25 October 2018 Al Khaleej Training and Education © 2010 1 Outline the fact that the exam is multiple choice, there is no negative marking and the required mark to pass. Outline how the course is structured (the number of days and the when sessions will start and end, including details of any course tests and homework assignments that are planned) Use this slide to give the delegates a very broad overview of the syllabus coverage, which also equates to the workbook and individual chapter coverage. Tie the exam significance to each of these areas as an indication of how much effort is expected of the delegate for each area. Perhaps mention how the syllabus is structured ie Elements, Sub-elements and Learning Objectives. There should not be more than one question per learning objective per examination. Use this slide to give the delegates a very broad overview of the syllabus coverage, which also equates to the workbook and individual chapter coverage. Tie the exam significance to each of these areas as an indication of how much effort is expected of the delegate for each area. Perhaps mention how the syllabus is structured ie Elements, Sub-elements and Learning Objectives. There should not be more than one question per learning objective per examination. The first chapter is broken into the above subsections – helpful to note the number of learning objectives attached to each => exam significance and effort required. Organization and Functioning of Securities Markets 11 Security-Market Indicator Series 2 Efficient Capital Markets 2 Investment Instruments and Securities 4 Corporate Actions 5 25 October 2018 Al Khaleej Training and Education © 2010 6 25 October 2018 Al Khaleej Training and Education © 2010 7 25 October 2018 Al Khaleej Training and Education © 2010 8 Outline the role and objectives of the financial markets – linking providers of resources (investors) with those needing those resources (firms). Talk about the existence of both the cash/spot market and a market that relates to futures prices. The futures market enables both speculation and hedging. Then go on to point out the distinction between short term (<1 year) money market and the longer term capital markets. Give brief examples of money market by discussing bank certificates of deposit and Treasury bills. Focus on the capital market (shares and bonds) to provide the distinction between the primary (new issues) and secondary market and outline the traditional role of an investment bank in relation to new issues/IPOs. 25 October 2018 Al Khaleej Training and Education © 2010 10 25 October 2018 Al Khaleej Training and Education © 2010 11 25 October 2018 Al Khaleej Training and Education © 2010 12 25 October 2018 Al Khaleej Training and Education © 2010 13 25 October 2018 Al Khaleej Training and Education © 2010 14 25 October 2018 Al Khaleej Training and Education © 2010 15 25 October 2018 Al Khaleej Training and Education © 2010 16 25 October 2018 Al Khaleej Training and Education © 2010 17 25 October 2018 Al Khaleej Training and Education © 2010 18 25 October 2018 Al Khaleej Training and Education © 2010 19 25 October 2018 Al Khaleej Training and Education © 2010 20 25 October 2018 Al Khaleej Training and Education © 2010 21 25 October 2018 Al Khaleej Training and Education © 2010 22 25 October 2018 Al Khaleej Training and Education © 2010 23 25 October 2018 Al Khaleej Training and Education © 2010 24 25 October 2018 Al Khaleej Training and Education © 2010 25 25 October 2018 Al Khaleej Training and Education © 2010 26 Saudi Exchange is largest in the region, with small number of listed company some of which are very large. Foreigners can invest indirectly via mutual funds. Registered dealers and commercial banks need to be licensed by CMA. Secondary market via commercial banks (they are the designated brokers) As illustrated by the Saudi Exchange, on exchange trading is generally more heavily regulated and provides a settlement infrastructure. OTC is less regulated and potentially more volatile. Market styles – reinforce the order driven by pointing out that the buyers and sellers are brought together by the system. Quote driven provides a market maker’s liquidity. Custody can be provided globally or regionally, probably embracing sub-custodians or nationally. Point out the pros and cons of each. 25 October 2018 Al Khaleej Training and Education © 2010 28 25 October 2018 Al Khaleej Training and Education © 2010 29 25 October 2018 Al Khaleej Training and Education © 2010 30 Talk through the logic and the fact that value weighted puts more emphasis on the bigger companies. Point out that DJIA is price weighted, S&P 500 is value weighted. Equally weighted indices are unusual. 