq 100 - Level
30
DAX & CAC40
31
DJ STOXX 50
32
DJ STOXX 50
33
How do you “buy” an index ?
♦ Tracking baskets
♦ Funds
♦ ETFs
♦ Index linked Notes
♦ Futures
♦ Options ...
34
Equity Portfolios
35
Exchange Traded Funds (ETFs)
36
SPDRs
37
Why?
38
What is a Spider?
39
More on Spider
40
Even more on Spider
41
QQQQ
42
“Primary” and Secondary Market
Share
B ETF
Share
Buy / Sell A
Share
Buy / Sell
C
Market
Investor A
Maker
Buy / Sell
Borrow
Lend
Investor B
43
SECTION 4
Equity Derivatives
Futures
45
Derivative - Future versus Spot
♦ A Future has a risk profile which is very similar to that of the underlying
Value of a share
Value of a future
0 0
share price share price share price
today
46
Why futures?
47
What does this say?
48
Word Equity Futures
49
Equity swaps
50
Equity swap: Example
♦ Investor would like to have exposure to the S&P but can not invest directly.
♦ Investor asks the bank to invest $100 for them.
♦ Investor accepts both the potential gain and loss in the market.
♦ How much will that cost?
♦ The bank needs to borrow money to buy the stock and has to pay interest
(LIBOR).
♦ Therefore, assuming there are no other costs, the cost of a swap will be my
borrowing costs (LIBOR) plus my profit margin.
51
SECTION 5
Certificates
Certificates
53
Certificates
♦ Also called
– Tracker certificates
– Benchmark certificates
– Performance linked notes
54
Open-end Certificate on DAX
Deutsche Börse: Certificate
55
Diverse range of underlyings
♦ Country Index
– DAX, CAC40, FTSE, S&P500, Nasdaq,…
♦ Sector Certificates
– DJ Stoxx sectors, FTSE Global sectors, …
– Biotech basket, fuel cell basket, data highway basket, EU enlargement basket
56
Diverse investment strategies
“The Euro PEG 20 Certificate has a clearly defined and disciplined
investment strategy…
Every quarter, 20 companies with the lowest Price-Earnings-to-growth
(PEG-ratio) from DJ STOXX Index are selected.”
57
Selling an Index “short” - UBS Shorty
“Initial Margin”
“Trade is
closed when
this level is
reached”
Short Term:
No asset premium
to collect
58
SECTION 6
Equity Options
Derivative - Calls versus Puts
Value
Value
Short Put
“bad risk”
Short Long
Put Call Price Risk
60
Options
♦ Call ♦ Put
♦ A buyer’s option ♦ A seller’s option
♦ Right to buy ♦ Right to sell
♦ An underlying (DAX, VOD, FTSE) ♦ An underlying
♦ at a fixed price (4500, 100 , 5000) ♦ at a fixed price
♦ on (European) ♦ on (European)
♦ or before (American) ♦ or before (American)
♦ fixed time (19/12/07) ♦ fixed time
61
Why Options?
62
Example
♦ IBM = USD95
♦ Investor owns shares
– Sells 3 month 100 Call for USD3
– If IBM trades above 100 in 3 months investor has earned 8% return for 3 months
♦ Or
♦ Investor owns shares
– Has a profit since they were bought at 80
– Buys the 3 month 90 Put for USD2
– Locks in 10% gain (90 – 80 – 2 = 8 = 10% of 80)
– Allows the investor to “stay long”
63
Options – They’re a BIG Business!
64
Summary
♦ From the issuer’s point of view equity is a way to finance the company’s
operations and assets
♦ From the investor’s point of view equity is a way to earn a return from the
success of a company’s business
♦ Theory says that only market risk is rewarded so investors should diversify
their equity investments
♦ The financial markets provide many ways for investors to “get long” or short
and to target exactly the risk they are willing to take on
65
Fixed Income Markets
Introduction to Financial Markets
SECTION 1
Bonds
Bonds are securities
2
Bond Markets
♦ Secondary trading
– Providing liquidity
– Credit analysis and research
– Providing indices
3
EuroSterling Bonds
4
Bond Characteristics
♦ Issue Size
♦ Currency of issue (may not be the same as the issuer’s home currency)
♦ Maturity
♦ Coupon Rate
♦ Coupon Frequency
5
Bonds
100
01/07/2006
6
Tesco - securities
7
Tesco - bonds
8
Tesco - bond
9
Why invest?
♦ Why would an investor buy these bonds rather than the comparable Gilt?
♦ What are they getting?
♦ What risks are they taking?
