Contents

CHAPTER 1: A modern financial system: an overview 8

1.1/ Theory and facts in finance 8

1.2/ The financial system and financial institutions /6 8
1.3/ Financial instrument (FI) /11 9
1.4/ Financial market /14 10
1.5 Flow of funds, market relationships and stability /27 11
CHAPTER 2: Commercial banks 12

2.1/ The main activities of commercial banking 12

2.2/ Sources of funds /44 12

2.3/ Uses of funds /48 14

1. Personal and housing finance 14
2. Commercial lending 14
3. Lending to government 15
4. Other bank assets 15
2.4 Off-balance-sheet business /52 15
1. direct credit substitutes 15
2. trade- and performance-related items 15
3. Commitments 16
4. FE, IR and other market-related contracts /54 16
5. volume of off-balance-sheet business 16
2.5 Regulation and prudential supervision of commercial banks /56 16
2.6 A background to the capital adequacy Standards /57 16
2.7 The Basel accords: evolution from Basel I to Basel III /59 17
1/ minimum capital adequacy requirement 17
2/ Definition of capital 17
3/ basel III structural framework 17
2.8/ Liquidity management and other supervisory controls /69 19
Other regulatory and supervisory controls /70 20
Extend reading /74 + Math 20
CHAPTER 3: Non-bank financial institutions 21

1/ Investment banks /89 21

1.1/ sources of funds and uses of funds 21
1.2/ Off-balance-sheet business /90 21
 Mergers and acquisitions /91 22
2/ Managed funds /94 23
2.1/ Structure of the managed funds sector 23
2.2/ Sources and uses of funds /94 23
2.3/ Capital guaranteed funds /97 24
2.4/ Capital stable funds 24
2.5/ Balanced growth funds 24
2.6/ Managed growth or capital growth funds 24
3/ Cash management trusts /98 24
4/ Public unit trusts /99 24
5/ Supernnuation funds /101 25
5.1/ Sources of funds /102 25
5.2/ Defined benefit funds and accumulation funds /105 26
5.3/ Regulation /106 26
6/ Life insurance offices /107 27
6.1/ Life insurance policies /108 27
7/ General insurance offices /110 28
7.1/ General insurance policies 28
8/ Hedge funds /112 28
9/ Finance companies and general financiers /113 29
9.1/ Sources of funds and uses of funds 29
9.2/ Sector structure 29
10/ Building societies /115 30
11/ Credit unions /116 30
12/ Export finance corporations /116 30
CHAPTER 4: The share market and the corporation 30

1/ The nature of a corporation /134 31

Advantages /135 31
Disadvantages 31
2/ The stock exchange /137 32
3/ The primary market role of a stock exchange /138 32
4/ The secondary market role of a stock exchange /140 33
5/ The managed product and derivative product roles of a stock exchange /141 33
5.1/ Exchange Traded Funds /142 34
5.2/ Contracts For Difference (CFD) /143 34
5.3/ Real Estate Investment Trusts (Reit) /144 34
5.4/ Infrastructure Funds /144 34
5.5/ Options 34
5.6/ Warrants 35
5.7/ Futures Contracts 35
6/ The interest rate market role of a stock exchange /146 35
7/ The trading and settlement roles of a stock exchange /148 35
8/ The information role of a stock exchange /150 36
9/ The regulatory role of a stock exchange /152 36
 10/ The private equity market/ 153 36
CHAPTER 5: Corporations issuing equity in the share market 37

1/ The investment decision: capital budgeting /163 37

1. Net present value 37
2. Internal Rate Of Return (IRR) /165 38
2/ The financing decision: equity, debt and risk /166 38
1. Financial Risk And The Debt-To-Equity Ratio /167 38
2. What is the appropriate debt-to-equity ratio? 38
3/ Initial public offering /169 38
1. Ordinary Shares: Limited Liability Companies /171 39
2. Ordinary Shares: No Liability Companies 39
4. Listing a business on a stock exchange /172 39
5/ Equity-funding alternatives for listed companies /174 40
1. Rights Issue Or Share Purchase Plan 40
2. Placements /175 40
3. Takeover Issues /176 40
4. Dividend Reinvestment Schemes 40
5. Preference Shares 41
6. Convertible Notes And Other Quasi-Equity Securities /178 41
CHAPTER 6: Investors in the share market 41

1/ Share-market investment /193 42

2/ Buying and selling shares /196 43
3/ Taxation /198 43
4/ Financial performance indicators /201 44
4.1 Capital structure 44
4.2 Liquidity 44
4.3 Debt servicing /202 45
4.4 Profitability /203 45
4.5 Share price 45
4.6 Risk 45
6.5 Pricing of shares /206 45
5.1 Estimating the price of a share 45
5.4 Share splits /209 47
5.5/ Pro-rata rights issues 47
6.6/ Stock-market indices and published share information /211 48
Chapter 8: Mathematics of finance: an introduction to basic concepts and calculations 48

1/ Simple interest /261 48

1.1/ Simple Interest Accumulation 48
1.2/ Present Value with Simple Interest /263 49
1.3/ Calculation of Yields /266 49
1.4/ Holding Period Yield /267 50
2/ Compound interest /268 50
Compound Interest Accumulation (S or Future Value) 50
Present Value (A) With Compound Interest 50
 Present Value Of An Annuity /272 51
Accumulated Value Of An Annuity (Future Value) /276 52
Effective Rates Of Interest 52
Chapter9: Short-term debt 52

1/ Trade credit /289 52

2/ Bank overdrafts /290 53
3/ Commercial bills 53
1. Features Of Commercial Bills /292 53
2. The Flow Of Funds And Bill Financing /294 54
3. Establishing A Bill Financing Facility 54
4.Advantages Of Commercial Bill Financing /296 55
4/ Calculations: discount securities /297 55
1. Calculating The Price Where The Yield Is Known 55
2. Calculating the face value where the issue price and yield are known 55
3. Calculating The Yield 55
4. Calculating The Price Where The Discount Rate Is Known 56
5. Calculating The Discount Rate /301 56
5/ Promissory notes /302 56
Establishing A P-Note Issue programs: 56
Underwritten P-Note Issues /304 57
Non-Underwritten Issues 57
6/ Negotiable certificates of deposit (CD) /305 57
7/ Inventory finance, accounts receivable financing and factoring /306 57
1. Inventory finance 57
2. Account receivable financing and factoring 58
Chapter 10: Medium - to long-term debt 59

1/ Term loans or fully drawn advances/ 317 59

a/ term loan structures 59
b/ Loan covenants /319 60
c/ Calculating the loan instalment on a term loan 60
2/ Mortgage finance /322 60
a/ Calculating the instalment on a mortgage loan 61
b/ Securitisation and mortgage finance 61
3/ The bond market: debentures, unsecured notes and subordinated debt /325 61
a/ Debentures and unsecured notes 61
b/ Issuing debentures and notes 62
c/ Subordinated debts /329 62
4/ Calculations: fixed-interest securities/ 330 63
a/ Bond price/yield relationship 63
b/ Price of a fixed-interest bond at a coupon date 63
c/ Price of a fixed-interest bond (sold) between coupon dates 63
5/ Leasing/ 333 63
a/ Types of leases 64
b/ Lease structures/ 336 65
Chapter 15: Foreign exchange: the structure and operation of the FX market 65

1/ Exchange rate regimes /487 65

2/ Foreign exchange market participants /488 66
a/ Foreign Exchange Dealers and Brokers 66
b/ Central Banks /489 66
c/ Firms Conducting International Trade Transactions 66
d/ unimportant 66
e/ Speculative Transactions (đầu cơ) 66
f/ Arbitrage Transactions /491 67
3/ The operation of the FX market /492 67
4/ Spot and forward transactions /493 67
5/ Spot market quotations /494 68
a/ asking for quotation 68
b/ Two-Way Quotations 68
c/ Transposing Spot Quotations /497 68
d/ Calculating Cross-Rates 69
6/ Forward market quotations /500 70
a/ Forward Points and Forward Exchange Contracts 70
b/ Some Real-World Complications /502 70
7/ Economic and Monetary Union of the EU and the FX markets /505 71
Chapter 18: An introduction to risk management and derivatives 71

1/ Understanding risk /568 71

a/ operational risks 71
b/ financial risks 71
2/ The risk management process /570 72
3/ Future contracts /574 72
4/ Forward contracts /576 73
a/ Forward rate agreement (FRAs) 74
b/ Forward foreign exchange contracts /578 74
5/ Option contracts /579 74
a/ Call Option Profit And Loss Payoff Profiles 75
b/ Put Option Profit And Loss Payoff Profiles 75
6/ Swap contracts /582 76
a/ Interest Rate Swaps 76
b/ Cross-Currency Swaps /585 77
Chapter 19: Futures contracts and forward rate agreements 77

1/ Hedging using futures contracts/ 596 77

2/ Main features of a futures transaction 78
a/ Orders and Agreement To Trade 78
b/ Margin Requirements /599 78
c/ Closing Out Of A Contract 79
d/ Contract Delivery /600 79
3/ Futures market instruments/ 601 79
4/ Futures market participants /603 79
 a/ hedgers (ng bảo hiểm rủi ro) 79
b/ Speculators 79
c/ Traders /604 80
d/ arbitrageurs 80
5/ Hedging: risk management using futures /605 80
a/ hedging the cost of funds (borrowing hedge) 80
b/ hedging the yield on funds (investment hedge) 81
c/ hedging a foreign currency transaction /608 81
d/ hedging the value of a share portfolio. 82
e/ Hedging Against Volatility /610 82
6/ Risks in using futures contracts for hedging /612 83
a/ Standard contract size 83
b/ margin payments 83
c/ basis risk 83
d/ cross-commodity hedging. 83
7/ Forward rate agreements /615 84
a/ Using An FRA For A Borrowing Hedge /617 84
REVIEW FINAL MATH 86
 CHAPTER 1: A modern financial system: an
overview
1.1/ Theory and facts in finance
4 pieces of finance and economics:
1. Risk and reward: rewards from investing depend on the risk that the investor must bear
(positively related to; all investment return follow same rule)
2. Supply and demand: fundamental determinants of market prices
3. No arbitrage: prices are just statements that must be consistent with each other
4. The time value of money
o Interest is the reward of waiting
o The pure time value of money is positive because people are generally impatient to
consume now and must be rewarded for waiting

Savings
- Deferring consumption
- allow consumption in the future to be independent of future levels of earned income, improve
overall

lenders (surplus units) excess funds invest and transfer that purchasing power to the future
today
sellers (deficit units) short of funds expect to have a surplus amount in the future that will
today enable the repayment of the current borrowing

1.2/ The financial system and financial institutions /6

A financial system comprises a range of:
- financial institutions: commercial banks
- financial instruments: stocks, bonds, notes,…
- financial markets: which interact to facilitate the flow of funds through the financial system.

four main attributes of rate of return:

• return or yield
• risk
• liquidity
• time-pattern of cash flows.

Apart from facilitating the flow of fund (1) from

savers to borrowers, the financial system also
facilitate portfolio restructuring (2) and monetary policy (3).

(1)
financial institutions - five categories (based on sources and uses of funds)
 1. Depository financial institutions:
- Take deposit from customer
- Provide loans to borrowers
- Become third party to connect 2 groups
- commercial banks, credit cooperatives, building societies
2. Investment banks:
- Provide advisory services and loans for clients (their corporate and government)
- fin risk management, M&A
3. Contractual savings institutions
- Receive periodic payments
- Payout to the holder of a contract if an event specified in the contract occur (ví dụ như người
mua bảo hiểm y tế, bị bệnh thì được thả tiền)
- Life insurance office, general insurers
- Superannuation funds: Superannuation funds (hưu trí)
4. Finance companies and general financiers
- Raise fund by issuing FI (commercial paper, medium-
term notes, bonds)
- make loans or provide lease finance to households or
business sector
5. Unit trusts
- a type of mutual funds that is controlled and managed by trustee
- invite the public to purchase units in a trust
- invest these fund by fund managers in asset specified in the trust deed (chung thu tin cay)

(2)
- A portfolio is a combination of assets and liabilities characterized by return risk quality and
timing of cash flow
- If someone want to invest long term, with not great risk, the financial system can facilitate
him to bond market
(3)
- Monetary policy: a central bank influences the level of interest rates in the financial system,
to maintain the level of inflation within a specified level.
- Ex: want to ⬆ prices, IR �⬇ money supply by selling bonds

Securitisation

1.3/ Financial instrument (FI) /11

a financial instrument: it acknowledges a financial commitment and represents an entitlement to
future cash flows
Equity Debt Derivatives (phai sinh)
ownership interest is an assets Periodic interest A synthetic security providing
payment specific future rights that derives
Repayment of its price from:
principal - a physical market commodity
(gold, oil)
- financial security (IR-sensitive
debt instruments, currencies,
equities)
Dividend, liquidation Used to manage price risk
exposure and to speculate

Ordinary share (common stock) - short/ medium/ 4 main types /12

- no maturity date long term - Futures contract (price today,
- receive dividend payment future payment and delivery;
- is entitled to the residuals value of - unsecured/ standardised)
assets of corporation after payment for secured (specified
the claims of other creditors and asset as a security/ - Forwards (forward foreign
security holders collteral) exchange contract, forward rate
agreement)
Hybrid security/ 11 - non (ex: term loan - Options: can sell at a specified
Preference share from a bank) and time, at predetermined price
- similar to both and equity and debt negotiable (can sell - Swaps contract: exchange
- is entitled to the residuals value of or nego) future CF (interest rate swap and
assets of corporation before paying currency swap)
claims of ordinary SH
Convertible note
- fix-interest debt has an option to
convert to ordinary share at a specific
date

1.4/ Financial market /14

1. matching principle:
a. short-term assets should be funded with short-term liabilities (ex: seasonal inventory
– overdraft (vay thấu chi))
b. longer-term assets should be funded with longer-term liabilities and equity (ex:
equipment – debentures (giấy ghi nợ ) / bonds)
c. not do this principle � frozen money, sub-prime mk collapse
2. primary and secondary market transactions
a. Primary:
- the issue of a new financial instrument to raise funds to purchase by: business (shares,
debentures), gov (treasury notes or bonds), individuals (mortgage)
- eco growth relies on this
b. Secondary:
- buy and sell existing financial securities – no new raised fund, just transfer ownership
- provide liquidity – facilitates the restructuring of portfolios of security owners
- encourage both saving and investment
3. direct finance and intermediated finance /16
Direct fin Intermediate fin (trung gian)
Explaining Funds obtained through primary mk, act as a third party by holding a portfolio of
via direct and contractual relationship assets and issuing claims based on them to
with providers savers (not from book)
The broker receives commission for
arranging the transaction between the
two parties; no rights to the benefits
that may flow from the purchase of
the security.
Ads - avoid intermediation costs - credit risk diversification and transformation
- diverse range of mk (less risk through expertise)
- greater flexibility Range of functions:
- asset transformation: wide range of fin
products
- maturity’: longer-term loans while satisfying
savers’ preferences for shorter-term savings.
- Credit risk diversification and
transformation: less risk thanks to expertise;
contractual
- Liquidity’: convert to cash; trans costs;
acquire and dispose fin assets
- Economies of scale: standardised

Disad - matching of preferences

- lq and marketability of a
security
 - search and transaction costs
assessment of (default) risk (rủi ro vỡ
nợ)
Examples share issues, corporate bonds and
government securities

4. Wholesaler and retailer markets

- Whole sale: Direct financial transactions between institutional investors (commercial banks,
insurance offices, superannuation funds, investment banks, fund managers, finance
companies, building societies, credit unions, government authorities and large corporation)
and borrowers
- Retail: transactions primarily of individuals and small to medium-sized businesses

5. Money market
- Short term, less than 12 months
- bring together institutional investors that have a surplus of funds and those with a short-term
shortage of funds
- Money-market submarkets:
o Central bank
o Interbank mk: ST liquidity needs of commercial
banks
o Bills market: are ST discount securities (no
interest, but sold to investors at $ less than the
face value); trade of band and non-bank bills
o Commercial paper mk: commercial paper as
promissory notes, often on unsecured basis
o Negotiable certificates of deposit market
(CDs): short-term discount securities issued by
banks

6. Capital markets
- markets for longerterm funding; includes
o equity: ownership interest; ordinary share, common stock; dividend or capital gain
(loss)
o corporate debt /25
▪ term loans
▪ commercial property fin
▪ debenture: trái khoáng
▪ unsecured notes
▪ subordinated debt (notes): characteristics of both debt and equity
▪ lease arrangement
▪ securitization: have asset then sell claims of it
o government debt
▪ Treasury notes are discount securities maturities up to 6m.
▪ Treasury bonds for up to 10 years.
▪ Crowding out: government borrowing that reduces the net amount of funds
available for other lending in the financial system
o foreign exchange
o derivatives markets

1.5 Flow of funds, market relationships and stability /27

- The flow of funds to deficit units involves the creation of financial instruments that are
exchanged for money in the primary markets
o Direct or indirect (intermediate)
- Transactions in the secondary markets do not provide additional funding, but involve a flow
of funds and a change of ownership
 o Add marketability and liquidity to primary mk securities
- domestic economy can be divided into four sectors: business corporations, financial
corporations, government and households. An additional sector is the rest-of-the-world sector.
- Factors influence flow of fund:
o Fiscal policy (compulsory superannuation)
o Global institution: world bank, IMF, BIS