25 October 2018 Al Khaleej Training and Education © 2010 32 25 October 2018 Al Khaleej Training and Education © 2010 33 Outline the three levels of emh and the conclusions regarding technical and fundamental analysis. Market depth – lots of orders above and below market price = deep, few = shallow Market width, in a deep and wide market the orders sizes are substantial as well as there being lots of them. Run through simple examples of the three undesirable activities 25 October 2018 Al Khaleej Training and Education © 2010 35 25 October 2018 Al Khaleej Training and Education © 2010 36 25 October 2018 Al Khaleej Training and Education © 2010 37 25 October 2018 Al Khaleej Training and Education © 2010 38 25 October 2018 Al Khaleej Training and Education © 2010 39 Broad run through each of the above 25 October 2018 Al Khaleej Training and Education © 2010 41 25 October 2018 Al Khaleej Training and Education © 2010 42 25 October 2018 Al Khaleej Training and Education © 2010 43 25 October 2018 Al Khaleej Training and Education © 2010 44 25 October 2018 Al Khaleej Training and Education © 2010 45 25 October 2018 Al Khaleej Training and Education © 2010 46 25 October 2018 Al Khaleej Training and Education © 2010 47 25 October 2018 Al Khaleej Training and Education © 2010 48 25 October 2018 Al Khaleej Training and Education © 2010 49 25 October 2018 Al Khaleej Training and Education © 2010 50 25 October 2018 Al Khaleej Training and Education © 2010 51 25 October 2018 Al Khaleej Training and Education © 2010 52 25 October 2018 Al Khaleej Training and Education © 2010 53 25 October 2018 Al Khaleej Training and Education © 2010 54 25 October 2018 Al Khaleej Training and Education © 2010 55 25 October 2018 Al Khaleej Training and Education © 2010 56 25 October 2018 Al Khaleej Training and Education © 2010 57 25 October 2018 Al Khaleej Training and Education © 2010 58 25 October 2018 Al Khaleej Training and Education © 2010 59 25 October 2018 Al Khaleej Training and Education © 2010 60 25 October 2018 Al Khaleej Training and Education © 2010 61 25 October 2018 Al Khaleej Training and Education © 2010 62 25 October 2018 Al Khaleej Training and Education © 2010 63 25 October 2018 Al Khaleej Training and Education © 2010 64 Talk through each of the above in broad terms, examples of rights and bonus issues on the next slides. Pre- emptive right to maintain the same percentage in the company of the enlarged share capital after a further issue of shares. What is the right to buy the share worth - the ‘nil paid’ price? Difference between the rights and the after = 42 cents Shareholder has two choices – either to take up the rights shares (and pay $3.50 each) or to sell the right to someone else and collect the 42 cents 25 October 2018 Al Khaleej Training and Education © 2010 68 25 October 2018 Al Khaleej Training and Education © 2010 69 25 October 2018 Al Khaleej Training and Education © 2010 70 25 October 2018 Al Khaleej Training and Education © 2010 71 25 October 2018 Al Khaleej Training and Education © 2010 72 25 October 2018 Al Khaleej Training and Education © 2010 73 Psychological barrier as the share price gets to excessive levels – so company can ‘capitalise’ some of their profit into shares. Sometimes referred to as a capitalisation or scrip issue. More shares…same company so you would expect the share price to fall….shown on the next slide… Same approach as for rights issues to discover the ex-bonus price 25 October 2018 Al Khaleej Training and Education © 2010 76 25 October 2018 Al Khaleej Training and Education © 2010 77 25 October 2018 Al Khaleej Training and Education © 2010 78 25 October 2018 Al Khaleej Training and Education © 2010 79 25 October 2018 Al Khaleej Training and Education © 2010 80 25 October 2018 Al Khaleej Training and Education © 2010 81 25 October 2018 Al Khaleej Training and Education © 2010 82 25 October 2018 Al Khaleej Training and Education © 2010 83 25 October 2018 Al Khaleej Training and Education © 2010 84 25 October 2018 Al Khaleej Training and Education © 2010 85 25 October 2018 Al Khaleej Training and Education © 2010 86 25 October 2018 Al Khaleej Training and Education © 2010 87 25 October 2018 Al Khaleej Training and Education © 2010 88 25 October 2018 Al Khaleej Training and Education © 2010 89 25 October 2018 Al Khaleej Training and Education © 2010 90 25 October 2018 Al Khaleej Training and Education © 2010 91 25 October 2018 Al Khaleej Training and Education © 2010 92 25 October 2018 Al Khaleej Training and Education © 2010 93 25 October 2018 Al Khaleej Training and Education © 2010 94 25 October 2018 Al Khaleej Training and Education © 2010 95 25 October 2018 Al Khaleej Training and Education © 2010 96 25 October 2018 Al Khaleej Training and Education © 2010 97 25 October 2018 Al Khaleej Training and Education © 2010 99 The bigger the RoE the better. But companies can also use debt for funding…so…ROA maybe more logical 25 October 2018 Al Khaleej Training and Education © 2010 101 25 October 2018 Al Khaleej Training and Education © 2010 102 25 October 2018 Al Khaleej Training and Education © 2010 103 25 October 2018 