Assignment on:

SECURITIES OPERATIONS

Course Code:FIN-3603
Course Title: Financial Markets & Institutions
Section: A
Group : E
Semester: 6th
Group Members:
Matric no. Name
B081308 ……………………………. Md Rashed
B081313 ……………………………. Sarowar Uddin
B081316 …………………………….Arman Talukder
B081317 …………………………….Shihab Uddin
B081339 ……………………………..Omar Faruk
B081346………………………………Mezbha Uddin
B081347 ……………………………..Ibrahim
Muzumdar
B081367 ……………………………..Saad Rahman
B081393………………………………Asraf Uddin
B081395………………………………K.M Rashedul
Alam
B081399……………………………….Mamunur Rashid
B081404……………………………….Ariful Islam
B081428……………………………….Ataus Samad
B081433……………………………….Kaiser Hamed
B081452……………………………….Abu Sufian
B081453……………………………….Kazi Asadullah
 SECURITIES OPERATION

1Q. Investment Banking Firm?

Ans. Investment banking firms(IBFs) assist in raising capital for corporations,
state and municipal governments. IBFs serve both financing entities and investors.
IBFs serve as an intermediary of buying securities from issuing companies and
selling them to investors. IBFs generate fees for services rather than interest
income. IBFs provide advise to companies on mergers and acquisitions.
2Q.How do IBFs facilitate new stock offerings?
Ans. IBF facilitate a firm issuing securities and investors by providing following
service:
 Origination: When a corporation decides to issue additional stock or issue
stock it first contact an IBF.IBF give advise on the amount of stock to issue
and help to determine the appropriate price for the newly issued stock.
Then issuing corporation registers with the Securities and Exchange
Commission (SEC). All the information about the agreement between the
issuer and the IBF must be provided in the registered statement.
 Underwriting: The original IBF form an underwriting syndicate. Other IBFs
underwrite a part of the security offering .It helps spread the underwriting
risk among the IBFs.
Stock offering are normally based on two agreement
• Best effort agreement
• Guarantee
In best effort agreement IBF does not guarantee a price to the issuing
corporation.
In this corporation bear the risk. In guarantee that all stock will be sold
if not than IBF will buy the remaining stock.
 Distribution: The prospectus is distributed to all the potential purchasers of
the stock and advertised to the public. The issuing stock may sell within
hours, if the issue does not sell as expected the underwriting syndicate will
reduce the price. Participating IBFs have retail brokerage operations and
other IBF can still selling in group. Corporation incurs flotation cost for
underwriting spread and direct issuance cost such as accounting, legal fees
etc.
 Advising: The IBF acts as an adviser throughout the process.IBF give advice
after the stock is issued, IBF may provide advice on the timing, amount,
terms and types of financing.
3Q.How do IBFs facilitate bond offerings?
Ans. The four main service of an IBF in placing bonds are described below:
 Origination: IBF may suggest a maximum amount of bonds that should be
issued based on the company’s characteristics. The coupon rate, the
maturity and other provision decided based on the characteristics of the
issuing firm. Bond issuer must register with the SEC.
 Underwriting Bonds: Public utilities often use competitive bids to select an
IBF. Corporation typically select an IBF based on reputation and prior
working experience. Underwriting spreads on newly bonds issued are
 normally lower than issued stock. It can place large blocks with institutional
investors and less market risk.
 Distribution of Bonds: The prospectus is distributed to all potential
purchasers of the bonds and the issue is advertised to the public. The
flotation costs are typically in the range of 0.5 percent to 3 percent of the
value of the bonds issued.
 Advising: IBF acts as an adviser throughout the origination stage. It may
serve as an adviser to the issuer even after the bond placement is
completed. IBF may advice on rising long term funds for future and type of
securities to issue at that time.
4Q.How do IBFs facilitate leverage buyouts?
Ans. IBFs facilitate leveraged buyout in three ways:
Valuation: They asses the market value of the LBO firm so that IBF
purchase the firm do
not pay more than the firm’s value.
Financing: IBF arrange financing which involves raising funds and
purchasing
outstanding stock held by public. When firm may not able to afford an
LBO, IBF may
consider purchasing a portion of the firm’s asset. IBF may finance the
purchase by
issuing bond.
Advising: IBF also provide advise to the firm.
5Q.How do IBFs facilitate arbitrage?
Ans. Purchasing of undervalued shares and reselling the shares at a higher
price is called
arbitrage. IBFs work with arbitrage firms to search for under valued firms
and then
finance to buyout the firm. Sometimes arbitrage activity is referred to as a
hostile LBO.
A firm is acquired and then its individual divisions are sold off it is called
asset stripping,
sum of the parts is sometimes greater than the whole. IBF generate fee
income from
advising arbitrage firms and also receive a commission on the bonds
issued to support the arbitrage activity. IBFs provide bridge loans when fund
raising is not expected to be complete when the acquisition is initiated. IBFs
also provide advice on takeover defense maneuvers.
6Q.How do IBFs facilitate corporate restructuring?
Ans. IBFs provide advice on corporate restructuring. IBFs help firms with
the process of implementing:
 Merger: IBFs have expertise at assessing corporate
restructuring could change the valuation of business. IBFs
potential synergies that might result from combining two
business. The combination of two business may be worth more
than the sum of the values of the business if they remain
separate.
  Acquisition: IBFs help the firm if it may realize benefits from the
acquisition of the other firm. Even the acquisition firm have to
premium above the target’s market value. Acquisition require
large amount of financing, IBFs provide financing to acquisition
firms. IBFs also provide equity financing, where they become
part owner of the acquired firms.
 Divestiture: IBFs also provide advice when a firm want to sellout
or disposal a part of it or fully.

