PMT MATRIX CAPITAL LTD
FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS
This document is created in accordance with the European Union legislative requirements, and,
specifically, the legislative acts of Cyprus Securities and Exchange Commission, having its aim the
provision of investors with the basic information regarding the financial instruments and most
common types of risks entailed by such instruments and transactions with them.
The investor should not deal in these products unless he understands their nature and the extent of his
exposure to risk. He should also be satisfied that the product is suitable for him in the light of individual
circumstances and financial position.
However, the present document cannot disclose all the risks and other significant aspects of Financial
Instruments. In case the Client would require any additional clarifications and consultation on related
matters, he can contact the relevant personnel of PMT.
All of the following information shall be used for information purposes only, nothing in this document
may be interpreted as an advice to invest or to abstain from investment in certain Financial
Instruments.
Current version of this document is placed at the official website at www.pmt.com.cy.
The Company shall notify its Clients of any material change to this document by posting its updated
version on the website; however, the Clients would not be expressly notified of any such changes,
therefore, it is highly recommended to refer to the current versions of this and other applicable
documents regularly.
GENERAL TYPES OF RISKS
Credit Risk is the measure of possibility of counterparty’s default on its obligations for repayment of
principal amount, interest or dividend payments on due date and in full amount. This type of risk is of
particular concern to investors who hold bonds and money market instruments in their portfolios.
Market risk is the risk that the value of financial instrument will decrease as a result of movement in
market factors. Such factors include:
Price Risk or volatility risk, is the risk of the day-to-day fluctuations in assets price, applies
mainly to stocks, options, long term bonds and commodities.
Interest Rate Risk is the risk that an investment's value will change as a result of a change in
interest rates. This risk affects the value of bonds more directly than stocks.
Currency Risk is the risk of changing of foreign exchange rates.
Equity risk is the risk involved in holding equity in a particular investment and it typically
refers to equity in companies through the purchase of stocks.
Country Risk refers to the credit risk in regard of the certain country. The political or economic risks
may affect all counterparties having such country as its domicile. Country defaults on its obligations can
harm the performance of all other financial instruments in that country as well as other countries it
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PMT MATRIX CAPITAL LTD
has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are
issued within a particular country. Country risk varies from one country to the next. Some countries
have high enough risk to discourage much foreign investment.
Country Risk specific to Russian Federation (Current Assessment)
After recording the severest recession it has known since the 1998 crisis, activity in Russia revived
with recent y-o-y GDP growth, thanks to the upturn in the oil prices, to base effects and capital inflows.
Currently the Russian economy should record positive but moderate growth. The solid gains made
recently by net exports, however, hide the persistent weakness of household consumption in spite of
an expected upturn. The Russian stock market continues to recover after the sharp fall recorded in two
preceding years; securities have recovered some of their value, bond spreads have gone back to the
pre-crisis levels and the national currency is gradually strengthening thanks to the recovery of oil
prices and the return of direct foreign investment. Corporates, which have suffered from the
consequences of the credit crunch, are nevertheless posting improved access to credit and a better
refinancing rate. The persistence of certain structural factors — lack of an efficient banking system, lag
in technology, insufficient investment in the oil sector, and problems associated with the business
climate — also affects the recovery.
Faced with a worse than expected economic situation recently, the government adopted countercyclical fiscal policy entailing costly emergency measures intended to avert the collapse of the financial
system and the private sector. Hardly indebted, the government undeniably has a large security
cushion to fall back on via its Reserve Fund. It has also resumed the program of partial privatization of
state-run companies in. The stabilization of the national currency and the decline of risk aversion make
it possible to build up foreign exchange reserves. But the fall in oil revenues, the rescue plan in response
to the problem of excessive private external debt and the recession had less success in reducing the
budgetary deficit than was expected. Currently it is likely to remain high. The government will continue
its stimulus policy directed to the automobile, agricultural and military industrial sectors, while
reducing public investment spending. It is thus likely that some Russian companies and small banks
not protected by the government will suffer new financial difficulties. Corporate payment behavior,
which deteriorated sharply in the crisis, will remain poor.
External events have served to consolidate the predominant domestic roles of the government,
particularly in the economy, but considerable social tensions have developed. And Russia still suffers
from a business environment that is not very reassuring.
World and European Financial markets have been highly influenced by the continuing instability of the
political outlook in connection with the Ukraine crisis. The sanctions being continuously imposed by
different governments on the Russian Federation entities and individuals are a significant factor of
increasing the market volatility and instability.
Despite having certain weaknesses, such as limited economic diversification, high dependence of
economy on raw material prices, excessive private sector foreign debt and deficiencies in the business
environment, Russian economy still has many strong advantages, such as abundant natural resources
including oil, gas, and metals, World’s third largest foreign exchange reserves, reasserted regional and
energy power as well as political stability.
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Liquidity Risk is the inability of effecting the transaction with a certain Financial Instrument at the
current market price and at any given time due to low or restricted marketability of such instrument.
Operational Risk is the risk of losses that is connected with the malfunction or inadequate
performance of internal systems, processes and people or connected with external events.
Systematic Risk is the risk that is caused by the movements of the economy in general and therefore
it cannot be eliminated by the investments diversification.
In addition to the usual risks typically encountered in the major securities markets others may arise in
emerging markets. Some of these markets have undergone substantial political and/or change. The
quality and reliability of official data may not always be equivalent to that of the most developed
western markets. Emerging securities markets are still developing and volumes traded are sometimes
less than in the major western exchanges. This lack of volume and liquidity may sometimes result in
increased volatility.
