英文證券卷十一 HKSI Paper 11 第一章

The objectives of improving the liquidity of the securities markets include:
I.Companies to have their securities listed and traded with the markets
II.Investors and lenders to enter into transactions through the markets
III.Professionals to serve as intermediaries on the markets

The note holder loses the note when the convertible note is converted into shares. The holder of a note receives a coupon rather than a dividend on the note before the conversion date. Holders of notes are classified as secured and unsecured, and are classified as creditors rather than shareholders when the company is wound up. When the market price is higher than the exchange price on the convertible note, the note holder tends to convert the note into shares.

The members of an unincorporated joint venture are primarily corporations and the agreement governs their activities. A private company would have been an acceptable answer, but because it is a mining company, so the better answer is an unincorporated joint venture.

Novation is the process whereby the clearing house undertakes the credit risk and acts as the counterparty of both buyer and seller. Only the exchange-traded market has this kind of arrangement. There is no clearing house used generally in foreign market, OTC market and fund-raising market. Thus, there is no novation.

The usage of OTC derivatives may increase credit risk rather than decrease. The benefits of using derivatives:
I. no requirement to pay margin when signing a contract
II. more flexible in terms of the contract period
III. more flexible in terms of contract value

The primary market is where new capital is raised and securities are issued for the first time. For example, the government issues a new debt security or a company issues new equity securities to raise funds from the public by listing on the stock market.

Companies listed on the stock exchange enjoy a number of advantages including potential to increase their capital base. Fund-raising by issuing shares to the public means that the issuer is able to fund its current and future capital requirements and expansion plans by issuing new shares to the public.

The lenders who provide funds to the borrowers by buying the debt securities are the holders of the securities and the creditors of the borrowers.

As the borrowers acquire funds by issuing debt securities, they are also called the “issuers”.

Interest is paid by the borrower to the lender at a specific interval(s) and according to a specific formula which is agreed by the two parties.

As a tradable security, there may be many holders of the security before it matures, apart from the original lender. A floating interest rate changes in line with changes in the pre-determined reference indicator or benchmark rate. Since debts have pre-determined cash flow, debt securities are also known as “fixed income” securities and the debt market the “fixed income market”.

Equity investors do not have any guaranteed returns in the form of income (dividends) or capital gain. The investors carry a risk where they may not recoup their investment. On the other hand, investors in debt invest on the basis of an agreed income stream throughout the period of the investment (loan) and the return of the capital at the end of the agreed period. Debt holders are entitled to claim on the company’s assets prior to equity holders in the event of liquidation.

Debt holders are the lenders of funds (creditors) to the debt issuers (borrowers). Equity capital is raised to fund the start-up of a new business, to expand an existing business or for recapitalization.

In order to obtain the services provided by the lender(debt issuers), the borrower (debt holders) is usually required to pay an additional amount of money at a specific interval(s), called “interest”. Thus, the return is fixed as long as you hold it until maturity and the company does not default.

The advantages of investing in debt securities include: (1)Lower risk than equities under normal circumstances. (2)Stable and predictable source of income; (3) Generally higher yield (return) when compared with bank deposit rates.

The risk of counterparties on the Stock Exchange is extremely low because the clearing house will carry out novation.
Exchange-traded stock option has very low liquidity risk, but still exists, the suggested answer is to exclude this option

Bonds and ordinary shares can either be traded at the Stock Exchange of Hong Kong Limited(SEHK) or at the OTC without trading at the SEHK. Generally, bonds have fixed return, but ordinary shares don’t have fixed return. Both may have the chance to incur a loss due to market changes.

Exchange-traded markets are those that operate via a centralized exchange, so it has higher liquidity and resilience. “Novation” operates and guarantee every transaction effectively, the credit risk is therefore lowered.

The global foreign exchange market is the biggest such market, and operates globally via a network of telephones and computer screens.

Types of equity securities include: ordinary shares, preference shares, equity warrants.