CHAPTER 2: Commercial banks

2.1/ The main activities of commercial banking
Main activities:
1. Take deposits
2. Making loans
3. Provide full range of financial services:
a. Personal service: pay rent, income tax, insurance premium, telephone bill
b. Provide assistance to foreign trade
c. Provide investment counselling, or assistance in investment activities

Importance of banks:
- A high level of regulation prior to the mid 1980
- After 1980 – deregulation – begin to practise liability management (read more below)
- Hold largest share of assets of all institution

Commercial banks:
- take deposits from customers and then invest those deposits by making loans to their
customers
- products and services include:
o balance-sheet transactions: assets (loans), liabilities (deposits), shareholders’ funds
(equity)
o off-balance-sheet: contingent liabilities, significant part of bank business
- should: ensure the availability of funds � banks move from asset management to liability
management
o asset man’: restrict loan to match available amount of deposits
o Liability man’: remove restriction, manage by borrowing directly from the domestic,
international capital markets

There are four primary roles of a bank: asset management, liability management, capital adequacy
management and liquidity management (from tb)

2.2/ Sources of funds /44

- Appear on balance sheet as lia or equity funds
- Sources of funds = liabilities + shareholder’s funds
- To attract surplus entities, offer instruments with different terms (mature, liquid, return, CF
attributes)
- Main sources:
1. current account deposits
o the most liquid – low interest rate
o held in cheque
▪ a written, dated, and signed instrument that direct a bank to pay a specific
sum of money to the bearer
▪ write an order on a cheque – instruct banks to pay named payee
 ▪ may be interest/ non interest
bearing
o used directly in a payment
o provide a stable source of fund
2. call or demand deposits
o held in (savings) account
o funds are available on demand
o usually receive interest pmt
o low rate of return (ROR) � high
liquid, low risk
o banks charge trans and service fees
3. term deposits
o fixed IR for investment in specified period of time
o higher ROR than 1,2
o safe – conservative investors – expect falling IR
o loss of liquidity owing to fixed maturity
4. negotiable certificates of deposit (CD)
o a certificate issued by a bank in its own name; pay to the bearer the face value of the
CD at the specified maturity date.
o the bank may issue a CD into money market
o no interest pmt (read ex /45), and known as a discount security
o highly negotiable security; short-term (30-180days)
o The yield on a CD cannot be adjusted until it reaches maturity and a new CD is
issued
5. bill acceptance liabilities (bank bills/ bills of exchange)
o 2 roles of bank: acceptance role (bill of exchange will be bank-accepted bill) or
discount the bills
o Is ST money-market discount security; highly liquidity
o Return: difference bt price the bill is bought and the price at which it is sold before
maturity, or the face value at maturity
o Encourage investor and increase creditworthiness by put bank’s name on the bill (as
an acceptor)
o Acceptance by bank guarantees flow of funds to its customers w/o using its own
funds

6. debt liabilities /46

o banks issue debt into both money and capital mk
o medium to long term instruments:
▪ debentures : a bond (supported by a form of security, being charge over
assets of the issuers) and collateralised floating charge (security attached to a
loan; is borrower defaults, the lender will take possession of borrower’
assets)
▪ unsecured notes
▪ trans-able certificates of deposit
7. foreign currency liabilities /47:
o easier to raise substantial amounts of debt at a net low cost
 o issued into international capital markets that are denominated in a FR currency
o discount security, medium-term notes, debentures, unsecured notes
▪ allow diversification
▪ facilitate matching FE denominated assets
▪ meet demand of corp customers for FE products
o Major reasons it is important (fromtb):
i. deregulation of the foreign exchange market
ii. diversification of funding sources
iii. demand from multinational corporate clients
iv. internationalisation of global financial markets
v. avoidance of the non-callable deposit prudential requirement
vi. expansion of banks' asset-base denominated in foreign currencies
8. loan capital and shareholders’ equity
o Loan capital or hybrid securities: char of both debt and equity
▪ are subordinated: the holder of the security will only be paid interest
payments, or have the principal repaid, after the entitlements of all other
creditors (but before ordinary shareholders)
o ordinary share

2.3/ Uses of funds /48

The majority of bank assets are financial assets that create an entitlement (quyền lợi) to future cash
flows.

The bank is entitled to receive periodic interest payments plus repayment of the principal in
accordance with the terms and conditions of the loan contract

1. Personal and housing finance

- banks are the principal providers of finance to individuals
- forms of personal finance include investment property finance, fixed-term loans, personal
overdrafts and credit card finance
- housing finance:
o provision of LT funds to enable the purchase of residential property
o bank register a mortgage (thế chấp): a form of security whereby a lender registers an
interest over the title of a property
o Bong bóng bất động sản (GFC case pg 49)
o Mortgage originators: specialist
o A typical owner-occupied housing loan will require regular amortised loan
instalments over the period of the loan
- investment property finance:
o the bank provides funds to an individual investor who purchases a property for rental
or leasing purposes (also register mortgage)
o IR can be fixed/ variable
- fixed term loan: provided for a predetermined period (up to 5yrs), used to purchase specific
G/S (car, travel)
- credit card: provide access to funds through electronic distribution sys (ATM, EFTPOS)

2. Commercial lending
- Commercial lending represents bank assets invested in the business sector plus lending to
other financial institutions
- SME: ComB are principal lenders (intermediated finance)
- unlike large corporations can choose comB and borrowing from direct market (direct finance)
owing to good credit rating
- Term loan: 3-7 years; negotiate conditions with bank
- bank bill swap rate (BBSW): the average mid-point of banks’ bid and offer rates in the
secondary bill market and is calculated and published daily. International
- Overdraft facilities: enable to manage mismatches in timing of cash flow
 o Overdraft advantage: an arrangement with a bank that allows a business to place its
operating account into debit up to an agreed limit
- Commercial bill: discount sec’
o 30-180d
o The bank will then generally sell the discounted bills into the money market, but if
the bank decides to hold the bills as assets on its balance sheet � bank bills held
- Rollover facility: an arrangement whereby a bank agrees to discount new securities over a
specified period as the existing securities mature
- A lease is an arrangement whereby the owner of an asset (the lessor) allows another party (the
lessee) to use that asset subject to the terms and conditions of the lease contract.
o If banks are lessor: Essentially, the lessee is borrowing the asset rather than
borrowing the funds to purchase the asset

3. Lending to government
If the taxation and other income receipts do not cover intra-year expenses, a government may issue
Treasury notes (T-notes, ST) or Treasury bonds (LT).

Why do banks invest in gov sec’ when they could obtain higher return by giving more loans to
borrowers?
Because Gov sec’:
- An investment alternative
- Source of liquidity – easily sold in secondary mk
- Provide IC stream and capital gains (while holing cash does not)
- Government securities can be used as security against banks' borrowing
- …read more pg.51

Therefore, lending to the government, particularly through the purchase of government securities,
provides a bank with the flexibility to actively manage its overall asset portfolio, while at the same
time lowering the overall levels of risk in its asset portfolio.

4. Other bank assets

- Including: receivables, shares in and loans to controlled entities, goodwill, property, plant
and equipment and unrealised gains from their trading activities in derivative products
- Banks highly depend on info system and product delivery sys � invest tech, property, plant,
equipment
- Shift away from physical asset, offset by electronic products and service delivery sys (phone,
internet banking)

2.4 Off-balance-sheet business /52

- off-balance-sheet: có thể hiểu là hoạt động chưa xảy ra, mà đã set kèo in the future

1. direct credit substitutes

- support a client’s financial obligations
- effectively ensures that the client is able to raise funds direct from the markets
- include guarantees, indemnities (tiền bảo kê) and letters of comfort

2. trade- and performance-related items

- is guarantees made by a bank on behalf of its client, but in this case they are made to support
a client’s non-financial contractual obligations
- the bank provides a guarantee on behalf of its client that it will make a payment to the third
party subject to the terms of the specific commercial contract
- documentary letters of credit (DLCs): The bank, on behalf of its client, will authorise
payment to a named party against delivery by that party of a shipment of goods (evidenced in
specified documents).
 - performance guarantees: a bank agrees to provide financial compensation to a third party if
a client does not complete the terms and conditions of a contract

3. Commitments
- Commitment: a bank in an undertaking to advance funds to a client, to underwrite debt and
equity issues or to purchase assets at some future date
- Outright Forward purchase agreements: contract today with agreed exchange rate on
specified date in the future
- Repurchase agreements: bank sells asset but will repurchase at a specified date
- Underwriting: a bank guarantees to cover any shortfall in funds received from a primary mk
issue of debt or eq securities
- Loans approved but not yet drawn down
- Credit card limit approvals that have not been used by card holders

4. FE, IR and other market-related contracts /54

- Designed to facilitate hedging against risk
- Used for speculating (đầu cơ)
- Examples:
o Forward exchange contracts: buy/sell at future date at today ER
o Currency swap
o Forward rate agreements
o IR future contracts: buy or sell a specific security at a specific price at a
predetermined future date
o IR option contracts: provide right (not obligation) to buy/sell
o Equity contracts: lock equity price today, apply at a specified future date

5. volume of off-balance-sheet business

2 outstanding features:
- the magnitude of the notional face value of the off-balance-sheet contracts written by banks
o notional face value: is significantly greater than the actual associated cash flows +
the largest single activity concerns IR
- it is mainly market-rate-related contracts
The nature + size of market-rate-related contracts, + the volatility + speed at which contracts are re-
priced in the market � losses being incurred by both financial institutions and their clients � threats
to stability of domestic and global financial systems

Cô giảng ít từ phần này trở xuống

2.5 Regulation and prudential supervision of commercial banks /56

Phần này nhiều thông tin nhưng ít lý thuyết quan trọng, nên đọc sách
- bank regulation: constraints on banking activities through prescriptive legislation and
prudential supervision
- Prudential supervision the imposition and monitoring of standards designed to ensure the
soundness and stability of a financial system
- Should: read book
- Australia’s system: read book
o Reserve bank of Aus (central bank): stability, soundness
o APRA: Regulation and supervision of authorised deposit-taking ins
o ASIC: Regulation and supervision of market integrity and consumer protection
o ACCC

2.6 A background to the capital adequacy Standards /57

Capital important functions:
• It is the source of equity funds for a corporation.
• It demonstrates shareholders’ commitment to the organisation.
• It enables growth in a business and is a source of future profits.
• It is necessary in order to write off periodic abnormal business losses.

2.7 The Basel accords: evolution from Basel I to Basel III /59
Basel I developed a measure of capital adequacy that principally focused on the level of credit risk
associated with a bank’s balance-sheet and off-balance-sheet business.
- Credit risk is the risk that counterparties to a transaction will default.
- Market risk is the exposure of an institution’s trading book to changes in interest rates and
foreign currency exchange rates

Basel II was a major extension, much more sensitive to different levels of risk

Basel III was primarily a response to the GFC but it has been revised and enhanced
- 2010
- focus on the capital adequacy of financial institutions
- main objective: increase bank liquidity and decrease bank leverage � support financial
system stability

1/ minimum capital adequacy requirement

- require that the ratio of a bank’s capital to its risk-weighted assets be set at some minimum
level
- require maintain a capital conservation buffer of 2.50 per cent
2/ Definition of capital
- Common Equity Tier 1 capital, or CET1, consists of the highest quality capital: common
shares, retained earnings and other reserves as set down by Australian Prudential Standard
APS 111
- Tier 2 capital is additional capital that contributes to a bank’s financial strength.

3/ basel III structural framework

The Basel III capital accord framework is based on three integrated pillars:
• Pillar 1: capital adequacy requirements, risk coverage and leverage ratios
• Pillar 2: risk management and supervision
• Pillar 3: the market discipline, incorporating disclosure and transparency requirements.

Pillar 1/ 60
3 risk components: credit risk, operational risk and market risk.

Credit risk component

It is the risk that a counterparty is unable to meet its obligations
o Risk-based capital ratio = ratio of capital/ risk-weighted assets
o Bank’s assets: cash, loans, securities

Basel III provides three alternative ways for a bank to measure credit risk:
1. the standardised approach (SA)
- Require each BS asset and offBS item a risk weight or fixed weight (banks not use their
internal model)
- Current exposer method = current + potential future credit exposure
- Original exposure method = sum of positive market-to-market value
 - Larger commercial banks, under certain conditions, can use the internal ratings-based
approach to credit risk.

2. the foundation internal ratings-based approach (FIRB)

- provide its own estimates of probability of default and effective maturity, but must rely on
supervisory estimates for other credit risk components, including the loss given default
estimates and exposure at default estimates

3. the advanced internal ratings-based approach (AIRB)

- provide its own estimates of all of the credit risk components

Operational risk component

- examples (pg62): internal and external frauds, employment practices and workplace safety,
damage to physical assets
- 3 overarching objectives:
o Operational objectives. impact on a bank of the loss of business function integrity
and capability.
o Financial impact objectives. direct losses as a result of an operational risk exposure,
the cost of recovering and consequential financial losses
o Regulatory objectives. derive from prudential standards established by bank
supervisors
- Business continuity management, or disaster risk management, is a significant component
of operational risk management
- Calculation of operational risk capital:
o Business indicator: BI
o Internal loss multiplier: ILM
o Example pg 63

Market risk component: risk of losses resulting from movements in market prices.
split into two components:
- general market risk: changes in the overall market for interest rates, equities, foreign
exchange and commodities.
- Specific market risk is the risk that the value of a security will change as a result of issuers
specific actors
Institutions have had a choice of two approaches to calculate their market risk capital requirements:
the internal model approach and the standardised approach

Value-at-risk models (VaR) /64

- estimate maximum potential gains or losses that may be incurred on a portfolio based on a
specified probability over a fixed time period
- historical data observations for min 1 year, updated at least monthly � not necessarily accurate
estimate of future loss
- requires a model to apply a 99.00 per cent confidence level over a 10-day holding period

Pillar 2: Risk management and supervision

The supervisory review process is intended to:
1. ensure that banks have sufficient capital to support all the risk exposures in their business
2. encourage banks to develop and use improved risk management policies and practices in
identifying, measuring and managing risk exposures

Pillar 2 encourages good risk management practice:

- capital adequacy
- risk management policies and procedures, including education and training
- applying internal responsibilities, delegations and exposure limits
- …

4 principles of supervisory review:

Principle 1: Banks should have a process for assessing their overall capital adequacy in relation to
their risk profile and a strategy for maintaining their capital levels

5 main figures of rigorous process:

1 board and senior management oversight
2 sound capital assessment
3 comprehensive assessment of risks
4 monitoring and reporting
5 internal control and review.

Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy assessments
and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital
ratios. Supervisors should take appropriate supervisory action if they are not satisfied with the
result of this process.

on-site examinations and inspections

• off-site reviews
• discussions with bank management
• reviews of work done by external auditors
• periodic reporting.

Principle 3: ‘Supervisors should expect banks to operate above the minimum regulatory capital
ratios and should have the ability to require banks to hold capital in excess of the minimum

Principle 4: ‘Supervisors should seek to intervene at an early stage to prevent capital falling below
the minimum levels required to support the risk characteristics of a particular bank and should
require rapid remedial action if capital is not maintained or restored

• intensifying the monitoring of the bank

• restricting the payment of dividends
• requiring the bank to prepare and implement a satisfactory capital adequacy restoration plan
• requiring the bank to raise additional capital immediately.

Pillar 3: Market discipline

Purpose: encourage market discipline by developing a set of disclosure requirements that allow
market participants to assess important information relating to the capital adequacy of an institution

Basel III and bank liquidity

2 standards:
1. liquidity coverage ratio (LCR) that aims to ensure that financial institutions hold high
quality liquid assets in sufficient volume to sustain them for a period of one month during a
period of ‘acute stress’.
- is the ratio between a financial institution’s high quality liquid assets (HQLA) and net cash
outflows over a 30-day (one month) period
- required to maintain at least 100%
2. Net stable funding ratio (NSFR) that aims to foster longer-term stability by requiring
financial institutions to fund their activities with stable sources of funding

2.8/ Liquidity management and other supervisory controls /69

Liquidity is access to funds that enable an institution to meet its business operating commitments

2 new liquidity standards:

1. financial institutions must hold high quality liquid assets in sufficient volume to sustain
them for one month during a period of ‘acute stress’
 o relate to the mismatch in terms to maturity of BS assets and liabilities and the timing
of associated CF: source of funds (liabilities) often needs to be repaid sooner than
their loan assets � liquidity risk exposure should be managed
2. financial institutions will be expected to fund their activities with stable sources of funding
o relate to role of banks in payment system: funds should be available for financial
settlement of the millions of financial transactions each day

- Liquid securities include cash, government securities, semi-government securities and money
market securities. Another liquidity contingency arrangement would be the provision of a
stand-by credit facility by an international bank.
- To obtain liquidity, should hold cash � no incentive bc no return on funds � put cash in
Securities portfolio � ROI + can easily be sold in 2nd mk
- APS 210 Liquidity: bank must implement and maintain a liquidity management strategy
(must be reviewed at least annually, approved by board of directors, have a formal
contingency plan)

Other regulatory and supervisory controls /70

- Risk management systems certification: annual attestation
- Business continuity management: should ensure appropriate policies and procedures are in
place to identify, measure and manage business continuity risk
- Audit (external auditors, on-site visits): requires a commercial bank’s external auditor to
inform it of the reliability of statistical data
- Disclosure and transparency
- Large exposures: exposures of greater than 10% of the group’s capital base
- Foreign currency exposures: report overnight foreign exchange positions; exposure limit
- Subsidiaries:
- Ownership and control: not permitted to have an aggregate interest of >=15% of the
nominal value of the voting shares of an institution (exemption :the Treasurer of the
Commonwealth of Australia)
- The board should comprise at least five directors who should be fit and proper persons,
capable of exercising independent judgment and widely representative of shareholders.
- The chairperson and a majority of directors should be non-executive board members.