10
Bond Price and Yield
11
Two Bonds – same borrower
♦ BOND A ♦ BOND B
12
Two Bonds – same borrower
♦ BOND A ♦ BOND B
13
Two Bonds – same borrower
♦ BOND A ♦ BOND B
14
SECTION 2
16
Gilt price performance
17
Gilt yield
18
The yield curve: 3 year yield has hardly moved!
19
World Bond Mkts
20
US Govt bonds
♦ From June 2004:
21
World Bond Curves
22
Quality of issuer/borrower
♦ Who would you be more comfortable lending £1,000 to; UBS AG or me?
♦ How would you make it clear to me you felt this way?
♦ How about UBS AG vs UK Treasury?
♦ Rates market can be segmented:
– LIBOR (London InterBank Offer Rate) / EURIBOR
– deposits
– futures
– swaps
– Government
– T-bills
– Treasury bonds/notes
– Credit
– Tesco
– UBS AG
– etc
23
Ratings
S&P Moody's
AAA Aaa
AA+ Aa1
AA Aa2
AA- Aa3
A+ A1 Investment
A A2 Grade
A- A3
BBB+ Baa1
BBB Baa2
BBB- Baa3
=============================
BB+ Ba1
BB Ba2 Non
BB- Ba3 Investment
B+ B1 Grade
B B2
B- B3
24
SECTION 3
26
Tesco bond yield
27
Tesco bond spread
28
Forecasting performance
♦ If you want to forecast how an investment in these Tesco bonds will perform
(over the next 1 year, say), what factors would you be thinking about?
29
Related Fixed Income Markets
♦ Deposits
– Cash deposits
– Deposit cash vs bond collateral (repo market)
30
SECTION 4
Interest Rates
The Money Market
♦ Deposits
– LIBOR
32
Types of interest rates
33
Time horizon and currencies
♦ If you believed interest rates are likely to rise would you charge the same
interest rate to a 1-year borrower and a 2-year borrower?
♦ What if rates are ‘likely’ to fall?
♦ Different countries have very different borrowing costs in their own currency:
– JPY (¥)
– USD ($)
– MXN
34
Deposit rates
♦client site
35
Deposit Index Rates
♦ For Euros
– tend to use Euribor - Euro Interbank Offered Rate
– about 50 prime banks polled for their rate for euro interbank term deposits within
the euro zone
– Also there is Eonia (Euro OverNight Index Average) which is an effective overnight
rate computed as a weighted average of all overnight unsecured lending transactions
in the interbank market
36
SECTION 5
♦ OTC agreements
– not securities
38
What is an interest rate swap?
LIBOR3
LIBOR2 LIBOR5
LIBOR1 LIBOR4
1 2 3 4 5
♦ Exchange of cashflows
♦ Fixed rate (the swap rate) for floating rate (LIBOR deposit rates)
♦ LIBOR is known at the beginning of each period, and paid at the end.
39
But why?
40
Some interest rate swap terminology
41
Hedging debt issuance - liability swap
8.52%
9% Swap
Bond XYZ
LIBOR
42
Liability swap
and
Receive fixed on swap
43
SECTION 6
Credit Derivatives
Credit Derivatives
45
Global Credit Derivatives Market
US $ bn
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1997 1998 1999 2000 2001 2002 2004
Source: BBA Credit Derivatives Report 2001/2002
46
Global Credit Derivatives Market—the products
CLNs and
Asset swaps
Repacks
12%
9% Credit Spread
options
Synthetic 3%
Securitisations
26%
Credit Default
Basket default Swaps
swaps 45%
5%
47
Credit Default Swaps
48
Credit Default swap
Before default
Periodic payment
Protection Protection
Buyer Seller
Credit Protection
On default
Periodic payment
Protection Protection
Deliverable Obligation
Buyer Seller
Par
49
Some CDS prices
50
Foreign Exchange Markets
Financial Markets Education
What does drive the FX Market?
1
What does drive the FX Market?
2
FX market ticks differently
3
FX and Risk Premium
♦ Investors are in general willing to take risk because they expect positive return
(risk premium)
♦ Many investors do not have strong convictions about future currency
movements
– They do not expect a positive long term return on currency
– No “safe” strategy in FX, long term trends unexpectedly reverse
4
Risk Premium
1000
Dividends not included
200
100
50
10
81 83 85 87 89 91 93 95 97 99 01 03 05
5
What is the “True Value” of a US Dollar ?
7
Does Purchasing Power Parity hold?
