Bhabani Shankar ParidaProduct Specialist / division

Trading Strategies from a Dealing Desk

Chart Patterns

What Are Charts? - What charts are, how to pick timeframe's, how charts are formed, and price scaling.

Support and Resistance - What support and resistance are, where they are established, and methods used.

Trend Lines - What trend lines are, scale settings, validation, angles, and more.

Introduction to Chart Patterns - A brief review of what chart patterns are, and how to recognize them.

Chart Patterns - A collection of articles describing common chart patterns.

Introduction to Candlesticks              

Indicators

Accumulation/Distribution Line - Combines price and volume to show how money may be flowing into or out of a stock.

Average Directional Index (ADX) - Shows whether a stock is trending or oscillating. Average True Range (ATR) - Measures a stock's volatility. Bollinger Band Width - Shows the distance between a stock's Bollinger Bands. Commodity Channel Index (CCI) - Shows a stock's variation from its 'typical' price. Chaikin Money Flow (CMF) - Combines price and volume to show how money may be

flowing into or out of a stock. Alternative to Accumulation/Distribution Line. Chaikin Oscillator - Combines price and volume to show how money may be flowing into or

out of a stock. Based on Accumulation/Distribution Line. Moving Average Convergence/Divergence (MACD) - Difference of two EMAs that shows a

stock's momentum and direction. Money Flow Index (MFI) - Combines a stock's 'typical' price with its volume to show how

money may be flowing into or out of the stock. On Balance Volume (OBV) - Combines price and volume in a very simple way to show how

money may be flowing into or out of a stock. Price Relative - Technical indicator that compares the performance of two stocks to each

other by dividing their price data. Rate of Change (ROC) and Momentum - Shows the speed at which a stock's price is

changing. Relative Strength Index (RSI) - Shows how strongly a stock is moving in its current direction. Stochastic Oscillator (Fast, Slow, and Full) - Shows how a stock's price is doing relative to

past movements. Fast, Slow and Full Stochastics are explained. Williams %R - Uses Stochastics to determine overbought and oversold levels.

Elliott Wave Theory

R. N. Elliott believed markets had well-defined waves that could be used to predict market direction. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock prices are governed by cycles founded upon the Fibonacci series (1-2-3-5-8-13-21…).

According to the Elliott Wave Theory, stock prices tend to move in a predetermined number of waves consistent with the Fibonacci series. Specifically, Elliott believed the market moved in five distinct waves on the upside and three distinct on the downside.

Grand Supercycle Supercycle Cycle Primary Intermediate Minor Minute Minuette Sub-Minuette

Credit Event Default Rates Credit Ratings Historical Default Rates Cumulative and Marginal Default Rates Transition Probabilities

1. Predicting Default Probabilities Recovery Rates

1. The Bankruptcy Process Estimates of Recovery Rates Assessing Corporate and Sovereign Rating

1. Corporate Default

2. Sovereign Default

Credit Event                             

Credit Ratings                         

Credit Ratings                         

Measuring Default Risk from Market Prices ..

Corporate Bond Prices

Spreads and Default Risk

Risk Premium

The Cross-Section of Yield Spreads

Credit Exposure

Credit Exposure by Instrument

1. Loans or Bonds

2. Guarantees

3. Commitments

4. Swaps or Forwards

5. Long Options

6. Short Options Exposure Modifiers

1. Marking to Market

2. Exposure Limits

3. Netting Arrangements

4. Time Puts                      

Netting agreements

Netting agreements: When payments between counterparties are offset to determine the “net amount:”

Only one party makes a “net” payment.

For example, assume Counterparty X owes $1 million to Counterparty Y and Counterparty Y owes $800,000 to Counterparty X. If they net, Counterparty X pays $200,000. Further, if Counterparty X defaults, Counterparty Y only loses $200,000 instead of the full $1 million.