Extend reading /74 + Math

Math exercise: read table page 75, 76

Case1: If a bank provides a $1 million loan to a company that has an AA credit rating (external rating
grade 1). The amount of capital required = book value × the risk weight × 8.00 per cent capital
adequacy requirement. That is, $1 million × 0.20 × 0.08 = $16 000. The remaining $984 000 can be
funded from bank liabilities.

Case2: The company has a single B credit rating issued by Standard & Poor’s. Reference to
the website of the bank supervisor indicates that the credit conversion factor is 20.00 per cent
and that the external rating grade 5 represents a risk weight of 150.00 per cent. The capital
required by the bank to support this off-balance-sheet transaction is $1 million × 0.20 × 1.50 ×
0.08 = $24 000.

residential housing loans (mortgage loans): the risk weight is determined relative to the loan-to-
valuation ratio (LVR) and the level of mortgage insurance.
The loan-to-valuation ratio is simply the amount borrowed to purchase a residential property
divided by the accredited valuation of the property.

Case3: A bank’s common equity requirement for the capital conservation buffer under Basel III with
a risk-weighted asset of $50 000 000 is equal to: � buffer: x2.5%

Case4: If a bank’s risk-weighted assets equal $50 000 000, the bank’s common equity requirement in
dollar value according to Basel III is: � x4.5%

CHAPTER 3: Non-bank financial institutions

1/ Investment banks /89
- as specialist facilitators (or off BS advisory services) of financial transactions rather than
providers of finance.
- a reputation as financial innovators, responsible for the development of new financial
products and services
- are organised around risk taking, risk measurement and operational controls.
- The activities that take place within an investment:
o Front office: involve client relations – trading, investment banking, research and
investment management
o Middle office: complement or monitor - accounting, bookkeeping, audit and
compliance
o Back office: removed from client relations – accounting and compliance
- the relative power and prestige of the activities depends critically on organisational culture
(especially risk taking versus risk management)

1.1/ sources of funds and uses of funds

- provide financial services to their corporate clients, high-net-worth individuals and
government clients
- those institutions do not have a depositor base – their liabilities or sources of funds are usually
raised through the issue of securities into the international money market and capital
markets
- High profile reputation � easier access to inter’ capital mk
- Investment banks provide limited lending, usually ST, tend to sell loans to 2nd mk rather than
hold them in their balance sheet

1.2/ Off-balance-sheet business /90

Innovative products and services in provision of advice, man, funding service, generaing main
income from fees:
1. Operation as FE dealders
 2. Advising clients on how, where and when to raise funds in the domestic and international
capital markets
3. Acting as the underwriter of new share and debt issues
Underwriter: an institution that supports the issue of securities by a client and agrees to buy
any securities not bought by investors (nhà bao tiêu, nhà bảo lãnh, sẽ được nhận hoa hồng)
4. The placement of new issues with institutional investors
- Raise additional d/e by issuing new securities to a large corporate client list
5. Providing advice to corporate clients on balance-sheet restructuring
- The most effective funding; bank will provide a client with advice on issues of changes IR,
ER
6. Evaluating and advising a corporate client on mergers and acquisitions
7. Conducting feasibility studies and advising clients on project finance and structured
finance undertakings
- Projects are usually LT (buildings, power stations,…)
- The financing bases on future expected CF that will be generated once it has been built �
specialist area of high-risk lending
8. Identifying client risk exposures and advising on risk management strategies
- Exposures: interest rate, foreign exchange, liquidity, credit, investment, fraud and disaster risk
- Ibank provide sophisticated solutions (identification, measurement and management of risk –
involve complex financial products)
9. Advising on, and partial provision of, venture capital
- Venture capital (risk capital): funding for new start-up businesses with high level of risk of
future success but potential high returns
- Often provided by a group or syndicate of investors (which Ibank is lead manager)

Mergers and acquisitions /91

- one company gains control over another - a significant fee-generating service provided by
investment banks
- correlation between sustained eco growth and level of M&A
- Spin-offs: part of a company is separated from the whole and begins an existence as an
independent company. When cannot find buyers � parent and child
� Those are examples of BS restructuring by Ibank
- 3 types:
o horizontal takeover: the target company conducts the same type of business as the
takeover company (Mondelez International Inc., the maker of Oreo, has bought out
Vietnam’s Kinh Do Corp)
o vertical takeover: …operates within a related business area (Phúc Long bought a tea
manufacturer)
o conglomerate takeover: unrelated to existing business (Thaco Truong Hai bought
Emart)
o hostile takeover: takeover company are actively resisted by the board of directors of
the target company
- Ibank earns significant fee income � not a passive player � seek out, analyses evaluate �
approach client and try to sell takeover ideas
- the value of the merged entity should be greater than the sum of the two original companies
on a stand-alone basis.
- Synergy benefits from /92:
o Economies of scale
o Finance advantages: extend debt funding
o Competitive growth opportunities: purchase > build new facilities
 o Business diversification: versify sources of revenue; protect from a downturn in a
single economic market
- Must consider the economic, legal, accounting and taxation implications of the proposal,
often across a number of jurisdictions (because across countries and cultures)
- Issues (more /93):
o Analysis of the target company
o Valuation of the company
o Establishment of contacts
o …

2/ Managed funds /94

- Managed funds (MF) investment vehicles through which the pooled savings of individuals
are invested
- Mutual funds (US) managed funds that are established under a corporate structure; investors
purchase shares in the fund
- Trust fund (AUS, UK) managed funds established under a trust deed; managed by a trustee
or responsible entity
o Trust deed: document detailing the sources, uses and disbursement of funds in a trust
o Managed funds have maintained a dual protective structure for investors by
separating the roles and responsibilities of the custodian or trustee and the fund
manager
- A mutual fund custodian is a commercial bank or trust company that provides safekeeping
of the fund’s investment securities, and controls cash flows to and from shareholders
- The responsible entity is both the trustee and the manager of the trust fund, and is
responsible for all aspects of its operation.
- Managed funds use the services and skills of professional investment managers or fund
managers � who maximise the return � move many investment funds around the globe
- Driving forces of MF growth:
o Deregulation
o Affluent population
o Ageing pop – saving for retirement
o Highly educated investors

2.1/ Structure of the managed funds sector

The main categories of managed funds are:
• Cash management trusts (see Section 3.3)
• Public unit trusts (see Section 3.4)
• Superannuation funds (see Section 3.5)
• Statutory funds of life offices (see Section 3.6)
• Hedge funds (see Section 3.8)
• Common funds: combine the funds of beneficiaries into an investment pool and invest those
funds in specified asset classes; do not issue units to investors
• Friendly societies: provide investment and other services (insurance, sickness and
unemployment benefits) with products products (the issue of bonds that invest in a range of asset
classes)

2.2/ Sources and uses of funds /94

- MF is not a financial intermediary, but provide direct access to wide range of investment
opportunities – include wholesale investment mk
 - MF fund from specific contractual commitments of investors - periodic payments into the
fund (e.g. superannuation) or, single payment or premium (e.g. an insurance policy)
- Risk is diversified bt fund managers
- Each professional fund manager will:
o Invest
o Balance investment
o Reinvest
o Restructure based on forecast changes
o Provide fin advice and periodically report to the fund trustee

Different types of managed fund below:

2.3/ Capital guaranteed funds /97
- A capital guaranteed fund aims to provide investors with positive returns while protecting
their investment from downside losses
- Complex structure
- During market volatility, there is still risk, capital losses

2.4/ Capital stable funds

- A capital stable fund aims to at least secure contributors’ investment, but the fund does not
provide an explicit or implicit capital guarantee
- Low volatility and lower expected returns
- Small portion be reinvested in riskier assets

2.5/ Balanced growth funds

- Delivering LT income stream and capital appreciation or growth
- More aggressive strategy – assets diversified across a greater risk spectrum
- include money-market instruments, some government securities, property and a relatively
high proportion of domestic and foreign equities
- be subjected to greater market fluctuations

2.6/ Managed growth or capital growth funds

- A managed growth fund is designed to maximise the return from capital growth
- The proportion of equity in a MgrowthF portfolio is considerably higher than it is in the
balanced growth funds � greater range of risk securities

3/ Cash management trusts /98

- A cash management trust (CMT) is a mutual investment fund, often managed by a financial
intermediary within the terms of a specific trust deed
- defines the types of assets in which the trust may invest – generally restricted to short-term
money-market instruments
- a high degree of liquidity, investments are primarily in bank deposits and money-market
securities
- provides an opportunity for the smaller individual investor to obtain indirect access to money-
market investments
- growing stockbroking industry:

4/ Public unit trusts /99

A public unit trust is an investment fund stablished under a trust deed whereby the trust sells units in
the trust to investors
- Trustee: responsible entity for management, appoint fund managers
 - The trust specifies how unit holders may be sell their units
- 4 main types of public unit trusts
Property trusts equity trusts mortgage trusts fixed-interest trusts
- invest in industrial, - invest in different equity - Invest in mortgage - invest in a range of
commercial, retail and markets (local or - A mortgage is a bonds (debt
residential property international share market) registered security securities) issued
- potential investment - useful to gain international taken by a lender over by governments or
choices wide share mk thanks to fund the land of a borrower corporations
- investors gain access managers with intimate - ‘first mortgages’,
to investment knowledge mortgagee has first
opportunities that may - Income funds: produce claim over the title to
not afford if purchase higher dividend returns the land in the event
direct from the market - Growth funds: achieve that the mortgagor
(w/o trust) greater capital gains in the defaults on the loan
value of the portfolio.

listed trusts unlisted trusts

- units of the trust are listed and traded on a stock exchange - dispose of units held in a trust is required to
- want to sell � through stockbroker sell them back to the trustee (after giving the
- more liquid required notice of intention to sell)
- the market determines the value of the units - used by equity trusts: highly liquid � it is not
- not exposed to the demand of liquidity as necessary to list the equity trust itself
� used with property trust because not a liquid asset � more
liquid fin security

Note: Why property trust will buy listed trust (more liquid) � to increase the liquidity of the unit � they just
need to transfer the property
Equity trust (high liquid) buy unlisted trust (less liquidity) � if they want to sell

5/ Supernnuation funds /101

- Superannuation funds (SAF), pension funds and provident funds are essentially the same
- Superannuation refers to specific savings accumulated by individuals in order to maintain
their lifestyle after retirement from work
- Age pension: a limited regular income stream paid by a government to older retired persons
- SAF gather LT savings, facilitates economic growth � positive economic and social
outcomes: higher standard of living, employments
- APRA classifies superannuation funds:
• Entities with more than four members
• Pooled superannuation trusts (PSTs): trusts in which regulated superannuation funds,
approved deposit funds and other PSTs invest.
• Small APRA funds: regulated by APRA with less than five members.
• Self-managed superannuation funds: superannuation funds regulated by the Australian
Taxation Office that have fewer than five members (trustees)
• Balance of life office statutory funds: superannuation or retirement purposes, in
statutory funds of life insurance companies. The balance of life office funds includes
annuities and assets
• backing non-policyholder liabilities.

5.1/ Sources of funds /102

- SAF accept and manage (accumulated) contributions from their members – who make periodic
contributions over an extended working life
- Sources of funds within the SAF system:
1. corporate funds, industry funds and public sector superannuation funds /103
- A corporate superannuation fund provides benefits to employees of a particular corporation
- Industry SAF: employees within a particular industry
- Public sector SAF: gov ems
- Can be contributory (both the employer and the employee make specified contributions) or
non-contributory (only employers)
- government employers do not make direct contributions to public sector superannuation
funds, but rather meet ongoing superannuation commitments from future taxation receipts
(translate)
2. Compulsory superannuation funds
Ageing population presents twofold problems:
- more people are retiring + improve living standards, live longer � require access to funds to
maintain a reasonablr lifestyle
- the aged leave workforce - % actively working and contribute to tax base will fall + increased
aged support service demand
- Australia: superannuation guarantee charge (SGC); earnings of a superannuation fund are
taxed at a concessional 15.00 per cent taxation rate; member reach 60 in pension mode,
earnings and withdrawals are tax free
3. Retail superannuation funds
- operated by financial institutions and membership is open; Anyone can join
- ‘for-profit’: run by financial institutions, charge a fee on capital invested and take a
percentage of the investment earnings
4. Self-managed superannuation funds (SMSFs)
- regulated by the Australian Taxation Office (ATO)
- largest amount of money (30%) resides in
- useful buffer against financial crisis and stock market crashes – but too conservative
- Most SMSF trustees are the trustees of their own superannuation funds and are middle-aged
or older
- SMSFs have enjoyed an uncontroversial existence (sự tồn tại không thể kiểm soát được)
5. Rollover funds
- People who change jobs or retires early may need to retain accumulated superannuation
entitlements in a prescribed superannuation arrangement
- Ex: in Australia, B moves from one job to another may roll over their existing superannuation
as an eligible termination payment (ETP): a payout from a superannuation fund if a person
withdraws from that fund, plus other amounts directly related to a person’s termination of
employment (ex financial inducement paid, retrenchment benefits)

5.2/ Defined benefit funds and accumulation funds /105

defined benefit fund defined contribution fund (accumulation)
- is a superannuation fund that may be offered by an - gathers in the contributions of employer and
employer to employees employee � invest those funds on behalf of the
- is calculated based on a formula stated at the time superannuation fund member
the member joins the fund - the total amount of superannuation funds =
- normally calculated on the basis of the specified accumulated sum of contributions + investment
factor times the employee’s average salary over the earnings - expenses and taxes
final year, or few years, of employment, multiplied - amount received depends totally on the
by the number of years of fund membership investment performance of the fund �
- predominance type investment risk lies with the fund members

5.3/ Regulation /106

- Early 1990s, the Commonwealth Government – retirement income
 - 1992: compulsory superannuation
- The Superannuation Industry (Supervision) Act 1993 (Cwlth) (SIS) and the Income Tax
Assessment Act 1936 are the two principal pieces of legislation that directly affect the
operation
- APRA: prudential supervision
- ASIC: market integrity, consumer protection

6/ Life insurance offices /107

- are contractual savings institutions
- liabilities of insurance offices are defined by contracts in which, in return for the payment of
specified periodic cash flows, the policyholder will be entitled to a determinable benefit
following the occurrence of a specified future event or condition
- Insurance policy
o Cost: premium paid annually unti the policy matures/ terminated
o in return for payment of the premium, a policyholder or a beneficiary will receive a
payment upon death or disablement, or at a nominated maturity date, subject to the
terms and conditions of the insurance policy
- Insurance premiums = a form of savings
- Life insurance offices are also providers of superannuation or retirement savings products
- Statutory funds established within a life insurance office that hold, separate, the assets
backing policyholder liabilities from the other assets of the life insurance office
- Inflow of funds is regular, predictable, long term; not subject to erratic, seasonal fluctuations

6.1/ Life insurance policies /108

basic insurance policy products offered by a life insurance office include
1. Whole-of-life policy
- LT, pay the sum insured, plus bonuses, on the death of the policyholder
- an investment component: allows periodic bonuses to accumulate on a whole-of-life
insurance policy � the policy will pay both the sum insured and the total bonuses attached to
the policy
- acquires a surrender value—that is, an amount that will be paid if the policy is cancelled by
the policyholder
2. Term-life policy
- pays a specified benefit to a nominated beneficiary on the death of the insured, if occurs
during the term of the policy
- predetermined period, no investment component
- more attractive: obtain financial protection for the nominated beneficiary over that period
(when personal debt commitments are high)
- exclusions: suicide, maybe required to undergo a medical examination, injured or dies as a
result of riot, terrorist act or war – the cover may be limited or unavailable
3. Total and permanent disablement insurance (Bảo hiểm thương tật toàn bộ và vĩnh viễn) /109
- often taken as an extension to a life insurance policy
- will pay a specified amount, either as a lump sum or as an annuity, if an injury causes total
and permanent disablement to the policyholder
- a total and permanent disablement will be determined within the constraints of either:
o the total and permanent loss of the use of a combination of two of the following:
hands, feet and/or eyes; or
o total and permanent disablement resulting from an injury, accident or illness whereby
the insured is unable to carry out the normal functions of their usual occupation
4. Trauma insurance (Bảo hiểm chấn thương)
 - make a lump-sum payment to the insured of a specified trauma event (cancer, heart attack,
HIV, mảo body parts failure and terminal disease or illness)
5. Income protection insurance
- periodic payment of an amount up to 75.00 per cent of average pretax income, predetermined
period
- Serious injury, illness or redundancy may result in an individual being unable to work for an
extended period of time
- The amount paid will be offset by any other related payments received (workers’
compensation)
6. Business overheads insurance: rovides coverage for strictly defined, normal day-to-day
operating expenses

7/ General insurance offices /110

cover specified risks and provide a promise to pay the insured a predetermined amount in the event
that the peril that is insured against occurs