7Q. What are the Brokerage services?

Ans. Brokerage firm execute securities transactions usually one of the
following:
 Market orders: Purchase or sell securities at the market price existing
when the order reaches the exchange floor are called market orders. The
actual transaction will occur within a few minutes from the time of the
customer’s request, assuming that the is made while the markets are
open.
 Limit orders: Purchase or sell securities at a specified price or better are
called limit orders. There are two type of limit orders:

• Stop buy order

• Stop loss order
In stop buy order a investor specifies a purchase price that higher the
current
market price of the stock. In stop loss order a investor specifies a
selling price that is
below the current market price of the stock.
 Short selling: Investors can speculate on expectations of a decline in
securities price by short selling.
8Q. Full service V/S Discount brokerage service?
Ans. Full service brokerage firm: Full service brokerage firm provide investment
advice to execute transactions/orders. They maintain a long term
relationship with the customers because they provide a service that can’t
differentiate from competitors. In full service brokerage firm required
minimum opening balance.
Discount brokerage firms: Discount brokerage firm only execute security
transaction upon request. They can’t maintain long term relationship with
customers. Some discount brokerage firm may offer online brokerage
service. Many discount brokerage firms are owned by large commercial
bank.
9Q. Risk of securities firms?
Ans. There are four risks in operation of securities firms:
 Market Risk: Securities firms’ activities are linked to stock market. When
stock price are rising, there is greater volume of stock offering and increase
secondary market transactions. Securities firms take equity positions which
are bolstered when price rises. When the stock market is depressed, stock
 transactions tend to decline, causing reduction in business for securities
firms.
 Interest Rate Risk: The performance of securities firms can be sensitive to
interest rate movements because market values of bond held as investments
increase as interest rate falls and also lower interest rate encourage
investors to withdraw money from banks and invest in stocks.
 Credit Risk: Securities firms provide bridge loans and other types of credit to
corporations. The default tends increase during the periods when economic
conditions deteriorate.
 Exchange Rate Risk: Many securities firms have operations in foreign
countries. The earning remitted by foreign subsidiaries are reduced when the
foreign currencies weaken against the securities firms home currency.

What Does Derivative Mean?

In finance, a security whose price is dependent on or derived from one or more
underlying assets. The derivative itself is merely a contract between two or more
parties, with a value determined by fluctuations in the underlying asset, which could
be stocks, bonds, commodities, currencies, interest rates, and market indexes. Most
derivatives are characterized by high leverage.

Types of Derivation:

• Futures
• Forward
• Option
• Swap

What Does Futures Mean?

Futures involve a financial contract that requires the buyer to purchase an
asset (or the seller to sell an asset), such as a physical commodity or a financial
instrument, at a specific price on a predetermined date in the future. Futures
contracts detail the quality and quantity of the underlying asset; they are
standardized to facilitate trading on a futures exchange. Some futures contracts
may call for physical delivery of the asset, and others are settled in cash. The
futures markets are characterized by the ability to use very high leverage relative
to stock markets. Futures can be used either to hedge or to speculate on the price
movement of the underlying asset. For example, a producer of corn could use
futures to lock in a certain price and reduce risk (hedge). However, anybody could
speculate on the price movement of corn by going long or short using futures.

What Does Forward Contract Mean?

A cash market transaction in which delivery of the commodity
is deferred until after the contract has been made. Although the delivery is made in
the future, the price is determined on the initial trade date.

What Does Option Mean?

A financial derivative that represents a contract sold by one party
(option writer) to another party (option holder). The contract offers the buyer the
right, but not the obligation, to buy (call) or sell (put) a security or another financial
asset at an agreed-on price (the strike price) during a certain period or on a specific
date (exercise date).

What Does Swap mean?

Traditionally, the exchange of one security for another for the purpose of changing
the maturity (bonds), the quality of issues (stocks or bonds), or one's investment
objectives. Swaps include currency swaps and interest rate swaps.

Swap
If companies in different countries have regional advantages on
interest rates, a swap will benefit both firms. For example, one firm may have a
lower fixed interest rate while another has access to a lower floating interest rate.
To take advantage of this situation, the companies would do an interest rate swap.

Closing Out A Futures Position

As we discussed previously, when a trader goes long or short on a position, he can
close his position prior to expiration by executing a reversing transaction that is
exactly the same as his original trade. The clearing house views the trader as
holding a long and short position that offset each other, causing the trader's
position to be flat. This is the same as having no position at all.

Example: Closing a Futures Position

You have entered a long position in 30 December S& P 250 contracts, in August.
Come September, you decide that you want to close your position before the
contract expires. To accomplish this, you must short, or sell the 30 December S & P
250 contract. The clearing house sees your position as flat because you are now
long and short the same amount and type of contract.