8
Fast food and strong currencies
9
The Big Mac Index – 2005
10
PPP & exchange rate
♦ If PPP holds between two countries then the exchange rate is determined by
the rate of inflation in the two countries
♦ The growth rate of FORDOM is (inflationDOM – inflationFOR)
♦ If PPP holds and there is no inflation, then FX rates should not change
♦ IF PPP holds and inflation equals the risk-free rate the current FX forward will
be the future FX spot
11
FX spot and PPP
180
♦ You have to be patient!
160
♦ You might have to wait some
140 years
120
100
80
86 88 90 92 94 96 98 00 02 04
12
FX talk – Technical Analysis
13
Drivers of the Foreign Exchange Market
15
FX information
News
♦ Fundamental
♦ Technical
♦ Dealing Floor
Products
♦ Spot
♦ Forward
♦ Options
16
FX Products
Snapshot of FX market
18
What’s out there?
19
Spot Exchange Rates
20
What is Spot “Dollar-Swiss”
21
What is “Cable”?
22
Can really quote either way - reciprocity
23
Spot Quotes
24
The Typical Timing of Spot Trades
DAYS
0 1 2
25
Marketmaker Spot Quotes and Terminology
The “figure” or
“big figure”
♦ EUR|AUD:
BID ASK/OFFER
♦ EUR|AUD:
1.62 57 | 59
The “handle”
26
Spot Quotes
27
Spot Quotes (continued)
28
Spot Quotes (continued)
29
Market Jargon
30
FX Forwards and Options –
Corporate Hedging
Japanese hedger
♦ A Japanese car manufacturer just sold 1,000 cars to a European wholesaler for
10 million Euro
♦ The car manufacturer will receive the 10 million Euro in 3 months.
♦ A car costs 1.2 million JPY to produce
♦ The manufacturer gets 10,000 Euro per car in 3 months
32
How to hedge the FX risk?
33
How to get rid of FX risk - Currency Forwards
34
What’s the intuition?
♦ EUROs are becoming relatively more abundant. When supply goes up, price
goes down
35
Forward Points
♦ In our example,
36
Outrights versus Pips
37
(Short) Forward versus Put
38
3 month 130 EUR put JPY call -
♦ Buy insurance!
♦ 3 month standard 130 strike EUR put JPY call costs
– 0.69% of EUR face
– 0.93 JPY per EUR
– 9,300,000 JPY (EUR face 10,000,000)
– this results in a worst-case margin of 7.56%
4.1
39
Disclaimer
This material has been prepared by UBS AG, or an affiliate thereof ("UBS"). In certain countries UBS AG is referred to as UBS SA.
This material is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment
objectives, financial situation or particular needs of any recipient. It is published solely for informational purposes and is not to be construed as a
solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is
provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement
or summary of the securities, markets or developments referred to in the materials. It should not be regarded by recipients as a substitute for the
exercise of their own judgement. Any opinions expressed in this material are subject to change without notice and may differ or be contrary to
opinions expressed by other business areas or groups of UBS as a result of using different assumptions and criteria. UBS is under no obligation to
update or keep current the information contained herein. UBS, its directors, officers and employees' or clients may have or have had interests or
long or short positions in the securities or other financial instruments referred to herein and may at any time make purchases and/or sales in them
as principal or agent. UBS may act or have acted as market-maker in the securities or other financial instruments discussed in this material.
Furthermore, UBS may have or have had a relationship with or may provide or has provided investment banking, capital markets and/or other
financial services to the relevant companies. Neither UBS nor any of its affiliates, nor any of UBS' or any of its affiliates, directors, employees or
agents accepts any liability for any loss or damage arising out of the use of all or any part of this material.
Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is
not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or
related instrument mentioned in this presentation. Prior to entering into a transaction you should consult with your own legal, regulatory, tax,
financial and accounting advisers to the extent you deem necessary to make your own investment, hedging and trading decisions. Any transaction
between you and UBS will be subject to the detailed provisions of the term sheet, confirmation or electronic matching systems relating to that
transaction. Clients wishing to effect transactions should contact their local sales representative. Additional information will be made available
upon request.
40
Disclaimer continued
United Kingdom and rest of Europe: Except as otherwise specified herein, this material is communicated by UBS Limited, a subsidiary of UBS AG, to
persons who are market counterparties or intermediate customers (as detailed in the FSA Rules) and is only available to such persons. The
information contained herein does not apply to, and should not be relied upon by, private customers. Switzerland: These materials are distributed
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information or wish to effect transactions in the relevant securities, they should contact Giubergia UBS SIM SpA, an associate of UBS SA, in Milan.
United States: These materials are distributed by UBS Securities LLC or UBS Financial Services Inc., subsidiaries of UBS AG, or solely to US
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foreign exchange and other banking business, and related research, are distributed in Japan by UBS AG, Tokyo Branch. Australia: These materials
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