Cross-product netting: A provision that allows counterparties to net payment across different products

                

Credit Derivatives                   

Credit Default Swaps Total Return Swaps Credit-Linked Notes                     

Credit Derivatives                   

Credit Derivatives                   

Credit Derivatives                   

ISDA events that trigger a credit event.                   

Bankruptcy

Obligation Acceleration: becomes due early

Obligation Default

Failure to Pay

Repudiation/Moratorium: disclaimed or challenges (e.g., governmental authority disaffirms)

Restructuring: debatable, definitions vary. ISDA revised definition in 2001.LO 53.2: List the ISDA events that trigger a default swap.

A credit downgrade by an agency is (e.g., BBB to BB+) is not a default event

Credit Derivatives                   

TOTAL RETURN SWAP                   

CREDIT LINKED NOTE                  

securitization

Securitization

• Securitization:

1. Pooled assets

2. Securities issued to investors –the securities represent interests in the asset pool.

3. Securities collateralized by the principal and interest (P&I) income on the original asset pool.

4. Cash flows generated by underlying assets fund principal and interest on the securities (and transaction costs)

5. Asset-backed securities (ABS): securities themselves are “backed” or supported by the assets

Securitization

What can be securitized?

1. Any current or future cash flow that is generated by assets can be securitized.

2. Securitization market has grown and become more sophisticated

3. More and more asset types

4. Most common: mortgage loans, auto loans, credit card receivables, student loans, equipment leases, aircraft

The role of each participant

The role of each participant involved in the securitization process.

Sponsor: institution that starts the securitization. May not own the asset sold in the securitization; may just advise.

Originator/transferor: original owner of asset. Wants to monetize credit-sensitive assets.

Asset purchaser/Transferee/Securitized Product Issuer: Third-party legal entity that buys the asset from the originator. This transferee is “inserted between” the originator (original seller) and the buyer.

If structure is create solely for the purpose of buying assets in a securitization, it is called a Special Purpose Entity (SPE). T

SPE can be a trust or a corporation.

First to Default Basket

A FDB works in a similar manner to a single-name CDS with a crucial difference - the protection seller of a FTD basket provides protection against the first reference entity that experiences a credit event from a basket of more than one reference entity. The protection seller, therefore, assumes the "first-to-default" risk on a basket of credits.

The protection buyer views a basket swap as a lower cost method of hedging multiple credits (or, in effect, providing an equity cushion to this part of its portfolio). . FTD baskets can also be offered to investors in the form of credit-linked notes (CLNs).

CDS Swaptions

Credit default swaptions are options to enter into a CDS contract at no cost, with a given premium rate called the strike, paid with a single upfront payment. An option to buy credit protection is called a payer swaption and an option to sell credit protection is called a receiver swaption. Just as interest rate swaptions provide protection against yield curve moves, a credit default swaption protects against credit curve moves. But the key difference is that for the latter, the underlying instrument may default before the swaption maturity. In such a case there are three possibilities depending on the contract:

If nothing is specified in the contract, the swaption can still be exercised (which makes more sense with CDS indices because there is still a remaining part even after the first default events).

The swaption can have an acceleration clause requiring the option to be exercised immediately after a default.

The swaption can be knocked out or cancelled. If the underlying instrument does not default before swaption maturity, the final

value will be:Payer swaption: RPV01*.max(Swap Rate - Strike,0)Receiver swaption: RPV01*.max(Strike - Swap Rate,0)

*RPV01i ,t = present value on day t of a 1 basis point stream of premia which terminates at maturity or default, whichever occurs first. The calculation of RPV01i ,t requires a CDS pricing model.

The role of each participant

Underwriter: markets, distributes securities.

Rating agencies (e.g., S&P, Moody‟s, Fitch) may rate structured product. Typically rate both the issue (instrument) and the issuer (the institution or company).

Law firms: Provides essential „sound opinion‟

Regulatory agencies: In the United States, the SEC

External risk transfer and risk finance counterparties: Firms that may act as counterparties in the securitization.

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