Al Khaleej Training and Education © 2010 104 25 October 2018 Al Khaleej Training and Education © 2010 105 25 October 2018 Al Khaleej Training and Education © 2010 106 25 October 2018 Al Khaleej Training and Education © 2010 107 25 October 2018 Al Khaleej Training and Education © 2010 108 25 October 2018 Al Khaleej Training and Education © 2010 110 25 October 2018 Al Khaleej Training and Education © 2010 114 25 October 2018 Al Khaleej Training and Education © 2010 115 25 October 2018 Al Khaleej Training and Education © 2010 116 25 October 2018 Al Khaleej Training and Education © 2010 117 25 October 2018 Al Khaleej Training and Education © 2010 118 25 October 2018 Al Khaleej Training and Education © 2010 119 AER = (1 + flat rate/frequency)power of frequency – 1 = (1 + 0.0125)4 –1 = 0.050945337 25 October 2018 Al Khaleej Training and Education © 2010 121 25 October 2018 Al Khaleej Training and Education © 2010 122 25 October 2018 Al Khaleej Training and Education © 2010 123 25 October 2018 Al Khaleej Training and Education © 2010 124 25 October 2018 Al Khaleej Training and Education © 2010 125 25 October 2018 Al Khaleej Training and Education © 2010 126 25 October 2018 Al Khaleej Training and Education © 2010 127 25 October 2018 Al Khaleej Training and Education © 2010 128 25 October 2018 Al Khaleej Training and Education © 2010 129 25 October 2018 Al Khaleej Training and Education © 2010 130 25 October 2018 Al Khaleej Training and Education © 2010 131 25 October 2018 Al Khaleej Training and Education © 2010 132 arithmetic = add geometric = multiply used on rates of return: arithmetic tells you over a number of periods the return you could expect on average if you had invested for one period geometric tells you the average annual return if you had invested your money over the entire period 25 October 2018 Al Khaleej Training and Education © 2010 135 25 October 2018 Al Khaleej Training and Education © 2010 136 25 October 2018 Al Khaleej Training and Education © 2010 137 25 October 2018 Al Khaleej Training and Education © 2010 138 Explain why squaring Standard deviation is used more often as it is is the same units as the data Show formula is obvious Mention n-1 for a sample from a population workbook has an alternative formula which is sigma is the square root of (sum of x2 divided by n minus mean squared) page 2.10 25 October 2018 Al Khaleej Training and Education © 2010 141 Same as Treynor but uses the total risk of a portfolio rather than relative risk (Sharpe = SD) This measure is based on the capital market line. An undiversified portfolio could have a low beta but overall high risk which Treynor wouldn’t pick up. A higher Sharpe ratio than the market means the portfolios return exceeds its expected return given its risk. Fine to look at the risk and expected return of one security on its own, what about combining several securities together? If we have two securities with average returns of 6% p.a. and standard deviations of 3% what will the expected return and standard deviation be for a portfolio invested 50/50 between them? 25 October 2018 Al Khaleej Training and Education © 2010 144 25 October 2018 Al Khaleej Training and Education © 2010 145 The seventh chapter is broken into the above subsections – helpful to note the number of learning objectives attached to each => exam significance and effort required. Economics: Gross Domestic Product 3 Economic Fluctuations: Unemployment and Inflation 4 Fiscal Policy 1 Money and the Banking System 3 Foreign Exchange and the Global Economy 6 25 October 2018 Al Khaleej Training and Education © 2010 147 25 October 2018 Al Khaleej Training and Education © 2010 148 25 October 2018 Al Khaleej Training and Education © 2010 149 25 October 2018 Al Khaleej Training and Education © 2010 150 25 October 2018 Al Khaleej Training and Education © 2010 151 25 October 2018 Al Khaleej Training and Education © 2010 152 25 October 2018 Al Khaleej Training and Education © 2010 153 25 October 2018 Al Khaleej Training and Education © 2010 154 25 October 2018 Al Khaleej Training and Education © 2010 155 25 October 2018 Al Khaleej Training and Education © 2010 156 25 October 2018 Al Khaleej Training and Education © 2010 157 25 October 2018 Al Khaleej Training and Education © 2010 158 25 October 2018 Al Khaleej Training and Education © 2010 159 25 October 2018 Al Khaleej Training and Education © 2010 160 25 October 2018 Al Khaleej Training and Education © 2010 161 25 October 2018 Al Khaleej Training and Education © 2010 162 25 October 2018 Al Khaleej Training and Education © 2010 163 Discount means dollars are getting cheaper, so you will get more of them BY ADDING THE DISCOUNT 25 October 2018 Al Khaleej Training and Education © 2010 165 25 October 2018 Al Khaleej Training and Education © 2010 166 The third chapter is broken into the above subsections – helpful to note the number of learning objectives attached to each => exam significance and effort required. Security Valuation 2 Company Analysis and Stock Valuation 3 Technical Analysis 1 Price Multiples 1 25 October 2018 Al Khaleej Training and Education © 2010 168 25 October 2018 Al Khaleej Training and Education © 2010 169 25 October 2018 Al Khaleej Training and Education © 2010 170 25 October 2018 Al Khaleej Training and Education © 2010 171 25 October 2018 Al Khaleej Training and Education © 2010 172 25 October 2018 Al Khaleej Training and Education © 2010 173 25 October 2018 Al Khaleej Training and Education © 2010 175 25 October 2018 Al Khaleej Training and Education © 2010 176 25 October 2018 Al Khaleej Training and Education © 2010 177 25 October 2018 Al Khaleej Training and Education © 2010 178 25 October 2018 Al Khaleej Training and Education © 2010 179 25 October 2018 Al Khaleej Training and Education © 2010 180 25 October 2018 Al Khaleej Training and Education © 2010 181 25 October 2018 Al Khaleej Training and Education © 2010 182 The fourth chapter is broken into the above subsections – helpful to note the number of learning objectives attached to each => exam significance and effort required. Features of Debt Securities 4 Risks associated with investing in bonds 4 Understanding yield spreads 1 Valuation of debt securities 3 25 October 2018 Al Khaleej Training and Education © 2010 184 25 October 2018 Al Khaleej Training and Education © 2010 185 A bond is simply a series of individual cash flows – these cash flow can be used to price the bond based on the required rate of return. 25 October 2018 Al Khaleej Training and Education © 2010 187 25 October 2018 Al Khaleej Training and Education © 2010 188 25 October 2018 Al Khaleej Training and Education © 2010 189 25 October 2018 Al Khaleej Training and Education © 2010 190 25 October 2018 Al Khaleej Training and Education © 2010 191 25 October 2018 Al Khaleej Training and Education © 2010 192 25 October 2018 Al Khaleej Training and Education © 2010 193 Can be used to assess an investment. Flat yield (also known as a running yield, or interest yield) egTr 5% 08 price 101 5/101 = 4.95% However this is not the end of the story. In 2008 investor will receive 100, this is a further £1 loss. This is taken into account in the YTM – it is the discount rate applied to the cash flows to generate the prevailing market price. It will be less than 4.95% due to the loss on redemption. Clearly it is a fuller and more logical measure of yield. Major bond markets, where there are lots of bonds from the same issuer eg Government bonds are used to generate YTMs for different maturities and combined on yield curves…. 25 October 2018 Al Khaleej Training and Education © 2010 195 25 October 2018 Al Khaleej Training and Education © 2010 196 25 October 2018 Al Khaleej Training and Education © 2010 197 25 October 2018 Al Khaleej Training and Education © 2010 198 25 October 2018 Al Khaleej Training and Education © 2010 199 What impacts the bond price? Interest rates. If they rise, then investors will want to move into other investments and sell and the price of bonds will fall. If fall, then investors will want to move into bonds where the return is higher, more buyers than seller and the price rises. Redemption date If interest rates increase the impact on long term gilts will be greater because the impact of the interest rate will impact a number of years. The closer to redemption, the greater element of the the return is the repayment at par and so interest rate changes have less of an impact on the price Pull to redemption What impacts the bond price? Interest rates. If they rise, then investors will want to move into other investments and sell and the price of bonds will fall. If fall, then investors will want to move into bonds where the return is higher, more buyers than seller and the price rises. Redemption date If interest rates increase the impact on long term gilts will be greater because the impact of the interest rate will impact a number of years. The closer to redemption, the greater element of the the return is the repayment at par and so interest rate changes have less of an impact on the price Pull to redemption Why? Liquidity preference, investors prefer (and will pay for) liquidity by accepting a lower yield 25 October 2018 Al Khaleej Training and Education © 2010 203 25 October 2018 Al Khaleej Training and Education © 2010 204 25 October 2018 Al Khaleej Training and Education © 2010 205 25 October 2018 Al Khaleej Training and Education © 2010 206 25 October 2018 Al Khaleej Training and Education © 2010 207 Basis point is one 100th of a percentage point. 