Types of equity securities include: ordinary shares, preference shares, equity warrants.

The borrower of bond need to repay the principal amount at the maturity date and an interest component periodically. Since bond is a kind of debt, bond-holders have higher priority to receive allocated assets when liquidation. Default risk exists in bonds.

The return to investors consists of dividend income and capital gain.

Derivatives will not distribute dividends.

A forward contract, which is traded OTC, is an agreement in which two parties agree to the purchase and sale of an asset at some future time under such conditions as they agree.

A forward contract is an agreement in which two parties agree to the purchase and sale of an asset at some future time under such conditions as they agree. In contrast to futures contracts, forward contracts are traded OTC, and their terms are not standardized.

In summary, the functions of derivatives can be classified as: risk management (i.e. hedging exposures). Speculation (i.e. taking profit from price movements). Arbitrage (i.e. buying or selling an asset in one market and immediately transacting an opposite trade of an equal amount of the same asset in a different market, in order to capture a risk-free profit).

OTC volume dominates the derivatives market. Such contracts are tailor-made to the requirements of the parties involved. The transactions are arranged by phone and computer networks and not through a centralized marketplace. Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

The entry level of stock warrants is much less than that of underlying assets.

If a cervitable bond doesn’t convert to ordinary shares upon expiration, it will be redeemed like ordinary bonds to receive the principal.

Why do investors favour bonds?
I. lower risks than stocks
II. fixed and more stable income
III. The principal can be redeemed as long as there is no default.

Forward rate agreement is the derivative to bet on the change of interest rates.

All futures are traded in the exchange. Agreements and swaps etc are generally referred to over-the-counter derivatives.

Derivatives include futures, forwards, swaps and options (or a combination of one or more of these categories). Equity warrants are classified as equity securities.

To hedge current market positions, one must take an opposite position in the derivatives market.

To hedge futures market positions, one must take an identical position to the current market position in the derivatives market?

The role of intermediaries is to channel the flow of funds between the borrowers and lenders. Therefore, indirect financing, or intermediation, occurs when the needs of borrowers and lenders do not match.

In order to obtain the services provided by the lender, the borrower is usually required to pay an additional amount of money, called “interest”.

The purpose of hedging current positions is to maintain the portfolio value when spot market falls. Therefore, to successfully hedge the position, the investor should take an opposite position in the futures market.

Participants in the derivatives market include borrowers and lenders of the underlying assets who use derivatives transactions for hedging, speculative or arbitrage purposes.

Money plays an important role in the financial system. Money acts as a
-means of storing wealth
– medium of exchange
-unit against which to value other goods and services.

In order to fulfil its functions, money needs to be durable, storable and portable.

Money plays an important role in the financial system. Money acts as a
– means of storing wealth
– medium of exchange
– unit against which to value other goods and services.

Financial intermediaries may perform the function of “market makers”, who quote two-way prices in the market – that is, they quote a bid and an ask, so that they encourage securities trading and thus increase liquidity in the market.

Intermediation transfers risk to intermediaries but additional cost to borrowers and investors. Intermediaries channel funds from where there is a surplus to where there is a deficit, this improves the efficiency of the allocation.

The main advantage of intermediation is the transfer of risk from borrowers and lenders to intermediaries. This lowers the credit risk

Intermediation (indirect financing) involves third parties, financial institutions or intermediaries, acting as a link between fund providers (lenders) and fund seekers (borrowers).

Intermediation transfers risk to intermediaries but additional cost to borrowers and investors.

The main disadvantage of intermediation is the additional cost that is passed on to borrowers and investors in the form of higher interest costs, fees, brokerage or commission. Disintermediation or direct financing may be less costly.

Intermediation transfers risk to intermediaries but additional cost to borrowers and investors.

Under an effective financial market, there must be an efficient payment and settlement system. Thus, buyers and sellers cannot trade without cost.

Stapled securities are traded, cleared and settled on the SEHK and quoted on a single price.