7.1/ General insurance policies

House and contents insurance
- House insurance provides financial protection to the insured in the event of loss or damage to
a residential property – a specified amount
- co-insurance clause: insurance office will pay a claim only up to the proportional insurance
coverage (read ex/110)
- List of perils include in House and contents insurance: fire, explosion, natural disaster,
malicious acts, riots, civil commotion, external impact, storm and water damage, thefts
- provide new-for-old replacement value
- incorporate public liability insurance: covers injury or death to a third party visiting the
named property that may result from negligence on the part of the property owner or occupier

Motor vehicle insurance

- comprehensive insurance policy: highest level of cover – from damages – of named vehicle
and third-part vehicles
- third-party policy: A third-party policy only covers damage or loss to a third-party vehicle
or property, but does not cover the vehicle of the insured
- third-party, fire and theft policy: covered only for damage or loss associated with fire or
theft to named and third-part vehicles
- in AUS, compulsory third-party insurance: vehicle owners must pay for this insurance
cover when they pay their annual vehicle registration (+ legal liability for bodily injury
caused by a motor vehicle accident)
- the more expensive the vehicle owned, the more prudent it is to take higher insurance cover

8/ Hedge funds /112

- Quỹ đầu tư: invest in exotic financial products mainly for high-networth individuals and
institutional investors; a higher-risk asset
- specialise in different types of financial instrument (equity, foreign exchange, bonds,
commodities and derivatives)
- 2 sectors:
o single-manager hedge funds
o fund of funds: invests in a number of single-manager funds – attempts to diversify
- offered and managed by:
o individual managers: high profile, reputation
 o financial institutions (investment banks): extra transparency, keep investors informed
- source: obtain funds from institutional investors, high-networth individuals, retail investors
o Institutional investors seek to manage the risk and return structure of their investment
portfolios by adding hedge fund investments to a portfolio
- Hedge fund may list on a stock exhange � secondary mk allow hedge fund investor to buy anh
sell units in the fund � liquid � prices move with current ml valuation
- positve returns in both upward and downward-moving market (contrast to traditional fund
management)
- seek to leverage investment opportunities by borrowing large amounts of debt, over and
above the funds lodged by the hedge fund investors
- Leverage a position by using derivative products:
o takes a short position will either sell forward shares (bán khống), or use a derivative
such as an option or futures contract that it forecasts will fall in price.
o the fund may buy shares it forecasts will rise in price by using either borrowed funds
or derivatives products
Từ khúc này trở đi cô không giảng

9/ Finance companies and general financiers /113

- borrow funds in the domestic and international financial markets in order to provide loans to
their customers
- not accept deposits from the general public
- Finance companies emerged largely in response to regulatory constraints (Các công ty tài
chính nổi lên phần lớn để đối phó với những ràng buộc về quy định)
- Banks took major ownership and funding of financial companies

9.1/ Sources of funds and uses of funds

- There is a direct correlation between the rise and fall in the relative importance of finance
companies and general financiers and the process of deregulation of the banking sector
- The main sources of funds:
o borrowings from related corporations, loans from banks (derives from the fact that
o borrowing direct from the domestic and international money and capital markets
o offshore funding following deregulation of capital flows
- On the asset side of the balance sheet, the main categories of business:

9.2/ Sector structure

Categories of the finance company and general financier:
1. diversified finance companies that provide a wide range of lending products
2. manufacturer-affiliated companies: almost exclusively involved with the financing of the
sale of the parent manufacturers’ products
3. niche specialists: small independent companies that have developed an expertise in one
aspect of lending, such as lease financing
finance companies that operate in Australia:
- ESANDA
- MyFord Finance
- RACV Finance limites
10/ Building societies /115
- A niche financial institution that evolved to meet a specific market need during the period of
heavy regulation of commercial banks
- found in certain countries where there is a large demand for finance to buy residential
property
- main activities: accept deposits from individuals and to provide mortgage finance primarily
for owner-occupied housing (� gather in savings from their depositors and provide loans to
their customers to purchase residential property)
- the growth of building societies resulted from portfolio and interest rate restrictions imposed
by the Reserve Bank on the activities of savings (commercial) banks
- were not regulated by the Reserve Bank and were able to offer—and charge—more interest
rates than could the commercial banks
- Responses to increased competition from the banks:
o Smaller building societies merged
o Improve technology
o Diversifying
o Seek regulatory approval and become commercial bank � most important response
11/ Credit unions /116
- Credit unions provide deposit and loan products for their members
- Strength: derives mainly from a common bond of association of its members, which based in
employment, industry or the community
- obtain the majority of funds from deposits lodged by their members
o supplement their deposit base by borrowing from other credit unions
o issue promissory notes, other securities into fin market
o attract deposits inexpensively through automatic customer payroll deductions
- provide:
o loans to members for residential housing, personal term loans, credit card facilities
and limited commercial lending to small businesses
o an automatic bill payment facility against the member’s credit balance

12/ Export finance corporations /116

- are government authorities that provide financial support and services to exporting
corporations in a nation-state
- Australia official export credit agency is the Export Finance and Insurance Corporation
(EFIC)
o The role: facilitate and encourage Australian export trade through the provision of
trade insurance and other trade-related financial services and products
o Under the Export Finance and Insurance Corporation Act 1991 (Cwlth)
- EFIC ecourages internation trade by:
o Insuring against non-payment; overseas political risk; unfair calling
o Guarantee trade finance
o Indemnifying (Bồi thường) financial transactions; provide performance bonds…

CHAPTER 4: The share market and the

corporation
1/ The nature of a corporation /134
A corporation is a company that is a legal entity established under the corporations legislation of a
nation-state. The shares of a publicly listed corporation are listed on a stock exchange and the main
source of equity funding, the ordinary share, is quoted in the share market.

1. Ownership
a. Widely dispersed: can be readily bought and sold in the share market without directly
affecting the continuing existence of the business.
b. Easily transferable
2. Shareholders, as owners of a company, do not have a right to participate directly in the
day-to-day operation and management
a. The objectives and policies determined by a board of directors, the members of
which are elected at a general meeting of shareholders
b. Directors: legal responsibility to ensure that the corporation operates in the best
interests of the shareholders.
c. The board of directors appoints an executive management group that is responsible
for achieving the specified objectives and policies of the organisation through the
management of the day-to-day affairs
3. The liability of shareholders for the debts of the business is limited
a. a limited liability company is limited to the issue price of the share
b. a no liability company (shareholder has purchased partly paid shares), there is no
legal requirement for the shareholder to meet a future call for payment of any unpaid
amount

Advantages /135 Disadvantages

Investors: Problems relates to the separation of ownership and
- Large amounts of equity funding can control
normally be obtained more easily - Managers do not own business � will not act in
- the share market is normally deep and the best interest of the shareholders � agency
liquid problems: the conflict of interest that may exist
between shareholders and management
SH: - Efficient share:
- Reduce risk of share ownership by o Owners can express their (dis)satisfaction
diversified portfolio through purchase or sales of share
- Readily to transfer ownership by buying o a public judgment lowers the managers’
and selling reputations and reduces their employability
o Another corporation may buy the lower-
- The separation of ownership priced shares - assume control of the
(shareholders) and control (managers): company
can appoint specialised and skilled o But: managers are mobile and may
personnel to run the business; to plan implement a short-term maximisation
and implement strategic decisions more
 effectively over both short-term and strategy knowing that they will move to
longer-term another more lucrative job before the
- the right of perpetual succession: adverse impact appears
unaffected by changes in ownership - align the interests of shareholders with those of
- corporate form has the potential to exist management: share options
indefinitely; essential for large-scales o buy shares with discount price � incentive
undertakings and finance at cheap cost to manage company well
- boards of directors, and regulators, have moved
towards more rigorous corporate governance
requirements.

2/ The stock exchange /137

Read more theory

3/ The primary market role of a stock exchange /138

- to ensure the efficient and orderly sale of new-issue securities, and includes all of the
support facilities that are required to enable this to happen
- major stock exchanges also list fixed interest debt instruments (treasury bonds, debentures)
and units in listed trusts
- New float or initial public offering (IPO): the initial listing of the securities of a corporation
on a stock exchange
- A rights issue is the issue of additional shares to existing shareholders on a pro-rata basis of,
say, one additional share for every five shares held.
- Placements are the issue of new shares to selected institutional investors such as fund
managers
- Dividend reinvestment schemes: give shareholders the opportunity to reinvest dividend
receipts back into the company by buying additional shares in the company
- With an offer to issue new shares to the public, the application form must be attached to the
issue prospectus: document prepared by a company stating the terms and conditions of an
issue of securities to the public
4/ The secondary market role of a stock exchange /140
- involve the buying and selling of existing financial securities, principally ordinary shares

- shareholder will normally issue a sell order to a stockbroker � enter the order into stock
exchanfe securities trading system � buy order of another stockbroker (behalf of another
client) � match the orders and facilitate sales of the shares, transfer of ownership and payment
- Market liquidity the ratio of the value of share turnover to market capitalisation
- Market capitalisation the number of shares issued by listed corporations multiplied by
current share prices
- The standard measure of market liquidity is the ratio of the value of turnover to market
capitalisation, where market capitalisation is calculated by multiplying the number of shares
on issue by the current market prices.

5/ The managed product and derivative product roles of a stock

exchange /141
- Equity-based managed products provide investors with the opportunity to gain a
diversified exposure to a market, or a market sector, through a single investment product
rather than directly purchasing all the individual securities represented in the basket of
securities held in the managed product.
o allow investors to invest in asset classes that otherwise complex to manage or
difficult to access directly
 - equity-related derivative product: price of the derivative will be directly correlated with
the price of the corresponding equity security quoted on the stock exchange
o exchange traded contracts: standard terms and conditions
o over-the-counter contracts: not standardised across a market
o opportunity to manage, hedge a risk exposure in investment portfolio
o synthetically restructure an investment portfolio

Managed products are described as:

5.1/ Exchange Traded Funds /142
Exchange traded funds (ETFs) exchange traded products (ETPs)
● offered through a stock exchange such as the ● ETFs are part of a class of investments
ASX generally invest in a basket of called ETPs
securities listed on the ASX, securities listed ● involve active management strategies
on an international stock exchange, foreign ● structured products (SPs): involve a
currencies or commodities company promising an investor a rate of
● tracks the performance of an index return that is based on the movement in the
● Active ETFs: outperform an index rather price of an underlying asset, such as an
than merely tracking it index
● investor gains access to a diversified
portfolio of securities
● most are open ended funds (number of units
offered is not fixed)

5.2/ Contracts For Difference (CFD) /143

- is a contract listed on a stock exchange that is an agreement between a buyer and seller to
exchange the difference in the value of a CFD
- Difference in value = value of CFD start date – close date
- based on a nominated security listed on a local or international stock exchange, stock
exchange indices, foreign currencies or commodities
- provides a high level of leverage for an investor � risk higher when the CFD is closed out
5.3/ Real Estate Investment Trusts (Reit) /144
- purchases property and holds the assets within a trust
- listed on a stock exchange and traded same as ordinary shares
- Types of property that a REIT may purchase include: industrial; hotel and leisure; retain;
office
- Investors benefit from: capital gains on the property assets and rental income generated by the
properties
5.4/ Infrastructure Funds /144
- is a managed fund that may be listed on a stock exchange and enables investors to gain access
to investment opportunities in large-scale infrastructure projects such as toll roads
- Predictable income (because being regulated and guaranteed by government)
- High level of barriers (cost, tech, regulation), low competition
- The categories:
o utilities (power station, electricity, gas pipeline);
o transport and materials handling: railways, airport
o communication facilities: broadcasting and communication towers
5.5/ Options
- An option contract gives the buyer of the option the right, but not the obligation, to buy (call
option) or sell (put option) a specified security at a predetermined price, on or before a
predetermined date
 - Must pay a premium to writer, seller of the option
- Types of option contracts: stock options, index options, flexible options and low-exercise-
price options
- Example pg.145: if an investor predicts a fall in price � option strategy to protect the risk
- protected the investment portfolio = (exercise price - the current market price - the premium
paid) x number of shares = 1 000 ($7.00 − $6.00 − $0.20) = $800.
5.6/ Warrants
- A warrant issuer: must be authorised by the stock exchange to write warrant contracts �
determine the terms and conditions � the warrant is then quoted and traded on stock exchange
o Upward price movement � benefit call holder (buyer)
o Downward � put warrant holder (seller)
- Types:
o Equity-based warrant: buy/sell underlying security
o Instalment warrant (bao dam tra gop): underlying shares by periodic instalments;
entitled to receive dividend payments and franking credits
5.7/ Futures Contracts
- A futures contract is a contract between two parties to either buy or sell a specified
commodity or financial instrument at the expiry date of the contract.
- value of the contract at commencement, and at the expiry date, will relate to the price of the
underlying physical market price at each of those dates

6/ The interest rate market role of a stock exchange /146

- An interest rate market is a market that facilitates the issue of debt securities and the
subsequent trading of those securities on a formal exchange
- If a debt issuer chooses to list the issue on a stock exchange, the price of the issue will be
quoted by the exchange and trading in the securities
- add value to issued debt and new debt issues in three ways:
o Transparency: info about price, yeildm …
o Ease of entry and exit: at min cost, little delay,…
o Liquidity: wider investment market, facilitate transfer of ownership
- Fixed-interest securities, typically long-term instruments, main types:
o A straight corporate bond:
▪ interest payment is called a coupon – which bond issuers pay
▪ face value of the bond is repaid to the holder at maturity
▪ may be secured or unsecured; unsecured bond is called unsecured note
▪ price of bond with change with interest rates for new issues
o A floating rate note (FRN)
▪ pays a variable rate of interest
▪ coupon payment quarterly, half year or annually
o A convertible note is a hybrid security: includes an option to convert the note at a
future date into ordinary shares
o Redeemable convertible preference shares (Cổ phiếu ưu đãi có thể chuyển đổi hoàn
lại)
▪ Hybrid
▪ Have option to redeem

7/ The trading and settlement roles of a stock exchange /148

- Uncertificated securities electronic record of share ownership; original share certificate is not
issued
- Contract note sent by a stockbroker to a client advising details of a share transaction
 - CHESS the electronic securities transaction settlement platform used by the ASX Trade
o Facilitate settlement (sự thanh toán sổ sách)
o Provide an electronic sub-register that records the ownership
- Bid and offer bid is an order to buy; offer is an order to sell
- ASX requires settlement two business days after the transaction (T + 2) � quickly: issue
uncertificated securities
- A shareholder who wishes to trade uncertificated shares must conduct the transaction with a
CHESS sponsor

8/ The information role of a stock exchange /150

- The ASX has a number of specific listing rules that relate to the provision of information, in
particular continuous disclosure rules that are designed to ensure a well-informed market
- Corporations Act (Cwlth) states that a reasonable person would consider information to be
material if it would be likely to influence persons who commonly invest in securities in
deciding whether or not to subscribe/ buy/ sell securities
- require disclosure:

9/ The regulatory role of a stock exchange /152

- the Australian share market is quite heavily regulated and supervised
- two major supervisors:
o the Australian Securities
o Investments Commission (ASIC): supervision of real-time trading on domestic
licensed markets; enforce law; market integrity, dair, orderly, transparent market
- ASX surveillance monitors market trading to identify situations where trading volumes or
price movements indicate the market may not be fully informed
o Alert – ask to explain – detail investigation – penalties – suspension – delisting (đình
chỉ - hủy niêm yết) (removal from quotation on a stock exchange of the securities of
an entity
- Reserve Bank of Australia (RBA): monitoring and assessment of licensed clearing and
settlement platforms and systems; ensure participants comply with its Financial Stability
Standards

10/ The private equity market/ 153

- Private equity: for companies that are unable to/ choose not to, access equity funding
through a public issue in the share market – because inadequate collateral/ profit performance
to attract investors
- Provide to high-risk companies – higher return
- Types:
o Start-up funds
o Business expansion funds
 o Recovery finance: those experience financial diff
o Management buy-out financing: managers seek to buy existing business funded
- major providers of funds for the private equity funds are superannuation funds and life
insurance offices
- The nature of equity is long-term finance; however, the investment horizon of private equity
investors is often for a shorter period, usually less than 5-7 years
- Limited liquidity: cannot be sold through share market
- principal objective: improve the profit performance of the company significantly � listed on
a stock exchange through an initial public offering (IPO)/ sold to a trade buyer
- Private equity funding tends to grow in times of sustained economic growth

CHAPTER 5: Corporations issuing equity in

the share market
1/ The investment decision: capital budgeting /163
- Capital budgeting refers to the choices that a company makes when allocating or budgeting
its capital
- The range of possibilities for the decision maker is potentially unlimited
- Basic principle: maximise shareholder value
- Need to quantify alternative investment opportunities � which to proceed/ deferred/ rejected.
- 2 important quantitative measures:
1. Net present value
- net present value (NPV) of an investment is the difference between its costs and its returns
over time
- Present value: the current value derived by discounting a future cash flow by a required rate
of return
- Discount rate = required rate of return = WACC weighted average cost of capital

- The NPV decision rule: should accept an investment proposal that has a positive NPV and
reject any proposal with a negative NPV
2. Internal Rate Of Return (IRR) /165
- Provides an actual percentage figure as the rate of return >< NPV provides a positive or
negative dollar amount
- The IRR on a business investment is defined as the discount rate that results in an NPV of
zero when it is used to discount an investment’s forecast cash flows
- IRR is acceptable when greater than the firm’s required rate of return (discount rate or
WACC)
- Cách tính IRR? � trang 165 ;;-;; dùng máy tính chuyên dụng á
- The first problem occurs when the cash flows associated with an investment are non-
conventional cash flows.
o Usually initial negative then positive CF. If there was a negative cash flow in the final
period � 2 changes in sign, no unique IRR � error message
- The second problem occurs when investment choices are mutually exclusive projects �
choose one of two � IRR may give a misleading decision rule

2/ The financing decision: equity, debt and risk /166

- financing decision (funding decisions) relates to the question of how a business investment is
to be funded
- Risk can be defined as the variability or uncertainty of returns from the business’s
investments - measured by the variance in net cash flows
- Business risk:
o exposures to factors that have an impact on a firm’s activities and operations
o affected by factors such as the rate of growth of that sector; market share;
agressiveness of competition; management and workforce competence
- Financial risk: Impact on the value of assets and liabilities, cash flow
o Interest rate risk
o Foreign exhange risk: denominated in fr currency
o Lidiquidity risk: sufficient cash, liquid assets meeting day-to-day operation
requirements
o Credit risk: debtors do not repay on time; default
o Country risk

1. Financial Risk And The Debt-To-Equity Ratio /167

- Greater the proportion of debt relative to equity - greater the risk � dilemma
- increasing the degree of leverage, or debt - improve the shareholders’ earnings attributable
to ordinary shares, or expected earnings per share (EPS)
- higher debt-to-equity ratio (D/E) – Higher financial debt - greater EPS
2. What is the appropriate debt-to-equity ratio?
- no agreed ideal debt-to-equity ratio; four main criteria:
1. near the norm in the industry
2. determining future gearing ratio: history of the ratio for the firm
3. limit imposed by lenders: loan covenants (conditions or restrictions incorporated into
loan contracts that are designed to protect the interests of the lender)
4. management’s decision concerning the firm’s capacity to service debt
- The most prudent (=smart) debt-to-equity ratio is the largest ratio at which a corporation still
has the capacity to service debt commitments under a pessimistic business scenario.