25 October 2018 Al Khaleej Training and Education © 2010 209 25 October 2018 Al Khaleej Training and Education © 2010 210 25 October 2018 Al Khaleej Training and Education © 2010 211 The fifth chapter is broken into the above subsections – helpful to note the number of learning objectives attached to each => exam significance and effort required. General 1 Forward Contracts 2 Future Contracts 4 Option Contracts 5 Swap Contracts 1 25 October 2018 Al Khaleej Training and Education © 2010 213 25 October 2018 Al Khaleej Training and Education © 2010 214 25 October 2018 Al Khaleej Training and Education © 2010 215 25 October 2018 Al Khaleej Training and Education © 2010 216 Futures traded: Metals (zinc, copper, silver, nickel, lead, aluminium etc) Soft commodities (cocoa, coffee,sugar) and financial instruments 25 October 2018 Al Khaleej Training and Education © 2010 219 25 October 2018 Al Khaleej Training and Education © 2010 220 Now look at an illustration 25 October 2018 Al Khaleej Training and Education © 2010 222 25 October 2018 Al Khaleej Training and Education © 2010 223 Intrinsic value (worth of the option) Premium the price of the option Time value is the represents the possibility that the price will go up or down. It is influenced by the time to expiry and the volatility of the underlying share price. Work out the time values for the following prices. 25 October 2018 Al Khaleej Training and Education © 2010 226 25 October 2018 Al Khaleej Training and Education © 2010 228 25 October 2018 Al Khaleej Training and Education © 2010 229 25 October 2018 Al Khaleej Training and Education © 2010 230 25 October 2018 Al Khaleej Training and Education © 2010 231 OTC market not tradable like futures and options (standardised contracts). 25 October 2018 Al Khaleej Training and Education © 2010 234 25 October 2018 Al Khaleej Training and Education © 2010 235 25 October 2018 Al Khaleej Training and Education © 2010 236 The sixth chapter is broken into the above subsections – helpful to note the number of learning objectives attached to each => exam significance and effort required. The Investment Setting 5 Asset Allocation Decision 2 Introduction to Portfolio Management 3 Asset Pricing Models 3 Cash Management 2 25 October 2018 Al Khaleej Training and Education © 2010 238 25 October 2018 Al Khaleej Training and Education © 2010 239 25 October 2018 Al Khaleej Training and Education © 2010 240 25 October 2018 Al Khaleej Training and Education © 2010 241 25 October 2018 Al Khaleej Training and Education © 2010 242 The return of the portfolio is just the weighted average expected return but the standard deviation is reduced because there is not perfect correlation +1 You can achieve a portfolio anywhere in the enclosed area. Which direction do you want to go? (left :low risk, and up: high return) Keep going and you will hit one of the portfolios on the efficient frontier Wouldn’t choose any portfolio on the line AB as can get better return for same risk on BC, therefore the true efficient frontier is the line BC for this portfolio Diversification reduces exposure to business risk and financial risk Obviously the lower the covariance Therefore should we even care about specific (unique, unsystematic) risk as if we diversify efficiently it has no impact. 25 October 2018 Al Khaleej Training and Education © 2010 246 25 October 2018 Al Khaleej Training and Education © 2010 247 This is the CAPM equation By using it we can estimate what return we would require from this security to compensate us for the risk, we can compare this to the return we expect and consequently see if it is worth investing Do E(Ri)=rf + Bi(E(Rm-rf)) for each one this gives a required return for the associated level of risk. If the expected return is higher than the calculated required return it is undervalued. The risk premium of 4% is constant, so for e.g,. on BskyB the calc is 3%+0.5x4%=5% 25 October 2018 Al Khaleej Training and Education © 2010 250 25 October 2018 Al Khaleej Training and Education © 2010 251 25 October 2018 Al Khaleej Training and Education © 2010 252 The eighth chapter is a single subsections – helpful to note the number of learning objectives attached to each => exam significance and effort required. Here it is 7 learning objectives. 25 October 2018 Al Khaleej Training and Education © 2010 254 An open ended scheme is one that can expand or contract depending on demand. New units/shares are created by the depositary/trustee at manager’s request. Creation price is based on most recent underlying valuation 25 October 2018 Al Khaleej Training and Education © 2010 256 25 October 2018 Al Khaleej Training and Education © 2010 257 25 October 2018 Al Khaleej Training and Education © 2010 258 25 October 2018 Al Khaleej Training and Education © 2010 259 25 October 2018 Al Khaleej Training and Education © 2010 260 25 October 2018 Al Khaleej Training and Education © 2010 261 25 October 2018 Al Khaleej Training and Education © 2010 262 25 October 2018 Al Khaleej Training and Education © 2010 263 25 October 2018 Al Khaleej Training and Education © 2010 264 25 October 2018 Al Khaleej Training and Education © 2010 265 25 October 2018 Al Khaleej Training and Education © 2010 266