TRANSFERABLE SECURITIES (Shares, Bonds and similar Financial Instruments)
Shares
Share (stock, equity share) is the security representing the share of ownership interest in a corporation.
As a unit in ownership the share usually implies voting rights in the shareholders’ meetings and
participation in the corporation’s profits in form of dividends.
Acquiring and/or holding a share the investor assumes the risk of the price of such share and future
fluctuations of this price. Although the dividend payments are independent of share price changes, the
overall profit on share is increased or decreased by the amount of price change. Price of share depends
on several factors, such as performance and prospects of the issuing company, forecasted profits per
share, liquidity of shares and their trade turnover and, very often, the prices of shares issued by the
companies of the same industry. Additionally to the general business environment and political
conditions, the share price could be affected by certain non-financial factors such as public opinion.
The payment of dividends also depends on the financial standing of the issuing company.
Most shares are traded on the public stock exchanges. Commonly, the prices are determined daily on
the basis of supply and demand. In case of shares that are traded outside stock exchanges, the
additional liquidity risk should be considered.
Shareholder participates in the profits and losses of the issuing company, therefore he may face the
credit risk which may depreciate the amount of investment to zero, in case the issuer declares its
bankruptcy.
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Bonds
Bond (debenture, fixed income security) is the financial instrument that incorporates the obligation of
its issuer to repay the bondholder with the nominal amount and, usually, the interest on the invested
capital.
Holder of the bond has a claim against its issuer but, contrary to the shareholder, has no part of
corporate ownership in the issuing company. Interest-bearing bond guarantees the bondholder the
payment of interest accrued amount, usually at pre-determined intervals, and the repayment of
principal amount at maturity. Profit earned by the bond represents the difference between the
purchase price and the price of the bond when it is sold or redeemed. Accrued interest payments and
transaction charges are also incorporated in calculation of the bond’s earnings.
Credit or counterparty risk is always present for the bondholder. There is a certain probability of the
issuer’s default or bankruptcy, therefore the financial standing of the issuer should always be
considered as one of the most important investment factors. Credit ratings published by the
independent rating agencies provide the basis for assessment of issuer’s creditworthiness.
Interest rate risk is another major risk factor for the bondholders, there is a reverse correlation
between the movements in the interest rates and the bonds prices.
Liquidity risk, or the possibility of trading bonds, depends on the several factors, among which the
issued volume, time remaining to maturity, market conditions and specific market rules. Some bonds
may not be able to be sold easily without any price concessions. Liquidity risk should be the main
concern of investors who do not wish to hold the bond until maturity.
MONEY-MARKET INSTRUMENTS (Treasury Bills, Certificates of Deposit, Commercial Papers)
Such instruments include fixed income short-term investments evidenced by a certificate and which
are normally traded on the money markets. Those include, among others, treasury bills, certificates of
deposit and commercial papers.
Risks posed by the money-market instruments are largely the same as those implied by shares or
bonds. The main difference lies in the liquidity risk, which is considerably higher. Typically, there are
no organized markets for money-market instruments; therefore it could be no guarantee for such
instruments to be sold easily at any time. Liquidity risk may be partially decreased in case the issuer
guarantees the repayment of the principal amount at any given time provided the financial standing of
the issuer remains satisfactory.
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UNITS IN COLLECTIVE INVESTMENT UNDERTAKINGS
Shares (units) of investment funds are securities which confirm co-ownership of an investment fund.
Investment funds invest the money provided by investors in accordance with the principle of risk
diversification.
Funds may be classified as open-end and closed-end funds. The return on investment fund units is
composed of the annual distributions (in the case of interest/ dividend-paying funds, not of growth
funds) and the trend of the net asset value (NAV). NAV performance depends on the investment policy
specified in the fund terms as well as on the market trends of the certain financial instruments held by
the fund. Depending on the composition of a fund’s portfolio, the relevant risk-warning notices for
shares, bonds or other instruments must be taken into account.
Risk of investment fund depends on the market trends and the investment policy of the fund.
The life span of the fund is set out in its terms and conditions and usually is unlimited. Normally, units
of investment funds can be resold to the fund at any given time at the repurchase price, although in
practice they represent a profitable investment only if held for a long period, commonly for the
minimum of three years.
OPTIONS, FUTURES, SWAPS, FORWARD RATE AGREEMENTS AND OTHER DERIVATIVE
CONTRACTS
Derivative contract is a traded agreement for sale or purchase of a certain asset. Derivative and its price
are derived from a certain underlying asset; share, bond, precious metals or other commodities, as well
as financial values – interest rates, currency exchange rates, indices, can be used as such underlying
asset. Derivatives can be used to balance potential negative change of prices of the main asset. Options
and futures transactions offer the opportunity to make considerable profits, but, at the same time
involve the risk of substantial losses.
Futures and Forwards are contracts to buy or sell a certain underlying financial instruments at a certain
future date at a certain specified price. Unlike in Forwards, delivery and payment are obligatory in
Futures.
The risk associated with futures and forward contract is the market risk (interest rate risk and
exchange rate risk).
Forward rate agreement is a forward contract in which one party pays a fixed interest rate and the
other party pays a floating interest rate.
Option is an agreement according to which a buyer of an option acquires the right to buy or sell a certain
financial instrument at a certain future date at a certain specified price.
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Selling Options poses much greater risk than buying Options; in case the price of the underlying asset
moves against buyer’s expectations, the Option may be let to lapse. The maximum loss in this case is
equivalent to the Option’s premium. On the other hand, the seller of the Option may be liable to
maintain the margin account and to exercise the Option on the conditions leading to losses much more
substantial than the Option’s premium.
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