Lenders refer to people who lend money to financial institutions or borrowers. Intermediation may not be able to reduce lenders’ costs, because direct financing may be more profitable and not necessarily has costs. However, there will be credit risks for direct financing for not every borrower repays the outstanding amounts totally and as scheduled. Alternatively, through intermediation, the intermediary will bear the credit risk of the borrower, so the lender can rest assured they can recover the loan and recover it more easily.

Interest represents the cost of the borrowing and the interest rate is affected by the economic conditions and the creditworthiness (default risk) of the borrower. A floating interest rate changes in line with changes in the pre-determined reference indicator or benchmark rate. Common reference rates in Hong Kong are the HIBOR or the London Interbank Offer Rate (“LIBOR”).

Derivatives are fundamentally classified into four basic types: futures; forwards; swaps ; options.

Futures contracts are exchange-traded and therefore have standardized features. In contrast to futures contracts, forward contracts are traded OTC, and their terms are not standardized.

A forward contract is not transferable and there is no margin or collateral requirement to assure performance of the contract. Thus, there is counterparty risk.

Generally, the exchange acts as the counterparty to both the buyer and the seller for settlement and clearance. Thus, counterparty risk is eliminated, which means that investors need not worry that the other side of the transaction might default. Since forward contracts are traded OTC, the counterparty risk is higher.

Forward contracts are kind of OTC derivatives. The contractual arrangement is made directly between the buyer and seller and the trade have customized features. Thus, the volumes of forward contracts are lower than that of futures contracts which are exchange-traded derivatives.

Exchange-traded derivatives have standardized features such as size per contract, exercise price and time to maturity. Generally, the exchange acts as the counterparty to both the buyer and the seller for settlement and clearance. Thus, counterparty risk is eliminated, which means that investors need not worry that the other side of the transaction might default. Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

Derivatives are fundamentally classified into four basic types: futures; forwards; swaps ; options.

A futures contract are exchange-traded and it is an agreement to buy or sell an underlying asset at a specified price and date in the future.

OTC derivatives traded in Hong Kong consist predominantly of FX instruments such as currency swaps, forwards, interest rate swaps and FRAs.

Contracts traded on HKFE can be classified as: (1) equity derivatives; (2) index derivatives; (3) interest rate (or debt) derivatives; (4) commodity derivatives

Debt holders are the lenders of funds (creditors) to the debt issuers (borrowers).

Lower capital appreciation is the disadvantage of debt.

Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

A swap is an agreement between two parties to exchange (or swap) the financial obligations – or income-C – they derive from a portfolio of assets or liabilities. Swaps are traded OTC and are highly customized. OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. Thus, it has counterparty risk.

A forward contract is an agreement in which two parties agree to the purchase and sale of an asset at some future time under such conditions as they agree. However, swaps are not trading with asset.

A swap is an agreement between two parties to exchange (or swap) the financial obligations – or income-C – they derive from a portfolio of assets or liabilities.

Fixed-income securities generally involve regular interest repayments throughout the life of the loan, and repayment of the principal amount at maturity together with the final interest instalment. The regular interest amounts known as coupons..

All over-the-counter instruments are flexible to negotiate based on the needs of each party.

The primary market is where new capital is raised and securities are issued for the first time. For example, the government issues a new debt security or a company issues new equity securities to raise funds from the public by listing on the stock market.

The work of corporate finance professionals includes the following: (1) providing strategic advice for corporations; (2) providing financial advice for corporations; (3) carrying out valuation of companies, specific company assets or specific company securities; (4)raising capital for corporations – debt, equity and hybrid forms; (5) lending to corporations; (6)restructuring the business or the finances of a corporation; (7) advising a company on merger and acquisition strategies.

The work of corporate finance professionals includes the following: (1) providing strategic advice for corporations; (2) providing financial advice for corporations; (3) carrying out valuation of companies, specific company assets or specific company securities; (4)raising capital for corporations – debt, equity and hybrid forms; (5) lending to corporations; (6)restructuring the business or the finances of a corporation; (7) advising a company on merger and acquisition strategies.