3/ Initial public offering /169

- A sole proprietor (personally liable for liabilities, entitled all profits) � limited number of SH
(additional eq funds) � publicly listed corporation (expand eq and sh base) � main focus
 o Large access
o Issued shares are liquid, easily sold or bought � attractive
o raise profile in financial market
- initial public offering (IPO) - the flotation of a business
o decided after consultation between
▪ business seeking flotation (promoter; about funding requirements,
expectations, future profitability and development)
▪ financial advisers (stock broker, Ibank; recommend the appropriate timing
and structure; prepare prospectus)
o IPO advisers may arrange underwriting group
▪ Situation could not have been foreseen � protect the underwriters with out-
clause: If the index falls below a nominated level, or by a certain percentage,
then the underwriters may be released from their underwriting obligation
▪ Then, will be withdrawn or the issue to be re-priced
o Cost of IPO:
▪ fees of advisers, acconting advice, printing, distribution � up to 10% of the
amount raised (smaller issues cost higher)
▪ 1% payable as brokerage on allotted shares.

Two common types of corporate structures are:

1. Ordinary Shares: Limited Liability Companies /171
- Ordinary shares are the principal source of equity funding - represent a residual ownership
claim on the assets
- SH: control over its management - derived from the voting right attached to each share
- SH vote in person or by proxy - (người thay mặt) someone who is authorised to vote on a
shareholder’s behalf
- An instalment receipt is issued instead of a partly paid share; upon payment of a specified
amount at a future date, the fully paid share is issued as a replacement for the instalment
receipt
- contributing shares (partly paid shares) and instalment receipts - the shareholder has a
contractual obligation to pay the remaining amount when it is called or due
- shareholder’s liability is limited to the extent of the fully paid share.
- factors of share issue price: expected future earnings, P/E ratios
2. Ordinary Shares: No Liability Companies
- will issue ordinary shares to raise equity funds, but the shares will be issued on a partly paid
basis
- Shareholders cannot be compelled to meet a call on the shares, but those who do not meet the
call forfeit their shareholding. The decision will be based on the shareholder’s view of the
prospect of the venture succeeding
- To attract risk capital: offer option (right but not obligation) to purchase additional shares at
a predetermined price and future date

4. Listing a business on a stock exchange /172

- A company will normally apply to a stock exchange in its home country
- The listing rules: the rules that must be met by an entity seeking to be quoted on that stock
exchange; a listed corporation must continue to comply if it is to remain a listed corporation
on the exchange
- Delisted: removal from quotation of the securities of an entity that breaches stock exchange
listing rules
- Main principles: read more page 173
 - Dual listing:
o list on more than one exchange to gain access to a much wider capital market
o for the issue of new primary market securities
o greater liquidity in the secondary market
o Dual listing is normally achieved by the creation of two holding companies, each
entitled to 50% of the group’s assets.
5/ Equity-funding alternatives for listed companies /174
Various ways a listed corporation might raise equity funds through the issue of additional ordinary
shares:
1. Rights Issue Or Share Purchase Plan
- An offer made to existing shareholders to purchase additional ordinary shares
- must be attached to a prospectus
- ensure that all shareholders receive an equal opportunity to participate – through pro-rata
offer: a proportional offer to buy securities based on an investor’s current shareholding
o a 1:5 (one for five) offer grants shareholders the right to purchase one new share for
every five shares held.
- New share terms are determined by board of directors:
o The company’s cash-flow requirements
o The projected return on assets expected to derive from the new investments funded by
the rights issue
o The cost of alternative funding sources
- With a renounceable rights issue, the right of the existing shareholder to take up new shares
on a pro-rata basis may be sold to another party during the period the right is on offer (><
non-renounceable right)
- An alternative method of offering additional shares to existing shareholders is through a
share purchase plan: the opportunity to purchase a fixed dollar amount of shares at a
predetermined price
2. Placements /175
- the board of directors may decide to raise further equity funds by making a placement of
ordinary shares with selected investors (institutional investors such as fund managers)
- a memorandum of information detailing the company’s activities must be sent to all
participants.
- Advantages:
o Be arranged and finalised more quickly than pro-rata
o Discount to current mk price may be less than pro-rata
- Disad: dilutes the proportion of the ownership
3. Takeover Issues /176
- An equity-funded takeover (or part-equity-funded takeover), in which the takeover
company issues additional ordinary shares to fund the acquisition of the shares in the target
company (method used to fund a merger and acquisition)
- All-share takeover has dropped significantly
4. Dividend Reinvestment Schemes
- encouraging shareholders to put further equity funds back into the corporation
- allows shareholders to reinvest their periodic dividend receipts by purchasing additional
ordinary shares in the company
- Ads:
o Corporation meets the associated transaction costs, such as brokerage fees
o Investors have a simple savings regimen.
 - Calculate issue price of a share: take the weighted average of the market price of the
company’s shares exchange for the five days traded on the stock following the ex-dividend
date, and then adjust that price by the company’s stated discount (0-5%)
- reinvestment schemes inappropriate: periods when the company sees few new prospects
for future profitable investments and when its cash position is quite healthy

5. Preference Shares
- Preference shares are a form of equity funding, have a number of features in common with
debt - Described as hybrid security
- Dividend rates fixed at the issue date – rank ahead of ordinary shares, behind creditors, in
divident payment and assets laims
- Combination of following features:
o Cumulative or non-cumulative
o Redeemable or non-redeemable
o Convertible or non-convertible
o Issued at different rankings

6. Convertible Notes And Other Quasi-Equity Securities /178

those instruments that provide the holder with the right to convert the instrument into ordinary shares
at a future specified date
Convertible notes
- hybrid debt instrument issued for a fixed term by the company and paying a stated rate of
interest for the term of the note holder has the right to convert
- The conversion price is set close to the market price of the share
- Rate of interest offered on the notes is usually lower than on straight debt instruments
- Attraction:
o Funds on terms more favourable
o Lower rate of interest
o Longer term to maturity
o Expense of interest paid may be tax-deductible
Company-issued options
- a security issued by a corporation that gives the holder the right (not the obligation) to buy
ordinary shares in the company on a predetermined date and at a predetermined price
- company-issued options are typically offered in conjunction with a rights issue or a placement
(free/ sold at price/ set exercise date)
- investors gains a highly geared investment strategy that provides a potential future equity
interest in the corporation
Company-issued equity warrants
- an option to buy additional shares that is originally attached to a debt issue
- the warrant gives the holder the right to exercise the warrant and buy ordinary shares of the
company at a specified price over a given period
- may allow the warrant to be detachable from the bond issue and traded separately from the
bond
- non-detachable: can only be sold together with the associated bond
- warrant holder does not receive dividend payments, but benefit from capital gains on share
price rises above the warrant conversion price

CHAPTER 6: Investors in the share market

Shareholders receive a return in two forms:
1 periodic dividend receipts
2 capital gains (losses) from changes in share value.

Factors encourage investors to invest in securities quoted on a stock exchange:

- depth and lq of share markets
o measured by market capitalisation, that is, the number of shares issued multiplied by
share prices
o can buy and sell long-term, higher-risk securities + maintain liquidity in investment
portfolio.
- efficient price discovery
o speed of information get into the market
o efficiency of info asorbed by mk participants

1/ Share-market investment /193

- investors can select investment opportunities within a range of different industry sectors
- primary preference: return on portfolio – correlation with the level of risk
o return in the form of income/ capital growth
- consider: taxation implications of income versus capital growth
- consider: liquidity requirements
- 2 types of risk:
o Systematic risks:
▪ exposures that will have an impact on share prices generally in the market
▪ cannot be reduced by diversification
▪ includes: changes in IR, ER; contraction or expansion in economic activity,
political stability, …
▪ measured by the so-called beta coefficient: the amount of systematic risk that
is present in a particular share relative to an average share listed on a stock
exchange
▪ the bigger beta, the higher risk
o unsystematic risk affects a single corporation or a small group of companies

- Investment theory contends that by holding a diversified investment portfolio an investor

is able to minimise the risk exposures associated with investing in a single share
o include a range of investment categories, including shares, fixed-interest securities
and property
o across different industry sectors within an economy
o 10-25 stocks
- Active investment:
o strategic stock selections to structure a share portfolio
o An active investor will buy and sell shares based on new information received in the
market
o technical analysis considers trends that are evident over time; contend that market
behaviour history will be repeated
 o fundamental analysis: considers the domestic and international economic
environments (top-down approach) and the financial performance of a corporation
(bottom-up)
- Passive investment involves building an investment portfolio based on shares incorporated in
a share-market index - grouping of shares listed on a stock exchange that shows changes in
the overall prices of those shares’ day by day
- Index funds use a range of sophisticated techniques to replicate or track the share market,
including full or partial replication of a specified share market index
- The expected return of a portfolio is the weighted average of the expected returns of each
share. The weights are the proportion of each share to the total portfolio
- Portfolio variance, or risk, is the variability of the portfolio’s returns over time. It is the
result of the variance of each individual investment contained within the portfolio and the co-
variance, or correlation, between pairs of securities within the portfolio
o measures the way two shares’ returns move in relation to each other
- consider asset allocation:
o Risk versus return
o Investment time horizon
o Income versus capital growth
o Domestic and international share investments
- An investor may apply a strategic asset allocation approach: to take account of a dynamic
investment environment
- the investor may adopt a tactical asset allocation approach: the mix of shares in the portfolio
is changed to reflect altered circumstances of the investor and the share markets

2/ Buying and selling shares /196

an investor should consider a whole range of issues
- lq
- risk
- integrity
- charges
- return
- capital growth
- accessibility
- flexibility
- taxation
- social security

- direct investment strategy, investors buy or sell shares directly through a stockbroker
o investors select company � place order with stockbrokers to buy/ sell specific shares �
place the order into stock exchange’s electronic trading system � prioritise by price
and time, match corresponding buy, and sell orders � send a contract note
- Discount broker (non-advisory): accepts buy or sell orders from clients, but provides no
advice or recommendation; lower brokerage fee
- full-service advisory broker offers advice and recommendations to clients on investment
choices and strategies
- indirect investment: through fund manager in a unit trust or managed fund

3/ Taxation /198
- Capital gains occur when the value of the share, or share price, increases
- may be required to pay taxation on total annual dividends received and realised capital gains
 - Double taxation:
o 1: companies paid tax on their net profits � after-tax profits were then distributed to
shareholders (dividend payments)
o 2: tax was also payable by shareholders on the dividends received
o The tax was levied at the shareholder’s marginal rate of tax
- 1987 dividend imputation removed double taxation of dividends:
o dividends on which the company has already paid company tax are referred to as
franked dividends - received by the shareholder is grossed-up by the franking
credit

o
o Read more: calculations pg199, 200
- Marginal tax rate < company tax rate � SH pay no tax on the dividend received � the excess
franking credit can be applied against other taxable income
- a franking credit > income tax payable � shareholder receive a cash tax refund
- There is also tax payable on capital gains realised from the buying and selling of shares
o 1999: a capital gain was indexed and adjusted to reflect the inflation component of
the asset’s price change (indexation)
o The net capital gain after indexation was taxed at the taxpayer’s marginal tax rate.

4/ Financial performance indicators /201

Significant indicators of a company’s past and present financial performance: capital budgeting,
capital structure, liquidity and cash management, dividend policies, record of profitability, overall
performance; the impact of economic fluctuations on performance.

4.1 Capital structure

- Capital: Represent the funds available for business purposes
- Capital structure: the proportions of funding derived from debt and equity
o Measured by the debt-to-equity ratio
o the proprietorship ratio (shareholders’ interest ratio), which is the ratio of
shareholders’ funds to total assets
o The shareholders’ interest ratio is an indicator of the long-term financial viability
and stability of a firm
- Companies with a higher ratio of equity to other forms of finance are less dependent on
external funding and thus have a lower risk
- The higher the level of debt financing relative to the proportion of equity provided by the
shareholders of a firm, the greater the level of risk associated with future profitability

4.2 Liquidity
- Company: make sure sufficient cash - meet current commitments and take advantage of future
business opportunities
- Current ratio: ratio of current assets to current liabilities
o Rule of thumb: current ratio = 1.5 is acceptable

- liquidity ratio: current assets less stock, to current liabilities less the company’s bank
overdraft
o more realistic
 o rule of thumb: 0.7-0.8

o
o too much lq asset � lower return, not a good performance indicator

4.3 Debt servicing /202

- Interest cover ratio: the number of times a firm’s financial commitments are covered by
earnings b4 lease charges, interest, and tax
o Higher ratio � greater ability to cover interest commitments
o RO Thumb: minimum interest cover ratio of two times
o <1 � loss before tax
o Negative � loss before interest expense

4.4 Profitability /203

EBIT to total funds ratio and EBIT to long-term funds ratio:

ROE: Return of equity

Earnings per share (EPS): measures the earnings attributable to each ordinary share after abnormal
items. A disadvantage: be impacted by the number of shares outstanding.

4.5 Share price

The price to earnings ratio (P/E) is the market price of a company’s shares divided by its earnings
per share. This ratio is an indicator of investors’ evaluation of the future earnings prospects of a firm,
rather than an indicator of the firm’s current or past performance.

the share price to net tangible assets ratio: a measure of the discount or premium that a company’s
share price is trading at relative to its net tangible assets
- <1: share price is at a discount

4.6 Risk
- the variability, or fluctuation, in the share price
- The higher a stock’s beta, the greater the risk of that particular stock, and therefore the higher
should be the expected rate of return
o beta of 1.15 indicates that, based on historic data, the share price can be expected to
perform 15.00 per cent better than the overall market when share prices are rising, but
15.00 per cent worse if the market is falling
6.5 Pricing of shares /206
5.1 Estimating the price of a share

Valuing a share with a constant dividend:

When a company’s dividend payments are expected to remain constant, such that D0 = D1 = D2 = ...
Dn, the share price can be calculated based on a perpetuity � Present value of perpetuity:

Valuing a share with a constant dividend growth rate:

The constant dividend growth model recognises that a share price will be influenced by:
• a company’s earnings per share
• the company’s dividend payout ratio
• the expected growth rate in dividend payments
• an investor’s required rate of return.

