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MGMT-6330 Investment Analysis II: Asset Classes, Commodities and Derivatives
MGMT-6330 Investment Analysis II: Asset Classes, Commodities and Derivatives
MGMT-6330 Investment Analysis II: Asset Classes, Commodities and Derivatives
Analysis II
Asset Classes
In order to have a diversified portfolio, we need to understand various asset
classes as investment options.
The investor usually receives a share of the fund proportional to his/her investment.
We have already
studied these in
Investment Analysis I
and earlier in this
course
Investment Funds
Tangible Assets
Commodities
Absolute Return Investments
Derivatives and Exotics
For unmanaged and open-end investment funds, the share value is the NAV as
they stand ready to redeem at market value.
For closed-end funds, the share price is determined in a secondary market and
may be at a premium to the NAV or at a discount to it.
Applying sophisticated tactics: Investors can long, short, leverage and time ETFs
Land
Buildings
Natural resources (timber, minerals, fish)
Vehicles (e.g. ships), containers, etc.
Artworks
Derivative real estate investment are securities derived from the sale of real estate
or related to the sale of real estate (such as buying mortgages or mortgage-
backed security bundles)
Leveraged equity: Full ownership rights for an indefinite period encumbered by debt
(a promissory note unrelated to the real asset under consideration) or a mortgage
(a pledge that in case of inability to discharge the debt, the ownership would
transfer to the mortgagor)
Mortgages: Loans secured by the underlying real estate made to third parties
Aggregation vehicles: Aggregates investors and gives them access to real estate
investment to which they may not otherwise have access. Real Estate Limited
Partnerships (RELP) and Real Estate Investment Trusts (REIT) are examples of
these aggregation vehicles
How much would it cost today to replace this real asset? Of course one
needs to estimate the value of land (an independent exercise), PLUS
estimating todays cost of the current improvements.
The perpetuity is the annual Net Operating Income (NOI). NOI is gross
potential income minus expenses including vacancy, collection losses,
insurance, property taxes, repairs, utilities, and maintenance costs.
WORKSHOP
Energy:
Agricultural and farming products (soft
Oil, gas, electricity
commodities:
Fibers, grains, livestock,
beverages (coffee, cocoa, etc) ,
spices, dairy Minerals:
Gold, silver, copper,
coal, aluminum
Most investors do not wish to store grain or oil or tend to animals. Very few
investors (as opposed to consumers) buy the actual commodity.
Futures contracts are the easiest and cheapest way to invest in commodities.
Investible Indices:
are in turn based on a limited basket of the most liquid commodity futures
contracts so they can be easily replicated by taking proportional positions in the
participating commodities. For example, the Goldman Sachs Commodity Index
(GSCI) is a world-production weighted index of 24 commodities with liquid
futures contracts
There are many companies similar to BHP and those that are more focused on
a single or narrow range of commodities such as Exxon-Mobil. Single product
mining companies are a good example of a stock very directly influenced by the
price of the underlying product.
Cocoa (CJ, CC); Coffee (C, KC, KT, KO); Corn (ZC); Cotton (TT, CT)
Company Stock:
Funds:
DB Agriculture Fund (DBA); MLCX Grains Index (GRU); Dow Jones USB
Cocoa Total Return (NIB); Dow Jones USB Sugar Total Return (SGG)
Managed Futures Fund are pools in which fund managers take bets on
directional moves in the positions they hold (long or short) usually in a
single asset class, such as currency, fixed income, or commodities and
tend to use many actively traded futures contracts.
Funds of funds have been created to allow easier access to hedge funds
by small investors. An FoF has access to a large potential investor base
(albeit each may invest a much small amount; that is the point) but has
enough funds to invest in a variety of hedge funds thus providing retailing,
access, diversification, and expertise to those who otherwise may not be
able to enjoy these in the context of multiple hedge funds.
There are drawbacks with FoFs. They have fees of their own on top of the
base hedge fund fees, their performance will be diversified (diluted) if not
all funds perform. Also, as funds in FoFs are selected based on past
performance, they may be already passe by the time they make it into a
FoF.
Investment Analysis II - 2012 Houman Younessi 40
Investment
Analysis II
Derivatives
The previous pages show us that we no longer live and invest in the simple world
of stocks and bonds. Many new instruments have emerged, several if not most
of which no longer represents a direct investment in an asset but ones that offer
a return based on the return of another underlying asset. These are called
derivatives.
Derivative: A financial instrument that offers a return based on the return of
some other underlying asset.
Derivatives
Types of Derivatives
There are two distinct but ultimately related markets for derivatives. Derivatives
may be:
Derivatives
Forms of Derivatives
There are two distinct forms of derivatives. Derivatives may be:
Derivatives
Forms of Derivatives
Forward Commitments
Forward commitments come in three categories:
Derivatives
Forms of Derivatives
Contingent Claims
Warrants
Options are by far the largest category of contingent claims. Other forms of
contingent claims (all having option-like features) are:
Warrants: are issued by the firm whose stock (sometimes bonds) serves as the
underlying. At the time of issue, a warrant entitles the holder to purchase one
share of the stock for the appropriate exercise price. Further stock splits may
alter the proportion, always reflecting the original offer. The major differences
between warrants and call options are that:
Warrants have longer expiry than call options,
sometimes they are perpetual;
Warrants are dilutive, when a warrant is
exercise, the company must issue new stock;
Most warrants are over-the-counter
Derivatives
Forms of Derivatives
Contingent Claims
Callable/Putable Bonds
Callable/Putable bonds: We have seen these before (lecture 3). A
callable/putable bond gives the issuer/buyer the right to redeem the bond for a
pre-agreed price before the maturity or (in rare occasions) under certain pre-
specified conditions).
Derivatives
Forms of Derivatives
Contingent Claims
Convertible Bonds
Convertible bonds: Again, we have seen these before. A convertible bond is a bond
that carries the right at the holders option (the contingent claim) to convert it to
another security, often common stock.
Derivatives
Forms of Derivatives
Contingent Claims
Asset-backed Securities
Asset-backed Securities represent a claim on a pool of securities which may be
mortgages, automotive loans, bonds, and similar instruments. As borrowers
always have the option to pre-pay these loans when interest rates are favorable
(re-finance), they hold an option. The investor who buys into the pool of such
loans, is in fact selling an option.
Derivatives
Forms of Derivatives
Contingent Claims
Options
All contingent claims have an option (in the sense of a choice to take action) at
their core. As such one can consider them all as types of option instruments
(some do).
A proper option however is usually a standardized, more often than not
exchange traded instrument that has a contract associated with it called a term
sheet that at a minimum specifies the following:
The underlying asset
The right(s) or exercise terms, (call/put)
Settlement terms (e.g. deliver the underlying or an equivalent value)
Expiration date
Strike price (the price of the underlying)
Option price (the premium payable/paid to hold the option)