The work of corporate finance professionals includes the following: (1) providing strategic advice for corporations; (2) providing financial advice for corporations; (3) carrying out valuation of companies, specific company assets or specific company securities; (4)raising capital for corporations – debt, equity and hybrid forms; (5) lending to corporations; (6)restructuring the business or the finances of a corporation; (7) advising a company on merger and acquisition strategies.

Intermediaries are compensated for assuming the risk involved by receiving a fee (brokerage or commission) or by charging higher rates to borrowers than they pay to lenders.

In the primary market, the role of dealers includes forming “brokers’ panels” that underwrite, manage and promote a new issue to the public. In the secondary market, brokers and traders actively buy and sell debt securities either on their own account or as agents for principal borrowers and investors.

OTC markets enable buyers and sellers to trade derivatives products that have been tailored to meet their specific needs in a decentralized marketplace. Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

Swaps allow parties to exchange their exposure to suit their own outlook better. If the investor had borrowings at a floating rate of interest and had the view that interest rates were going to rise, they could look to swap their financial obligations with another investor, who had borrowings at a fixed rate of interest.

Forward contracts and futures are agreements of a similar nature, the difference being that forward contracts are traded over and over the exchange.
Exchange-traded products are subject to change of appointment, regardless of the counterparty’s credit status, which is commonly referred to as counterparty risk or settlement risk.

Where the issuing company is liquidated, preference shareholders rank above ordinary shareholders but below other creditors, when it comes to repayment.

A debt is a contractual agreement between the borrower of funds and the lender of funds, and represents the existence of a loan.

Mr. Liao bought call option without holding the underlying stock. This reflect he is not willing to hedge or arbitrage. He is willing to take profile from the change of price and he is speculating.

Mr. Liao bought put option without holding the underlying stock. This reflect he is not willing to hedge or arbitrage. He is willing to take profile from the change of price and he is speculating.

Mr. Liao bought put option with holding the underlying stock. He may want to hedge exposures.

Convertible notes are a form of hybrid security. They are effectively a combination of debt and equity.

When company liquidates, bondholders have claims prior to ordinary shareholders.

Ordinary shareholders have voting rights, representing their status as part-owners of the company. Voting occurs at the annual general meeting (“AGM”) or at a specially convened extraordinary general meeting (“EGM”). In the event of the company being liquidated, ordinary shareholders receive payment after other creditors have been fully paid. They are entitled to share the company’s profits in the form of a dividend, paid at the discretion of the company.

In the event of the company being liquidated, ordinary shareholders receive payment after other creditors and preference shareholders have been fully paid.

Only Eurobonds and Commercial paper are debt securities and raise money in debt markets.

From a risk management perspective, the Enron case highlights the following lessons: (1)The role of good corporate governance on the part of the board, setting a business culture of transparency and accountability. (2)The need for high quality, accurate and true information to be provided to the shareholders by the company. (3) The need to avoid conflict of interests, among employees, directors and auditors. (4) The importance of diversifying investment portfolios to manage risk.

Convertible bonds yield is lower.

If the finance sector is concerned about the quality of financial statements, it should take action, such as:
(1) insisting that their borrowers and investees take on qualified, experienced, capable and trustworthy accountants and auditors;
(2) insisting that their borrowers and investees receive and review regular, reliable and comprehensive management accounts;
(3) requiring an independent internal audit function within companies;
(4) supporting the auditing profession;
(5) encouraging financial analysts to discuss publicly financials containing cosmetic accounting;
(6) participating in the debate on accounting standards;
(7) reporting misleading and non-transparent financials to the regulatory agencies; and
(8) blacklisting accounting firms that endorse misleading and non-transparent financials.

Good corporate governance should have a good division of authority and should not allow operational staff to assist in the audit.