Cum-dividend and ex-dividend share prices

- Cum-dividend a share price includes an entitlement to receive a declared dividend
- Ex-dividend date at which a share price is theoretically expected to fall by the amount of the
declared dividend
5.2 Bonus share issues
Bonus issue where a company capitalises reserves through the issue of additional shares to
shareholders

5.4 Share splits /209

- Share split a proportional division of the number of shares issued by a company
- enables the board of directors to lower the price of the stock without changing the capital
structure of the company or diluting the return to shareholders

5.5/ Pro-rata rights issues

Renounceable: a right that can be sold before it is executed

6.6/ Stock-market indices and published share information /211
Read more:
- Bull market, bear market
- Benchmark index: different types
- 10 standards international GICS (page 213: energy, industrial, material,…)

Chapter 8: Mathematics of finance: an

introduction to basic concepts and
calculations
List of symbols: table 8.1/260

1/ Simple interest /261

- Simple interest is interest paid on the original principal amount borrowed or invested
- Principle: the face value amount of loan or deposit
- Example: 2 years investment with simple interest payable � first year: interest pmt � 2nd year:
interest pmt + original principal amount
- Interest-only business loan operates similarly

1.1/ Simple Interest Accumulation

* d/365 = n; and 365 days per annum depend on different countries

1.2/ Present Value with Simple Interest /263

The present value may be defined as the current value of a future cash flow, or series of cash flows,
discounted by the required rate of return
- the future value (=S) of $100 in one year, with simple interest of 10.00 per cent per annum, is
$110
- the present value (=A) of $110 received in one year, with simple interest of 10.00 per cent per
annum, is $100.
*Công thức ghi sai á nha; và Face value = future value

1.3/ Calculation of Yields /266

Yield or rate of return:

*Note that I=S-A

1.4/ Holding Period Yield /267
Reasons of selling bills in 2nd market:
- intention of investing surplus funds for a few days only
- holder needs to sell to raise fund
- restructuring an asset portfolio: better rate on alternative
investment
Yield to maturity (YTM)
The holding period yield (HPY) is the actual return received on an
investment, having regard to the cost of the instrument, the sale price
and any interest, or return, received in the interim
- HPY of discount security: different bt purchase price and sale price
Example /267
- Calculate purchase price for the whole period
- Purchase price in 2nd market (d=maturity-passed day)
- Different bt 2 prices � calculate HPY (i)

2/ Compound interest /268

Compound interest is calculated on the accumulated principal amount; interest is added (reinvest) to
the principal

Compound Interest Accumulation (S or Future Value)

Present Value (A) With Compound Interest

Dựa vào công thức ở trên suy ra
Cẩn thận với i (tính theo tháng thì chia 12 giùm cái)

Present Value Of An Annuity /272

If the annuity periodic cash flows occur at the end of each period, this is known as an ordinary
annuity. If the cash flows occur at the beginning of each period, this is known as an annuity due.

Ordinary annuity: (at the end of period)

Ví dụ trang 274 � tại sao n = -3 dị?; công thức lại sai rồi hẻ??
N LÀ ÂM MỚI ĐÚNG NHA

Annuity due: (at the beginning of the period)

Perpetuity: a cash-flow series where the same regular payment occurs each period forever

The first part is the formula for the present value of a series of cash flows (the coupon payments), and
the second part is the formula for the present value of a single cash flow (the face value of the bond).
Xem thêm ví dụ trang 274
Accumulated Value Of An Annuity (Future Value) /276

Không có dấu trừ trước n nhé

Effective Rates Of Interest

nominal rate of interest is the annual rate and is the rate that is typically advertised as an investment or
borrowing rate

i is the nominal rate of interest per period and m is the number of compounding periods per annum.

Chapter9: Short-term debt

1/ Trade credit /289
- Trade credit is a facility offered by many suppliers of goods that provides the purchaser of
goods with a specified period before the account must be paid.
o often for small business � less need for formal debt facilities
- Trade credit are usually specified on the invoice attached to the goods
- Invoice: contain information describing the good, price, amount, and terms of payment
- Early discount payment:
o Ex: 2/10, net/30: if payment is made within 10 days, the invoice price will be
discounted by 2.00 per cent; ‘net 30 days’, signifies that if payment has not been
made within 10 days, the full invoice price is payable within 30 days
o 2 choices: pay early and receive discount, or pay later by the specific date
o The opportunity cost of not accepting the discount: (lưu ý là KQ sẽ là (p.a)

- Opportunity cost of trade credit provider is complicated. Generally, more generous term �
increase demand; less generous � loss of market share
- Credit conditions must be weighted the potential cost of:
o Discount; length of discount period
o Total credit period and AR
o Risk of bad debts and associated recovery costs
- Advantage of discount is increase sales
- Disad:
o cost of discount
 o discount period
o increase AR
o increase collection and bad debts
- Accounts receivable is the record on the balance sheet of amounts due to a business,
including trade credit

2/ Bank overdrafts /290

- Overdraft facility is a major source of short-term business finance
- Allow firms to place its cheque (of operating account) into deficit, to an agreed limit
- The interest rate payable is negotiated; normally be at a margin above a periodically
published reference interest rate.
- The reference rate may be the bank’s own prime rate, or it may be a published market rate.
- Establishment fee, monthly account service fee and the fee on the unused overdraft limit
- Interest rate negotiated, reflecting the borrower’s credit risk
o Performance, cash flow
o Matching, collateral
- Country’s own published reference rates: LIBOR (UK), USCP (USA), BBSW (Aus)
- London interbank offered rate; the average of rates at which selected banks in the London
money market will lend to each other for a specified currency
- Operated on a fully fluctuating basis, reduce or bring the overdraft back into credit as and
when future cash flows are received by the company
- Consider the credit risk of borrowers:
o past financial performance and future cash-flow forecasts
o length of the typical mismatch between inflow and out flow
o adequacy of the collateral, or security, available in the event of default

3/ Commercial bills
- Raise funds for generate business, negotiable, supported by legal structure
- Categorised as:
o Trade bills are issued to finance specific international trade transactions
o Commercial bills are simply a method of borrowing and may not relate to a specific
transaction or purpose
o Bank-accepted bill = bank’s name on the bill

- Maturity usually 30, 60, 90, 120, 180 days

1. Features Of Commercial Bills /292

- A discount security for large and medium size
 - The issuer sells the bill today in order to raise funds
- No interest � sell at lower value than FV
- Parties involved:
o Drawer: bill issuers; secondary liability for repayment after the acceptor
o Acceptor: (usually bank); primary liability to repay the face value at maturity
o Payee: receive the funds, usually drawer
- So far the borrower has not raised any funds. The drawer will now seek to sell the bill:
o Discounter: is the provider of funds; discounts the face value and purchases the bill;
may or may not be the acceptor of the bill
o Endorser:
▪ previously a holder, but has subsequently sold the bill
▪ liability for payment of the bill runs from the acceptor to the drawer and then
to the endorsers in ascending order from the last endorser
▪ thứ tự responsibility: acceptor – drawer - endorser
- The return to the discounter of the bill is the difference between the price paid for the bill and
the face value on maturity
- before maturity, the return is the difference between the buy price and the sell price obtained
in the money market

2. The Flow Of Funds And Bill Financing /294

3. Establishing A Bill Financing Facility

- Normally 30-180 days, minimum FV $100,000
- Banks provide both a bill acceptance facility and a bill discount facility
- Cost of a bill financing facility = establishment fee + activation fee
4.Advantages Of Commercial Bill Financing /296
- Lower cost, lower interest than other business finance (overdrafts, term loan)
- provides a certain known cost of funds (although will be pre-priced at each rollover date)
- A bill line: an arrangement with a bank whereby the bank agrees to discount bills up to an
agreed amount
- short-term bill funding can be rolled over through successive periods and is thus converted
into a longer-term funding arrangement.
- the issuer’s name is associated with the discounting and rediscounting of the bill in the market
� enhances credit standing, reduces the cost of funding in the future

4/ Calculations: discount securities /297

1. Calculating The Price Where The Yield Is Known

See example on teacher’s example in 3.3

* days in year of USA = 360
* Price tỉ lệ nghịch với yield
� As an investor, you prefer lower price � higher yield
� As a borrower, you prefer higher price � lower yield

� Công thức thêm, tham khảo thôi

2. Calculating the face value where the issue price and yield are known
Suy ra từ previous

3. Calculating The Yield

Notes:
- the yield is about: per annum
- to calculate the holding period yield when a security is not held to maturity, use days held
rather than days to maturity in Equation above
- at the maturity date of a discount security, the sell price equals the face value
4. Calculating The Price Where The Discount Rate Is Known

Trong hình, vì sao công thức nhìn rất ngắn gọn � vì days to maturity = days in 1 year
Distinguish between:
- Discount rate: looking back, when we have face value of the future, how much we should pay
now
- Yield: looking forward, we pay money now, how much will we be paid back

5. Calculating The Discount Rate /301

5/ Promissory notes /302

- (P-notes or commercial paper) is discount (international) security
- Definition: an unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay, on demand at a fixed or determinable future time, a sum certain in
money, to the order of a specified person or to the bearer.
- Same with bill of exchange but no acceptor
- issued with a face value payable at maturity, but is sold today by the issuer for less than the
face value
- Discounted at the current mk yield
- For companies of excellent credit reputation:
o No acceptor or endorser
o As unsecured instruments (some still have with securitisation structures)
o � need to conform creditworthiness through detailed financial position or credit rating
agency (S&P, Moody’s)

Establishing A P-Note Issue programs:

- revolving facility: issuer having the right to cancel the program subject to providing the
dealers with the required period of notice, usually at 30 days.
- Arrangers: commercial, investment, merchant banks
- Dealers:
o chosen based on their ability to distribute the paper into the markets
o lead manager or program arranger will consult
o � form a dealer panel: panel members promote and distribute debt issues to clients
and maintain a secondary market in the paper
o size of the dealer panel will be sufficient � widely distributed
- Typical P-notes will maturity of 90d, issued by:
 o Tender: bid competitively
o Tap issuance: subject to the demand
o Dealer bids: members of the dealer panel are asked to bid
- Cách tính price như ở trên

Underwritten P-Note Issues /304

- Pnotes are prefer thanks to reduced
acceptor’s expense
- However, Pnotes will not be successful if:
o No strong reputation
o Incorrectly priced
o Another more attractive investment opportunity
o Low credit rating
o Economic and financial situation
- Therefore want to be underwrite (bảo lãnh) through commercial or investment bank
- underwriting syndicate
o agree to purchase notes up to an agreed limit and at a prearranged price
o promote the issue to investors in the market
o price agreed reflects credit standing
o rollover or revolving facility � assures the borrower of a line of credit extending
beyond the short-term life of any particular P-note issue
- a tender panel:
o members of the panel are given the first opportunity to buy the P-notes (not
obligation)
o bid
- Pnote cost are large � issue on large scale

Non-Underwritten Issues
- require no external management
- issuer approaches the money market directly and usually not through a tender panel
- issuer retains a commercial bank or an investment bank as lead manager - no financial
commitment and only receives a fee for services provided

6/ Negotiable certificates of deposit (CD) /305

- is an investment product offered by banks in the money markets to attract institutional
investors
- raise additional short-term funds to meet loan and funding commitments
- Banks use to manage their liabilities and liquidity + day-to-day operational lq
- active secondary market in CDs

7/ Inventory finance, accounts receivable financing and factoring /306

1. Inventory finance
- Most common form: floor plan finance
- Particularly designed for the needs of motor vehicles dealers to finance their inventory
- Dealers promote demand for the financier’s consumer finance service � encourage buyers to
borrow from financier to purchase
- The more successfully the dealer promotes the financier to the end consumer, the lower will
be the rate charged on the floor plan finance
- bailment is used to secure the financier’s commitment of funds
 o vehicles are purchased from man’ or distributor by the finance company (bailor)
o and possession is granted to the vehicle dealership (the bailee) for display purposes
o dealers have no right to sell without approval of the financier
o � when a customer wishes to buy a vehicle, the financier will pass ownership of the
vehicle to the dealer who can then pass ownership to the customer.

2. Account receivable financing and factoring

Accounts receivable financing is the provision of a loan to a business against the security of the
business’s accounts receivables, that is, its debtors.
- Supplied by finance companies
- Financier review structure of debt (exclusion: outstanding debts beyond 90 days, doubtful or
bad debts)
- Lending company takes charge of a company’s AR
- The borrowing company is still responsible for the debtor book and bad debts

Factoring: the sale, at a discount, of a firm’s accounts receivable assets to raise funds
- The financier is usually a finance company and is called the factor company.
- A customer that owes funds to a firm is known as a debtor
- Outstanding debt is an asset and is recorded on the firm’s balance sheet as an account
receivable
- May experience lq problems: solution is to sell AR at a discount to FV to generate immediate
CF �The factoring company accept higher risk� higher required yield
- Factoring arrangement:
o With-recourse: factor company can make a claim against the firm in the event of an
accounts receivable debt subsequently not being recoverable
o Non-recourse (khong doi lai)
- Notification basis:
o the factor company notifies the firm’s customers that payment is to be made directly
to it
o greater degree of control
- Non-Notification basis: payment is addressed not to the factor but to a post office box
controlled by the factor company.
- Lower discount yield when:

- cost of factoring (2.50 - 4.00 per cent) of the accounts receivable sold
o calculate all of the benefits that flow from factoring the debts
o include cash for AR + savings from free-up resource
 Chapter 10: Medium - to long-term debt
1/ Term loans or fully drawn advances/ 317
- For a specific period (3-15 years)
- A major type of intermediated finance, usually for known purpose
- Providers: Financial institution (Major) commercial bank, finance company; (Lesser)
investment, merchant banks, insurance offices and credit unions � business sector
- the full amount of the loan is provided to the borrower at the start of the loan.

a/ term loan structures

- lender usually requires some form of security attached to the loan
o Ex: a loan for the acquisition of land and the construction or purchase of premises on
the land will be secured by a mortgage over that property
o Or lenders take a charge over the assets of the company, such as stock, plant, vehicles
and office equipment
- If the borrower default � lender will exercise the security and take possession of the pledged
assets to recover
- an amortised loan (or credit foncier loan) (khoản vay được khấu hao)
o regular equal repayments occur throughout the term of the loan
o periodic loan instalment (tra gop) consisting of interest due and reduction of principle
o For example, a monthly loan instalment of $1 000 may comprise an interest
component of $800 and a principal repayment of $200.
- interest-only loans: each periodic loan instalment comprises interest payments over the term
of the loan, and the principal is repaid in full at the end
- deferred repayment:
o loan instalments commence after a specified period (usually a project becomes CF
positive)
o debt is amortised over the remaining term
- A loan may be structured with a fixed interest rate (usually be reset after a set of period) or a
variable interest rate (will specify a reference interest rate USCP, LIBOR, SIBOR,… plus a
margin).
o Margin reflect additional risk associated with an individual borrower (strong financial
standing and history company will be charged less margin)
- Bank’s own prime rate (Lãi suất cơ bản)
o reflects the banks’ borrowing costs and may contain an element that reflects their
overhead costs
o advantages: less volatile; sharp changes in the interest rate occur
less frequently � immune to risk of ST fluctuations in the reference
rate
- IR rate charged based on:
o An indicator rate (e.g. BBSW or a bank’s own prime lending rate)
o Credit risk of borrowers
o Term of the loan: usually LT attract high rate of interest than ST
o Repayment schedule
- Fees: pg319
o Represent costs by the bank in considering the loan application and
in the preparation of documentation on approval of the loan
o Establishment fee: incurred by banks with loan application and in
preparation of documents
 o service fee: administrative costs
o Commitment fee, line fee
o Bill option clause fee

b/ Loan covenants /319

- Covenants (khế ước, hợp đồng) be specified within a loan contract and typically restrict the
business and financial activities of the borrowing firm
- require a firm to maintain a minimum level of interest cover
o this is a measure of the borrower’s ability to meet its loan repayment obligations
o calculated by diving interest repayments into income
o higher ir cover � lower risk of default
- Positive covenant: requires borrower to take prescribed actions (e.g. min working capital)
- Negative covenant: restricts the acts and fin structure of borrower (e.g. max D/E, min working
capital)
- Some idea of the scope and extent of loan covenants (read more pg.320)
- Breach of covenant � default of the loan contract � lender then has the right act to protect its
exposure

c/ Calculating the loan instalment on a term loan

- interest-only loan = principal amount x interest rate
– amortised loan: ordinary annuity

For example, if a company obtained a $100 000 interest-only loan at 12.00 per cent per annum,
payable by quarterly instalments, then the quarterly loan payment would $100 000 × 0.03 = $3000.
Note that the 12.00 per cent per annum interest rate is divided by four to reflect the quarterly payment
(i.e. 0.12/4 = 0.03).

