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Derivatives

->product that their value derives from something else


1.futures
novation - the counter contract that replace the previous one
2.options and covered warrants
call->buy->holding an option
put->sell->writing an option
strike price -> the price that the parts agree forthe future transaction
premium -> the price of selling the option
->can be traded depending on the stock trading price
used by : -speculating(gambling)
-hedging(protection)
3.swap
a way to reduce te borrowing cost
variable interest - London Interbank Offer Rate (LIBOR)
fixed interest - x%
swap banks profit by the fact that its client borrow at different rates
Compounding rate concept
annual equivalent rate is higher if the interest rate is paid quarterly-> good i
f you save and bad if you borrow money using a quarterly rate
1.reinvest your dividents
2.start early
3.keep charges dovn
warren buffet investing strategy
1.look for good company at cheap price
Good company - high ROCE (return on capital employed=PBIT/debt+equity) + low Deb
t
2. look for companies with predictible earnings
3. profits backed by cash flow
4. avoid uncomplicated business if you dont understand them
5. strong brand + pricing power
6. management need to be owners of the business (not 100%)= management needs to
be paid by shares
Numbers that every investor needs to know
reasons to buy a share ->growth(share price goes up)- e.p.s(total profits per sh
are- higher the better)+ p/e(price per earnings - lower the better...)
- price to book value P/B (l
ess than one shows that you pay the correct ammount)
- EV/EBITDA (shows if the fi
rm is cheap comparing to its competitors)
- PEG (p/e rate reported to
expected growth rate)
->income(dividents)-yeld - annual income return from a s
tock
-cover - how many times the dividents
paid are coverd by the profit (higher the better)
->perks(some advantages)
10 signs that a company is doing bad
1. huge goodwill figure
2. current ratio(current assets/current liabilities - lower=bad)
3. gearing(huge leverage/borrowing)
4. off balance sheeet
5. plunging cash flow
6. adjusted EBITDA - this looks better in the papers because they can manipulate
it to make the business to look good
7. key management changes
8. directors dumping shares
9. companies with only one customer
10.rapid expansion
Starbucks tax case study
Declare low profits if you want to pay less taxes to HMRC.
corporation tax is paid on profits NOT on sales.
Profits= sales-costs -> mask sales or increase costs
Increasing cost can be done by : - borrow money from another brench from a diff
erent country(with lower tax rates) at a high interest rate
- royalties agreements into countries with low t
ax rates
- bring forward past losses
money laundering
1. placement - getting rid of hot money
2. layering - muddying the waters:- u can lend money at a very low interest rate
and then asking them lot less than they lend
- eurobonds because they belong to the p
erson that holds them phisically and can be exchanged quickly
3. integration - spending the clean cash
Quantitative easing 2 (QE2)
(Gross Domestic Product)G.D.P. = supply X velocity
QE2: when velocity drops pump more supply into the market
central bank -> can lower interest rate
-> buy assets(like bonds)-will increase commodities price
-can trigger inflation
Structured products dissadvantage
Product that its returns are linked to an index(eg FTSE100)
1. comission x% of sum invested
2. lock up periods are to big
3. money are not back guarantee
4. you loose interest and dividents
5. minimum investment
How to beat inflation
Factors that influence inflation
1.Goods & services
-demand rises or supply falls
2.Money
-inrease in supply
-demand for money falling
Measuring inflation
RPI (retail price index)
- unlike CPI includes property costs
CPI (consumer price index)
Ways to beat the inflation
Investor
- NSI index linked certificates
- blue chip shares (inside an ISA wrapper)
- retail bonds
- GOLD
Borrower
- pay off debts
The fastest way to value an income stock
Model : next divident/expected rate of return-divident growth rate = price
Use for : - steady, established stocks
- not for fast growing companies

3 ways to value a company
BOTTOM UP
Asset based approach
Net asset (Balance sheet)x$
asset adjustments +/-
liability adjustments +/-
revised =====
is applicable for the companies with lots of assests (not internet businesses an
d other)
TOP DOWN
Ratio based(using multiples)
Earning based multiples : P/E (price per earnings)ratio
Sales based multiples P/S (price per sales) ratio
Asset based multiples P/B (price per balance sheet) ratio
Rearrange the ratio to find the price P/E=5 => P=5E
Discounted cash flow
cash flow
I/R x%
dis cash flow
-------------
Net present value
Investment Banks
Bank -> Retail
-> iNVESMENT (goldman Sachs, JP Morgan)
5 activities of an investment bank:
1. prop' trading (propriety trading)
-currencyes, commodities, bonds
2. market making
-not very profitable(spreads) but a gives good PR image
3. Merge and Aquisition Advisory
4. Corporate Events/new issues
- might even be involved in underrating(gets a fee for buying shares tha
t other investors don't want)
5. Structured products
The trick used to turn banking losses into profits
Loan loss reserve adjustments
profit before llp 150m$ 100m$ 80m$
loan loss provision (50m$) 10m$ 40m$
-----------------------------
100m$ 110m$ 120m$
Watch underline cash flow info!!!!
INDEXes
Financial Times Stock Exchange (FTSE)
share price SHARES MARKET CAPITALISATION SHARE PRICE1 M CAP
A 1 1000 1000 5 5000
B 2 500 1000 4 2000
C 3 200 600 1 200
-----------------------------------------------------------------------------
6 2600 10 7200
1000(START VALUE OF AN INDEX) X 7200/2600=2777 (eg FTSE)
1000 X 10/6 = 1667 (eg DOW JONES)
Entry criteria : -size(market capitalisation)
- purple book record(accept some rules and regulations)
- be prepared to offer lots of shares to the market (free float)
FTSE100 TECHMARK100
FTSE250(NEXT 250!)
SMALL CAPS
FLEDGINES
IPOs
4 ways to raise money for a company : -organic growth(v slow)
-borrow money
-issue bonds
-share issues
ipo ->placement
->public offer
COMMODITIES
METALS(hard commodities) : LED, COOPER, AL, GOLD, SILVER, PT, PALADIUM
AGRICULTURALS (soft commodities)
ENERGY : OIL, GAS
features: -storage issues(some are perishable)
-delivery(accidents insurance)
-politics(read the news from the country from the commodity comes from
)
trading commodities: - wholsale :LME, NYMEX, CBOT, CME
- retail->phisical trades
->fund-ETFs(exchange trade founds)
Hedge founds
Strategies
1. Long/short(130/30=you can invest 160$ per 100)
2. relative value(arbitrage)
3. event driven(m&a-buy target sell the predator, bankrupcy)
4. macro(placing huge bets)
GOLD STANDARD
linking currency to commodities
1oz gold = $100
Sheila P/E ratio (cape-ciclicly addjusted pe)
Price/One years earnings(last year or a prediction for the future year)
cape -> use the avearage earnings over 10years
mebanefaber.com
Futures
inversed ctf | NasDR