A forward contract is not transferable and there is no margin or collateral requirement to assure performance of the contract. Forward contracts are traded OTC and thus there is no exchange acts as the counterparty between the buyer and seller.

Forward contracts are traded OTC and their terms are not standardized. Thus, forward contracts need not to mark to the market daily.

The collapse of Barings Bank in 1995 was a direct result of losses made by a rogue trader, and provided a valuable insight into the potential consequences of failure to segregate duties or implement transparent reporting lines in business. In addition, the board of Barings had overall responsibility for the culture and corporate governance of the bank. There was very little questioning of the extraordinary profits which were being reported from the Singapore trading operation and on which the bank had become so dependent.

It doesn’t have to change the assets combination of portfolios while we can hedge the exposure by using derivative.

Mr. Yin buys AUD futures and try to protect (or hedge) against adverse future price movements by “fixing” a predetermined price of AUD.

Speculation means taking profit from price movements.

When USD rise against AUD , Mr. Gao can take profit in future if he sells AUD futures now. Mr. Gao is taking profit from price movements and thus he is speculator.

Miss Zeng sells one month HIBOR futures and is trying to take profit from interest rate movements and thus he is speculator. Thus, she is a speculator.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another. Arbitrage requires offsetting positions to be made at more or less the same time.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another. Arbitrage requires offsetting positions to be made at more or less the same time. Thus, Mr. Gao is arbitrager.

Futures and options are exchange-traded derivatives and thus they have standardized features.

OTC volume dominates the derivatives market. Such contracts are tailor-made to the requirements of the parties involved. The transactions are arranged by phone and computer networks and not through a centralized marketplace. Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

In contrast to futures contracts, forward contracts are traded OTC, and their terms are not standardized.

Derivatives are financial instruments that derive their value from that of an underlying asset or financial instrument. A debt is a contractual agreement between the borrower of funds and the lender of funds, and represents the existence of a loan. Debt securities represent debt that is traded on the debt market.

Companies listed on the stock exchange enjoy a number of advantages including potential to increase their capital base. Fund-raising by issuing shares to the public means that the issuer is able to fund its current and future capital requirements and expansion plans by issuing new shares to the public.

The primary market is where new capital is raised and securities are issued for the first time. For example, the government issues a new debt security or a company issues new equity securities to raise funds from the public by listing on the stock market.

The primary market is where new capital is raised and securities are issued for the first time. For example, the government issues a new debt security or a company issues new equity securities to raise funds from the public by listing on the stock market.

In the event of the company being liquidated, ordinary shareholders receive payment after other creditors and preference shareholders have been fully paid.

The price paid for purchasing an option is referred to as the option premium, and is paid to the option seller. The option buyer obtain the leverage after the option premium payment.

A futures contract is an agreement to buy or sell an underlying asset at a specified price and date in the future.

A swap is an agreement between two parties to exchange (or swap) the financial obligations – or income stream-C – they derive from a portfolio of assets or liabilities.

The difference between forwards and futures include:
I. Futures care less about who is the counterparty because there is novation and less credit risks.
II. Futures is more standardized.
III. It’s easier to offset the positions if you trade futures because of high liquidity.
IV. Futures market is more centralized.

Private companies have the following characteristics
I.The number of shareholders are less than 50
II.The articles of association must restrict the right to transfer shares, so that existing shareholders have the right of first refusal
III.The articles of association must prohibit any invitation to the public to subscribe to any shares or debentures of the company

Stapling simply means that two different securities are “stapled” together for the purposes of trading or transfers, e.g. a share in a company and a unit in a trust. Stapled securities generally refer to an arrangement under which two or more different securities of the issuer are listed on the basis that they are legally bound together and cannot be transferred or traded separately.

Bankers are the employee of the bank. Employees will be paid earlier than creditors (including bond holders), followed by the preference shareholders, and lastly the ordinary shareholders.

A stapled security is traded like a stock but its components cannot be traded separately.

Financial intermediation mainly reduces
I. Credit risk
II. Liquidity risk