Securities Operation

8/7/2019 Securities Operation

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Assignment on:

SECURITIES OPERATIONS

Course Code:FIN-3603

Course Title: Financial Markets & Institutions

Section: AGroup : E

Semester: 6th

Group Members:

Matric no. Name

B081308 . Md Rashed

B081313 . Sarowar Uddin

B081316 .Arman Talukder

B081317 .Shihab Uddin

B081339 ..Omar Faruk

B081346Mezbha Uddin

B081347 ..Ibrahim

Muzumdar

B081367 ..Saad Rahman

B081393Asraf Uddin

B081395K.M Rashedul

Alam

B081399.Mamunur Rashid

B081404.Ariful Islam

B081428.Ataus SamadB081433.Kaiser Hamed

B081452.Abu Sufian

B081453.Kazi Asadullah


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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 interestincome. 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 companys 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


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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 firms value.

Financing: IBF arrange financing which involves raising funds and

purchasing

outstanding stock held by public. When firm may not able to afford anLBO, IBF may

consider purchasing a portion of the firms 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 thenfinance 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.


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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 targets 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

customers 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 insecurities 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 cant

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 cant maintain long term relationship with

customers. Some discount brokerage firm may offer online brokerageservice. Many discount brokerage firms are owned by large commercial

bank.

9Q. Risk of securities firms?

Ans. There are four risksin 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


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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 moreunderlying assets. The derivative itself is merely a contract between two or moreparties, with a value determined by fluctuations in the underlying asset, which could

be stocks, bonds, commodities, currencies, interest rates, and market indexes. Mostderivatives 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 financialinstrument, at a specific price on a predetermined date in the future. Futurescontracts detail the quality and quantity of the underlying asset; they arestandardized to facilitate trading on a futures exchange. Some futures contractsmay call for physical delivery of the asset, and others are settled in cash. Thefutures markets are characterized by the ability to use very high leverage relativeto stock markets. Futures can be used either to hedge or to speculate on the pricemovement of the underlying asset. For example, a producer of corn could usefutures to lock in a certain price and reduce risk (hedge). However, anybody couldspeculate on the price movement of corn by going long or short using futures.

What Does Forward ContractMean?A cash market transaction in which delivery of the commodity

is deferred until after the contract has been made. Although the delivery is made inthe 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


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(option writer) to another party (option holder). The contract offers the buyer theright, but not the obligation, to buy (call) or sell (put) a security or another financialasset at an agreed-on price (the strike price) during a certain period or on a specificdate (exercise date).

What Does Swap mean?Traditionally, the exchange of one security for another for the purpose of changingthe maturity (bonds), the quality of issues (stocks or bonds), or one's investmentobjectives. Swaps include currency swaps and interest rate swaps.

SwapIf companies in different countries have regional advantages on

interest rates, a swap will benefit both firms. For example, one firm may have alower 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 PositionAs 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 isexactly the same as his original trade. The clearing house views the trader asholding a long and short position that offset each other, causing the trader'sposition to be flat. This is the same as having no position at all.

Example: Closing a Futures PositionYou 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 thecontract expires. To accomplish this, you must short, or sell the 30 December S & P250 contract. The clearing house sees your position as flat because you are nowlong and short the same amount and type of contract.

Securities Operation

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