- amortised loan: Annuity due: the loan instalments were payable at the beginning of the month
- cái công thức này giống ct ở trên discount (i+1) lần

2/ Mortgage finance /322

- Mortgage = form of security for a loan
 - The borrower (mortgagor) conveys an interest in the land and property to the lender
(mortgagee)
- The loan in repaid � the mortgage is discharged
- Mortgagor defaults from the loan � mortgagee is entitled to take control, foreclose the
property � right for foreclosure
- Mainly retail home loans (residential mortgage finance): up to 30 years terms
- Commercial property loans (commercial mortgage finance): up to 10 years
- Mortgage insurance: cover that protects a lender in the event that a borrower defaults on a
mortgage loan, up to 100%; usually when the amount borrowed is greater than 80% per cent
of the loan-to-valuation ratio
- Mortgage lending is growing due to ageing populations: enter a reverse mortgage with their
bank
a/ Calculating the instalment on a mortgage loan
is the same as for a term loan (Equation 10.1).

b/ Securitisation and mortgage finance

Chứng khoán hóa và tài chính thế chấp
Securitisation = manage mortgage loan portfolios
- Convert of non-liquid assets into new asset-backed securities (serviced with cash flows from
the original assets; is liked because it is supported)
- Original holder sells bundle mortgage loans to a trustee of a special-purpose vehicle (SPV) �
trustee obtains funds to purchase mortgage from the bank by selling new securities

3/ The bond market: debentures, unsecured notes and subordinated debt

/325
A bond is a long-term debt instrument issued directly into the capital markets - specified periodic
interest rate for the term and the principal is repaid at maturity.
Australian bond market (đọc thêm trang 235):
- Treasury bonds issued by the Australian government. These bonds are called Commonwealth
Government Securities (CGS).
- Bonds issued by these central borrowing authorities are known as semis.
- Covered bonds issued by banks incorporate an underlying form of security to support the
bond, being a claim against mortgage securities held by the bank.
- Green bonds: issue to fund renewable energy infrastructure

- Credit rating; credit rating agency: applies standard measures to ascertain its view of the
creditworthiness of an issuer of debt (S&P, Moody’s Investor service)
- Crowding-out effect occurs where government borrows a larger proportion of the total funds
available for investment – by limit the % of total amount of funds available for business
investment.

a/ Debentures and unsecured notes

- Coupon and face value
A bond is a debt security issued into the capital markets that pays the holder periodic interest
payments in return for investing for a specified period of time.
A corporate bond is a bond issued by a company; be categorised as a debenture or an unsecured note.
- Unsecured note: no underlying security
- Debentures:
o Secured by a fixed and/or a floating charge over the issuing company’s unpledged
assets—those assets over which there has been no charge or interest conveyed to
another party
o usually convey a fixed charge over permanent assets - assets that are not to be sold in
the normal course of the business operations (include manufacturing equipment,
computer systems and a vehicle fleet)
o A floating charge allows the company to continue to operate and sell products (assets)
o if the company should default on bond payments, the floating charge is said to
crystallise and become a fixed charge
- the ranking of bond holders in their claim on the company’s assets:
1. First: fixed-charge debenture holders
2. Second: floating-charge debenture holders
3. Third: unsecured note holders
- Debenture trust deed specifies and protects the underlying security attached to a debenture
bond issue

b/ Issuing debentures and notes

3 principles issue methods:
- Public issue: issue to the public at large, by prospectus (bản cáo bạch)
- Family issue: issue to associated parties existing shareholders and investors by prospectus
- Private placement: institutions that deal regularly in securities, or to other institutional
investors (managers and insurance offices)

Some of the more common structures:

- Discounted debentures: discount to the face value
- Deep discount debentures: significant discount
- Zero-coupon debentures: return is the different bt the purchase price and FV paid at maturity
– no IR
- Deferred-interest debentures: interest earned is payable upon the maturity

Prospectus will provide detailed information about the business, including:

- Constraints: timing, high administrative and legal costs � companies turn to private placement
- Information memorandum: limited information provided to institutional investors with a
private placement debt issue

c/ Subordinated debts /329

- The debt ranks behind all other liabilities of the issuing company
- More like equity that debt (i.e. quasi-equity – has attribute of both debt and equity)
- Claims of debt holders are ‘subordinated’ to all other company liabilities – receive payment
after all creditors, debt and unsecured notes holders
- Debt issue may include an agreement: debt will not be presented for redemption (tra lai) for a
specific period.
- Maybe recorded on the balance sheet as SH’s funds rather than debt
4/ Calculations: fixed-interest securities/ 330
a/ Bond price/yield relationship
Inverse relationship between the price of an existing fixed coupon bond and changes in the current
yield market.
- If current coupon rate rise � price of existing fixed-interest securities will fall
- If current coupon rates fall � the price of existing securities will rise.
- Bond prices vary inversely with interest rate
- Interest rates vary conversely with coupon rate
Có thể đọc kỹ lại vì sao có relationship như thế

Bond yields can change when the perception of risk for either a particular borrower or for borrowers
in general changes.
- Risk + inflation increased � bond yield increases

b/ Price of a fixed-interest bond at a coupon date

With C is the periodic fixed coupon payment amount based on the fixed interest rate;
C = A* I (coupon) / n (coupon)
Read ex 10.4 & note page 331 to understand more

c/ Price of a fixed-interest bond (sold) between coupon dates

5/ Leasing/ 333
A lease is a contract whereby the owner of an asset (the lessor) grants to another party (the lessee) the
exclusive right to use the asset, usually for an agreed period of time, in return for the payment of rent.
- Providers:
o Principal providers: commercial banks and finance companies
 o Can through specialist leasing company, merchant banks
o Manufactures (used as mkt)
- Advantages (perspective of lessee):
o not involve the use of the company’s capital and other unused lines of credit � use
capital for ither investment opportunities
o Leasing provides 100.00 per cent financing
o repayment scheduling more flexible under lease agreements than with debt financing
o allow a company to use lease financing when negative covenants restrict further debt
funding
o suitable for ST asset
- Advantages (perspective of lessor):
o Higher return than straight loan
o Low risk
▪ easier to take back possession when compared to loan
▪ in liquidation (thanh toan no), the lessor retains ownership of the leased asset,
liquidator cannot sell it
o administratively cheaper than providing a loan
a/ Types of leases
An operating lease
- a short-term arrangement
- lessor may lease the same asset to successive lessees over time in order to earn a return on the
asset
- often used for: construction equipment, supply office equipment, computer systems,
manufacturing equipment and vehicles to both businesses and governments
- considerations:
o is a full-service lease, lessor will be responsible for maintenance and insurance
o minor penalties for cancellation
o for a short-term project
o risk of obsolescence (su loi thoi, cu ki) of an asset remains with the lessor
A finance lease
- is a longer-term arrangement between the lessor and the lessee
o with the lessor earning a return on the asset from the one lease contract
o lessee make regular lease rental payments
o At the end of the agreement: lump sum residual payment and obtain legal title to the
machine
- a net lease arrangement: costs of ownership and operation of the asset are the responsibility of
the lessee (maintenance and repairs, insurance,…)
- the sale value of the asset at the end of the lease will be used to offset the residual amount
payable � strong incentive for the lessee to maintain the asset in good condition
Sale and lease-back
- Original provider: sale asset � agreement with the new owner to lease back the asset for an
agreed period
- most common in commercial property, railway rolling stock and government car fleets
Cross-border lease
- a lessor in one country leases an asset to a lessee in another country
- considerations:
o recovery if lessee default
o measurement and management of foreign exchange risk
o legal jurisdiction
b/ Lease structures/ 336
Direct finance lease
- the lessor—such as a finance company, commercial, merchant bank or a specialist leasing
company—purchases an asset with its own funds and leases it to the lessee
- lease period and payment are negotiated
- lessor retains legal ownership; if lessee default, it will take control or possession of the
physical asset
- lessor’s security in the leasing relationship
o leasing guarantee provided by a financial institution
o personal guarantees from the directors of the lessee company
o a mortgage over property

Leveraged finance lease

- the lessor borrows a large proportion of the funds necessary for the acquisition of the asset
that is to be leased
- Large size and term: a multi-million-dollar transaction, up to 15y, suitable for aircraft,
ships, …
- Lessors consist of at least 2 companies that have formed partnership (a bank and a finance
company)
- Partnership can contribute 10, 25%, and borrows the balance from institutional lenders (the
debt parties).
- the lessors rely on tax deductions (from depreciation of the equipment and interest paid) to
earn their return
- Complex � lease manager: structures, negotiates and places the lease transaction, manages the
transaction for the life of the lease

Chapter 15: Foreign exchange: the structure

and operation of the FX market
- Bank for International Settlements (BIS): centre bank of center banks
- SWIFT: electronic system
- The City: financial system in London
1/ Exchange rate regimes /487
- Major currencies adopt a floating exchange rate regime, or a free float (an exchange rate is
determined by supply and demand factors in the FX markets).
- is not directly controlled by the government or the central bank, which will only seek to
influence the exchange rate when there has been a significant and rapid appreciation or
depreciation of the currency
- managed float: within a defined range (or band) relative to other currencies
o is allowed to adjust providing such movements do not adversely impact upon the
economic objectives
o countries: china, sing, Malay, indo
o used to maintain competitive trade equilibrium
- crawling peg: allowed to appreciate in controlled steps over time
o similar to managed float, but it is generally accepted in the international markets that
the currency is undervalued
- linked EX regime (or fixed EX):
 o Value of currency tied directly to value of 1 basket of currencies, within a limited
range established by the government
o used by HongKong
- appreciation, depreciation

Thầy nói thêm:

- law of one price: the prices of an identical good should be the same throughout the world if
trade barriers are low
- theory of Purchasing Power Parity assumes as

2/ Foreign exchange market participants /488

FX markets: markets that facilitate the buying and selling of foreign currencies
a/ Foreign Exchange Dealers and Brokers
- FX dealers
o Financial institution: commercial banks, investment banks and merchant banks
o quote two-way (buy and sell) prices in the market
o will quote prices at which they are prepared both to buy and to sell foreign currencies
o principal (chu so huu) in the FX market
o are usually licensed or authorised central banks
o The FX dealers pay a fee, or brokerage, for the service provided by the brokers.
- FX brokers
o whose transactions are almost exclusively with the FX dealers and not with the
public
o obtain best prices in global FX markets matching dealers’ buy-sell orders for fees

b/ Central Banks /489

The central banks of nation-states enter the FX markets periodically:
- acquire foreign currency to pay for their government’s purchases of imports
- change the composition of the central bank’s holdings of foreign currencies as part of its
management of official reserve assets (central bank holdings of foreign currencies, gold and
international drawing rights)
- influence the floating exchange rate
o clean float when an exchange rate is determined by market forces without central
bank intervention
o dirty float: a central bank regularly intervenes in the FX market to influence a floating
exchange rate

c/ Firms Conducting International Trade Transactions

- the dominant currency of international trade transactions is the USD - GBP, JPY, EUR
- exporters: receive fr currency, sell fr currency and buy domestic currency
- importers: use the FX market to buy fr currency (sell domestic currency) for purchasing
imports

d/ unimportant
e/ Speculative Transactions (đầu cơ)
- motivated by the pursuit of profit
- speculators are able to move the market price of a currency (try to fill the gap for profit)
- there are risks involved: loss even in expected direction but not to the extent that was
expected (the gain is not sufficient to cover transaction and opportunity cost)
- hedge funds is institutional FX speculator
 - Investors, businesses and financial institutions will also, at times, indulge in speculative
transactions.
- Long position: occurs when the underlying asset has been bought forward (mua trước, để
dành, expect appreciate sau này bán giá cao hơn)
- Short position: entering into a forward contract to sell an asset that is not held at that time
(expect depreciate, nên ký hợp đồng sẽ bán trong tương lại, để sau này không lo rớt giá – liên
quan đến bán khống) Link read more
- khác với arbitrage ở chỗ là mua nay, mai bán; còn arbitrage là mua nay bán nay, nhưng ở chỗ
khác, arbitrage khó làm hơn, cần AI, technology

f/ Arbitrage Transactions /491

- Arbitrage transactions are possible when differences occur between buy and sell prices in
markets.
- able to carry out simultaneous buy and sell transactions in two or more markets, involve no
FX risk exposure
- The opportunity of risk-free profit is rare, because the market is fast and the arbitrage
demand/supply transactions will move the exchange rate back into equilibrium
- geographic arbitrage: 2 dealers in different locations quote different rates on the same
currency
- triangle arbitrage: when exchange rates between 3 or more currencies are out of perfect
alignment

3/ The operation of the FX market /492

- The larger FX dealers provide their FX function as part of their overall treasury operations
- FX dealing room
o physical location of FX dealers, usually within an institution’s treasury operation
o few – 100 rooms
o essential to have access to the same information at each moment in time
o the array of computer screens - global communications network that links the
electronic trading platforms of FX dealers
o rates: indicative, change within seconds

4/ Spot and forward transactions /493

a maturity date, the value date or delivery date of the FX contract:
- two working days after the FX contract is entered into � spot transactions
- more than two working days after the FX contract has been entered into � forward
transactions
o a way of covering or hedging, against currency appreciation risk
- non-business day � advance to the next day
- monthly dates � corresponding to the spot day
- Tod value transaction: Transactions entered into today, with same-day value or settlement
- Tom value transaction � tomorrow
5/ Spot market quotations /494
a/ asking for quotation
- Unit of the quotation = base currency: the first-named currency in an FX quote; one unit
expressed in terms of another currency
- Terms currency the second-named currency in an FX quote; used to express the value of the
base currency
- Example: USD/EUR means the price of USD1 in terms of EUR. GBP/USD means the price
of GBP1 in terms of USD.

b/ Two-Way Quotations
Interpreting verbal quotations
relationship between an FX dealer and a corporate client:
1/
‘Dollar yen is eighty-two fifty-eight–sixty-six’ means: USD/JPY82.58–82.66
FX dealer quote to a broker: ‘fifty-eight sixty-six’
Base currency is USD, terms currency is JPY
2/
‘Aussie Sing dollar is one twenty-seven sixty–seventy’ means: AUD/SGD1.2760–1.2770
Note: When a quote states ‘the dollar’ without qualification it is referring to the USD.

Two-way prices
the euro Aussie spot rate (EUR/AUD1.3755–1.3765) � identify the price at which the price-maker
FX dealer will buy and sell:
• the price-maker FX dealer will buy EUR1 for AUD1.3755.
From the price-taker’s point of view, it would sell EUR1 and receive AUD1.3755 from the FX dealer
• the price-maker FX dealer will sell EUR1 for AUD1.3765.
From the price-taker’s point of view, it receives EUR1 on payment of AUD1.3765 to the FX dealer.

- bid price: the price at which a dealer will buy the unit of the quotation.
- sell price (=ask price) is referred to as the offer price: the price at which the dealer will sell
the unit of the quotation
- Spread: the points difference between bid and offer prices in a quote
- A point is the final decimal place in an FX quotation (chưa hiểu)
o Therefore, a quote of AUD/GBP0.6250–53 has a spread of three points.

- The number of decimal places quoted depends on the number of units in the quote
o Fewer than 10 units – quoted to four decimal places
o More than 10 units – two decimal places
o AUD/USD may be quoted as AUD/USD0.7554–0.7559, while the AUD/JPY may be
quoted as AUD/JPY83.43–83.49
c/ Transposing Spot Quotations /497
Reverse then invert:
d/ Calculating Cross-Rates
- a direct quote, where the USD is the unit of the quotation, or the base currency
- an indirect quote, where the USD is the terms currency, and the other currency is the unit of
the quotation
- cross-rate: the exchange rate of two currencies, neither being the USD

Crossing two direct FX quotations:

— Step 1 Place the currency that is to become the unit of the quotation first.
— Step 2 Divide opposite bid and offer rates; that is:
— Step 3 Divide the base currency offer into the terms currency bid (this gives the bid rate).
— Step 4 Divide the base currency bid into the terms currency offer (this gives the offer rate).

Crossing a direct and an indirect FX quotation (see Example 15.4).

— Step 1 Multiply the two bid rates (this gives the bid rate).
— Step 2 Multiply the two offer rates (this gives the offer rate).
• Crossing two indirect FX quotations (see Example 15.5).
— Step 1 Place the currency that is to become the unit of the quotation first.
— Step 2 Divide opposite bid and offer rates; that is:
— Step 3 Divide the terms currency offer rate into the base currency bid rate (this gives the bid rate).
— Step 4 Divide the terms currency bid rate into the base currency offer rate (this gives the offer
rate).
6/ Forward market quotations /500
a/ Forward Points and Forward Exchange Contracts
- Definition of foreign exchange rate, interest rate parity
- if the points are rising (going from smaller to larger), add them to the spot rate
- if the points are falling (going from larger to smaller), subtract them from the spot
rate.

- If the forward points are falling at a specific forward date, the base currency is at a
forward discount.
- If the forward points are rising at a specific forward date, the base currency is at a
forward premium.

Math:
Finding forward rate
The Aussie dollar is seventy-six thirty–forty, thirty-two–twenty-seven
Spot rate: AUD/USD0.7630–40
Six-month forward points: 0.0032–0.0027, which is falling, then subtracting
� the six-month forward rate of: 0.7598–0.7613, which is rising

Equation 15.2 gives a generalised formula to calculate forward points:

b/ Some Real-World Complications /502

Two-way FX quotations
FX dealers quote both bid and offer rates on a pair of currencies. FX quotations are given as the rate at
which the dealer will buy the base currency, and the rate at which the dealer will sell

Different interest rate year conventions

the USA, Japan and Europe calculate interest based on the 360-day convention, whereas most
Commonwealth countries, including the UK, Australia and New Zealand, use the 365-day
convention.
Cách đổi qua đổi lại:
 Borrowing and lending interest rates
Calculating bid forward points and offer forward points

Compound interest period

7/ Economic and Monetary Union of the EU and the FX markets /505

- the forward exchange rate varies from the spot exchange rate. Interest rate parity is the
principle behind this variance.
- Hard currency: currencies, including the USD, JPY, GBP and EUR, which are generally
accepted in international trade and financial transactions
- Finally, the euro-denominated capital markets are flourishing significant debt issues have
been successfully issued into the international capital markets by corporations, financial
institutions and governments.

Chapter 18: An introduction to risk

management and derivatives
1/ Understanding risk /568
risk is the possibility or probability that something may occur that is different from what was
expected.

a/ operational risks
- Operational risks are those exposures that may impact on the normal commercial functions of
a business (day-to-day ability)
- Vary depending on the nature of a business
o Smaller company: risk of loss of key personnel
- Sources of operational risk: technology, property and equipment, personnel, competitors,
natural disasters, gov, suppliers and outsourcing
b/ financial risks
- Unanticipated changes in projected CF, structure & value of BS assets and liabilities
- one risk will often have an impact upon another risk � specific risks should not be considered
in isolation.
- Risk managers need to be aware of both
o direct risks (initial risk event � impact on the operational or financial performance)
o consequential risks (result of an initial direct risk event).
- Major fin risk:
o Interest rate risk
o Gr exchange risk
 o Liquidity risk
o Credit risk
o Capital risk

2/ The risk management process /570

1. Identify operational and financial risk exposures: understand interrelationship and causal
linkages between the above categories.
2. Analyse the impact of the risk exposures:
- A business impact analysis will document each risk exposure and endeavour to measure the
operational and financial impacts should the risk event occur
- must measure all quantitative risks (as above), but also needs to recognise non-quantifiable
risks
3. Assess the attitude of the organisation to each identified risk exposure:
- Should determine the level of risk that it is willing to accept – not seek to mitigate or remove
all these risk
- which risks are to be avoided, controlled, transferred or retained
4. Select appropriate risk management strategies and products:
- Integrated process: The range of risk management strategies must be integrated into an overall
strategy that is compatible with the organisation’s risk management objectives
- conduct a cost–benefit analysis: measure the costs associated with establishing and
maintaining a risk management strategy versus its benefits to be gained
5. Establish related risk and product controls
- Procedural controls: document the risk management products that can and cannot be used by
the organisation
- System controls: cover all the electronic product delivery and information systems as they
relate to the identification, measurement, management and monitoring of risk management
- Also needs to ensure risk management personnel have the necessary understanding, skills and
experience to implement and monitor a particular strategy
6. Implement the risk management strategy: the risk management strategy about to be
implemented must be flexible and robust. That is, the strategy can be refined, modified or
changed as conditions change.
7. Monitor, report, review and audit.
- all risk management processes and strategies should be periodically audited
- Internal and external audit reports should be forwarded to executive management for review
and action as required
3/ Future contracts /574
- are standardised contracts traded through a formal exchange that enable the management of
risk exposures associated with commodities and financial assets
- referred to as an exchange-traded contract
- Agreement between 2 parties
o To buy or sell
o Specified commodity or financial instrument
o At a specified date in the future and a price determined today
o Therefore, manage an expose to risk
- If the portfolio comprises the shares of only a few companies � futures contracts associated
with those specific companies to manage the risk exposure
- If many listed shares � use a futures contract based on a share price index such as the
S&P/ASX 50 index
- The client will be required to pay an initial margin to the futures exchange clearing house.
 o Initial margin: a deposit lodged with a clearing house to cover adverse price
movements in a futures contract
o Clearing house: records transactions conducted on an exchange and facilitates value
settlement and transfer
- The margin will vary depending on the futures contract and current market volatility, but will
generally range (2–10%) of the value of the contract
- The futures contract will be marked-to-market by the clearing house; that is, the clearing
house will monitor changes in the price of a futures contract
o marked-to-market: the periodic re-pricing of an existing contract to reflect current
market valuations
- maintenance margin call: the top-up of an initial margin to cover adverse futures contract
price movements
- positive correlation between the futures contract price and the share prices in the share market

4/ Forward contracts /576

- Designed to manage specified risks
- Offered over the counter
o More flexible than standardised exchange-traded products
 o Terms and conditions can be negotiated
- Two main types

a/ Forward rate agreement (FRAs)

An FRA is a contractual agreement between two parties to lock in an FRA agreed rate
at a future FRA settlement date based on a specified FRA contract period and a
specified reference rate

- allows a borrower to manage a future interest rate risk exposure

- locks in an interest rate today that will apply at a specified future date
- does not need to ensure it has sufficient liquidity to meet margin call cash flows

- Approach bank 17th June

- Quote cover: 22 Aug � 22 Nov
- The reference rate is the three-month rate (contract period)
- 2Mv5M(22) or 2s/5s the 22nd or twos fives the twenty-second
- That is, the settlement date is in two months and interest cover is for a three-month
period.

b/ Forward foreign exchange contracts /578

- referred to as a forward exchange contract, facilitates the management of exchange rate risk
exposures
- locks in an exchange rate today for delivery of foreign currency at a specified future date
- removed the uncertainty of a future foreign currency denominated cash flow
- quote: AUD/USD0.7130–35 14:20.
o Aussie dollar seventy-one thirty–thirty-five fourteen twenty.
o AUD/USD0.7130–35 is the spot rate
o 14:20 are the forward points that determine the three-month forward exchange rate

5/ Option contracts /579

- gives the option buyer the right, but not the obligation, to buy or sell a specified commodity
or financial instrument at a specified price on or before a specified date
- price in option contracts is called exercise price or the strike price - determined today, able to
buy or sell the specified commodity or financial instrument at the exercise date
- Call options give the option buyer the right to buy; Put options right to sell the commodity
or financial instrument specified in the option contract at the exercise price
 - European-type options: and exercise only on the contract expiration date
- American-type options: any time up to the expiration date (with higher cost)
- benefit of an option contract hedging strategy is that losses that may result from adverse price
movements can be limited, while profits can be realised
- the buyer of the option must pay a premium to the seller, or writer, of the option

a/ Call Option Profit And Loss Payoff Profiles

- price: $20 (predict it to increase in the future)

- premium: $1.5
- In the call option:
o Below $20: option to lapse � total cost: the initial $1.5 per share paid
o $20 – 21.50: use the profit made from exercising the option to offset the $1.50
premium paid
o More than $21.5: the gain is unlimited
- For sellers:
o the gain from the premium will be eroded if the share price begins to move above the
$20.00
o if the price increases to $30: writer net loss of $8.50 per share

b/ Put Option Profit And Loss Payoff Profiles

- Exercise price: $6 (predict it decrease in the future)

- Premium: $0.7
Buyer option:
 - price above $6: lapse, with the net cost of the risk cover is the initial premium paid of $0.70
per bushel
- price of $5.30 the farmer will recover all the cost of the premium
- Below $6: the option has greater value, writer lose the premium
Writer option:
- below $6.00 a bushel, then the writer will begin to lose the premium when the contract is
exercised
- At the break-even spot price of $5.30, the net return on writing the contract is zero
- Loss will occur if the price falls even further.

Read carefully, it is easily mistaken 2 types, 4 cases

6/ Swap contracts /582

- Intermediated swap (majority) a party enters into a swap with a financial intermediary (bank)
- Direct swap two parties enter into a swap with each other without using a financial
intermediary
- Interest rate swaps and cross-currency swaps facilitate the management of interest rate and
foreign exchange risk exposures.
- Swaps are not a source of funding for a borrower

a/ Interest Rate Swaps

- an agreement between two parties, such as a company and a bank, to exchange a series of
interest payments based on a notional principal amount for a specified period
- Notional principal amount: the underlying amount specified in a contract that is used to
calculate the value of the contract
- Vanilla swap (fixed-for-floating) a swap of a series of fixed interest rate payments for
variable interest rate payments
o the fixed interest rate (the swap rate) will be set by the bank; the variable or floating
rate will be based on a periodically published reference rate.
o Reference rate: Singapore - SIBOR, in London - LIBOR, in Europe - EURIBOR and
in the USA – USCP; also depends on periods
- Basis swap (floating-for-floating) a swap of a series of two different reference rate interest
payments
- Swap rate the fixed interest rate specified in a swap contract
b/ Cross-Currency Swaps /585
- is an agreement between two parties (bank and a corporation) to exchange a principal amount
at the beginning of the swap, followed by the exchange of periodic interest payments during
the term of the swap, plus re-exchange of the principal amount at the swap completion date.
- involve two currencies – the ER can be spot rate or a forward exchange rate
- read again the example to understand more

Chapter 19: Futures contracts and forward

rate agreements
1/ Hedging using futures contracts/ 596
- A futures contract is a legally binding agreement between two parties to buy, or sell, a
specified commodity or financial instrument at a specified date in the future at a price
determined today.
- Example of a farmer with wheat: The farmer adopted a risk management strategy whereby
futures contracts were sold in the first instance and this position was closed out at a later date
by buying identical contracts. In the futures market transactions, the farmer sold high and
bought low.
2/ Main features of a futures transaction
a/ Orders and Agreement To Trade
- Australian 10y treasury bond contract
- An order normally specifies:
o Buy/ sell order
o Type of contract
o Delivery month/dates
o Price restrictions
▪ Market order: to b/s at current mk price
▪ Limit order: buy at lowest price up to a specified limit; to sell at highest
price down to specified limit
▪ Time limit
- The system auto matches corresponding buy and sell, first order received is given priority
- D&supply determines the price
- Transaction price on ASX Trade24: is quoted as an index figure (100 minus the yield).
o a yield of 7.25 per cent per annum, the contract will be quoted as 92.750 (100 minus
7.25).
o price of bond futures contract:

b/ Margin Requirements /599

- An agreement to buy a futures contract is called a long position
- an agreement to sell is known as a short position.
- Entering the contract, do not need to pay full price, but pay a deposit or initial margin.
o Held by clearing house
o 2.00 – 10.00 per cent
o Change depending on the volatility of the price of the commodity or financial
instrument underlying FC
o ensure that brokers and their clients are able to pay for any losses incurred, thus
protecting the profits of the opposite party
- a variation or maintenance margin call: ensure that parties to futures contracts do not default
on their contracts if the price of the contract moves against them
- market-to-market on a daily basis: all futures contracts are revalued by the clearing house
every day at current market prices
- ASX Clear (Futures) requires members to maintain margins at least equal to that determined
by SPAN
c/ Closing Out Of A Contract
- Close out futures strategy: buy or sell a futures contract before maturity date that is opposite
to the initial futures contract position, but identical in delivery date.
o The new contract will be conducted with a third mk participant.
o Company S closing out no longer has an open position in the futures market as it has
bought one contract and sold one contract
o it no longer has any contract, and can withdraw initial margin held with the clearing
house
- The open positions at the clearing house remain unaltered by the transactions. There is still
the same number of contracts at the contract delivery date.
o Is the counterparty to each contract
o As novation, facilitate easy entry and exit
o Guarantee all contracts
d/ Contract Delivery /600
final settlement may be in the form of delivery of the actual underlying financial instrument, known
as:
- standard delivery: FC settled by physical delivery of specified asset
- cash settlement: by cash payment at delivery date
- Contract month: the month in which a futures contract expires and settlement in cash or by
physical delivery is required (up to 6 quarter months)
- Last trading day: the day of the month on which a futures contract expires (the 3rd Thursday
of the settlement month)

3/ Futures market instruments/ 601

Futures markets can be established for virtually any commodity or financial instrument that has the
following attributes:
• It is traded freely, generally without direct government controls over the prices.
• There is, at times, a considerable degree of price fluctuation or volatility.
• Its quality can be graded according to a universally accepted standard.
• There is a plentiful supply of the commodity or security, or cash settlement is possible

4/ Futures market participants /603

4 types below, help to maintain the depth and liquidity that is necessary within a market if it is to be
efficient and successful, and to deliver competitive pricing.

a/ hedgers (ng bảo hiểm rủi ro)

Hedgers use the market in an attempt to manage price risks such as exposures to changes in interest
rates, exchange rates and share prices.
Examples of reducing financial risk (read more pg.603)
b/ Speculators
- Speculators attempt to make a profit by purposely taking risks. They enter the market in
the expectation that the market price will move in a favourable direction for them
- Speculators who expect prices to rise would take a long position and buy the contract now;
those who expect prices to fall would take a short position and sell the contract now
- Straddle buying and selling of contracts with different delivery dates to benefit from price
variances
- Spread position - same delivery- date contracts
- being the counterparty to a position that a hedger wants to take
- provide information to market participants on the expected future direction
 - take on the risks that hedgers seek to avoid. Without them, trading volumes in the market
would be much lower
c/ Traders /604
Traders conduct transactions on their own account, not on behalf of clients. Traders may be
described as a special class of speculator; they trade futures contracts based on very short-term
changes in price.
add depth and liquidity to the market and have the effect of narrowing the spread between bid and
offer prices.
d/ arbitrageurs
- without taking any risks
- make a profit by taking advantage of price differentials between different markets, such as
when a futures contract price is out of equilibrium with the physical market spot price of the
underlying commodity or financial instrument.
- bring about price changes in the markets such that the price of a physical market commodity
or financial instrument and the associated futures contract are brought into equilibrium with
one another

5/ Hedging: risk management using futures /605

Basic hedging rule: conduct a transaction in the futures market today that corresponds to the
transaction to be carried out in the physical market at a later date (at which time the open futures
position is closed out).

a/ hedging the cost of funds (borrowing hedge)

risk of increase IR
b/ hedging the yield on funds (investment hedge)

Cách tính value of the contract dựa vào Equation 19.1 (Ra rồi bên Math á)

Xem cái ví dụ của cô ở dưới

c/ hedging a foreign currency transaction /608

- profit from closing out position = value of the contract today – future = 2k dollars
- 2k dollars in AUD (current spot) = 2k/0.719 = AUD2,781.64
- import cost (in 3m) = USD8500/0.7190
- Net cost of USD funds = import cost (in 3m) – profit from closing out = AUD118 219.75 –
AUD2 781.64 = AUD115 438.11
d/ hedging the value of a share portfolio.

Value of portfolio
= the initial value * (1 + %change)
(%change = (current – old)/old; áp dụng ngay cả khi fall/ rise)
= 40M*(1+ (5200-5600)/5600) = -7.14%

e/ Hedging Against Volatility /610

Physical market Future market

Hedging borrowing costs
Today Today
Expect to borrow $1M in 3 months Sell one ($1M) 90-day bank bill at 91.6
Current rate is 8% p.a: forecast to rise Yield of 8.5% p.a
Price 979,471.35
In 3 months In 3 months
Issue a $1M bank bill Buy one bank bill at 91.00 (closing
Yield of 9% p.a futures position)
Price $978,290 Price $987,290
Futures contract profit of $1181.35
offset additional borrowing cost Profit on futures contract of +1181.35
Hedging yield on funds
Today
Want to invest 2M in bonds Buy 20 3-y treasury bond futures
Current yield 7% p.a contracts at 93.200.
Yield of 6.80% p.a
Yield could fall, increasing the Price %1,885,265.06
purchasing price
In 3 months
Buy bonds at y of 6.84% p.a Sell 20 3-y TB at 93.500 (65% p.a)
($1,955,122.29)
Price $1,927,303.27
 Profit from futures offset increase Profit +$ 42,038.21
purchase price
Not always profitable (pic in phone)

Hedging a foreign currency transaction

6/ Risks in using futures contracts for hedging /612

a/ Standard contract size

the mismatch in the contract size between the futures market and the physical market has resulted in a
net loss to the investor

b/ margin payments
- A futures exchange requires buyers and sellers of futures contracts to pay an initial margin
when entering into a contract (2-10%)
- The opportunity costs and cash-flow risks associated with initial margin and maintenance
margin calls must be assessed prior to entering into a futures contract hedging strategy.

c/ basis risk
- Basis risk a situation where pricing differentials are evident between financial markets
- Initial basis risk when basis risk exists at the start of a hedging strategy (at the
commencement)
o When the mk generally expects that prices in the physical mk will change
- Final basis risk where basis risk exists at the completion of a hedging strategy
o When pricing in future mk is not exactly matched with in physical market

d/ cross-commodity hedging.
- the use of a futures contract that is based on one commodity or financial instrument to hedge a
risk exposure associated with a different commodity or financial instrument
- is necessary because each futures exchange offers only a relatively small number of futures
contracts that are based on a limited range of commodities and financial instruments.
7/ Forward rate agreements /615
- A forward rate agreement (FRA) is an over-the-counter contract that is specifically
designed to manage interest rate risk exposures.
- a non-standardised contract
- typically offered by commercial banks and investment banks
- possible to negotiate specific terms and conditions to meet the particular risk management
needs
- allows the parties to lock in a rate of interest that will apply at a specified future date, based
on a notional principal amount
- Contract settlement occurs when one party compensates the other party by paying the
monetary value of the difference between the FRA agreed interest rate and the reference
interest rate.

The FRA will specify:

• the FRA agreed rate, fixed at the start of the FRA
• the notional principal amount of the interest cover
• the FRA settlement date when compensation is paid
• the contract period on which the FRA interest rate cover is based (end date)
- 3Mv9M: the six-month interest rates beginning in three months.
• the reference rate to be applied at settlement date (a variable or floating reference rate; usually
LIBOR, USCP, BBSW)

a/ Using An FRA For A Borrowing Hedge /617

- the FRA is established on 19 September, with the settlement date set as 19 April of the
following year, and the end date is 19 October
- � 7Mv13M(19) 13.25 to 20: in seven months’ time the dealer is prepared to lend six-month
money at 13.25 per cent per annum, or to borrow at 13.20 per cent per annum.
 - The company wishes to hedge a borrowing and so the relevant rate (agreed rate) is 13.25 per
cent per annum
- On 19 April, published reference rate and note that the six-month BBSW is 13.95 per cent per
annum

� The settlement paid by the FRA dealer to the company is $15 379.19.

strip of FRA
- the combination of a number of consecutive FRA contracts over an extended period
- appropriate if a company is funding its working-capital requirements through a bill facility
that has a rollover every three months
The main advantages of an FRA:
- a tailor-made, over-the-counter contract
- does not have associated margin payment requirements
disadvantages:
- risk that the settlement amount might not be forthcoming (overcome in futures market
transactions by the existence of the clearing house and the requirement for margin calls)
- no formal market: not easy to close out an FRA position; but can close out an agreement by
entering into another FRA that is the opposite
Notes: Chapters 18-20 discussion: Derivatives markets (futures and forwards, and options)

REVIEW FINAL MATH