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5. Alternative Investments
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5. Alternative Investments
by Frank J. Fabozzi
Handbook of Finance: Financial Markets and Instruments
Copyright
About the Editor
Contributors
Preface
TOPIC CATEGORIES
Guide to the Handbook Handbook of Finance
ORGANIZATION
TABLE OF CONTENTS
INDEX
CHAPTERS
1. Market Players andMarkets
1. Overview of Financial Instruments and Financial Markets
1.1. ISSUERS AND INVESTORS
1.2. DEBT VERSUS EQUITY INSTRUMENTS
1.3. CHARACTERISTICS OF DEBT INSTRUMENTS
1.3.1. Maturity
1.3.2. Par Value
1.3.3. Coupon Rate
1.3.4. Provisions for Paying off Debt Instruments
1.3.5. Options Granted to Bondholders
1.4. FINANCIAL MARKETS
1.4.1. Role of Financial Markets
1.4.2. Classification of Financial Markets
1.5. DERIVATIVE MARKETS
1.5.1. Types of Derivative Instruments
1.6. SUMMARY
1.7. REFERENCES
2. Fundamentals of Investing
2.1. SETTING INVESTMENT OBJECTIVES
2.2. ESTABLISHING AN INVESTMENT POLICY
2.2.1. Asset Classes
2.2.2. Risks Associated with Investing
2.3. SELECTING A PORTFOLIO STRATEGY
2.4. CONSTRUCTING THE PORTFOLIO
2.4.1. Constructing an Indexed Portfolio
2.4.2. Constructing an Active Portfolio
2.5. EVALUATING PERFORMANCE
2.6. SUMMARY
2.7. REFERENCES
3. The American Banking System
3.1. GLOBAL BANKING CONSTANTS
3.2. STRUCTURE OF THE POST-DEPRESSION BANKING SECTOR
3.2.1. Features of the "Old Structure" Still in Place
3.2.2. Product Constraints in American Banking
3.2.3. Geographic Constraints in American Banking
3.2.4. Interest Rate Ceilings on Bank Deposits
3.2.5. Reserve Requirements
3.2.6. Relationship Banking
3.3. FORCES FOR CHANGE IN AMERICAN BANKING IN THE 1980s AND 1990s
3.3.1. External Competition
3.3.2. Volatility, Risk, and Failure
3.4. DEREGULATION, REREGULATION, AND TODAY'S EVOLVING BANKING SYSTEM
3.4.1. Deposit Deregulation
3.4.2. Risk-Based Capital Standards
3.4.3. Technological Progress and Bank Developments
3.4.4. Product Deregulation
3.4.5. Geographic Deregulation
3.4.6. Results of Geographic Deregulation
3.5. THE AMERICAN BANKING SYSTEM WILL CONTINUE TO BE UNIQUE
3.5.1. The Outlook for Dual Banking
3.5.2. Continued Technological Advances in Risk Control
3.5.3. The Future U.S. Regulatory Structure
3.5.4. The Continued Separation of Depositories from Nonfinancial Firms
3.6. SUMMARY
3.7. REFERENCES
4. Monetary Policy: How the Fed Sets, Implements, and Measures Policy Choices
4.1. KEY ECONOMIC INFLUENCES ON FED POLICY
4.2. IMPLEMENTING MONETARY POLICY: THE TRANSMISSION PROCESS
4.3. THE IMPACT OF MONETARY POLICY: ITS DECLINING DIRECT INFLUENCE
4.4. GLOBAL CREDIBILITY: THE CENTRAL BANKER'S RESPONSIBILITY
4.5. SUMMARY
4.6. REFERENCES
5. Institutional Aspects of the Securities Markets
5.1. THE STOCK MARKET EFFICIENCY QUESTION
5.2. SOME HISTORY
5.3. THE ROLE OF FINANCIAL INFORMATION IN THE MARKET EFFICIENCY QUESTION
5.4. THE ROLE OF ORGANIZED MARKETS IN THE MARKET EFFICIENCY QUESTION
5.5. THE ROLE OF TRADING IN THE MARKET EFFICIENCY QUESTION
5.6. THE ROLE OF SECURITIES MARKET REGULATION IN THE MARKET EFFICIENCY QUESTION
5.7. THE ROLE OF STOCK MARKET INDICATORS IN THE MARKET EFFICIENCY QUESTION
5.8. SUMMARY
5.9. REFERENCES
6. Investment Banking
6.1. TYPES OF INVESTMENT BANKS
6.1.1. Financial Holding Companies
6.1.2. Full-Service Investment Banks
6.1.3. Boutique Investment Banks
6.2. INVESTMENT BANKING BUSINESS
6.2.1. Investment Banking
6.2.2. Trading and Principal Investments
6.2.3. Asset Management and Securities Services
6.3. TRENDS AND CHALLENGES
6.3.1. The Evolving Investment Banking Markets
6.3.2. Challenges and Opportunities
6.3.3. Success Factors
6.4. SUMMARY
6.5. REFERENCES
7. Securities Innovation
7.1. DEBT INNOVATIONS
7.1.1. Risk Reallocation
7.1.2. Enhanced Liquidity
7.1.3. Reductions in Agency Costs
7.1.4. Reductions in Transaction Costs
7.1.5. Reductions in Taxes
7.1.6. Circumvention of Regulatory Restrictions or Other Constraints
7.2. STRUCTURED PRODUCTS
7.2.1. What Structured Products Are Designed to Achieve
7.2.2. Taking a View on Interest Rates
7.2.3. Transferring Default Risk
7.3. HYBRID CAPITAL SECURITIES
7.3.1. Trust Preferred Hybrid Capital Securities
7.3.2. Newer Hybrid Structures
7.3.3. Substituting Debt for Equity
7.4. PREFERRED STOCK INNOVATIONS
7.4.1. Managing Interest Rate Risk with Preferred Stock
7.4.2. More Desirable Pattern of Cash Flows
7.4.3. Other Preferred Stock Innovations
7.5. CONVERTIBLE SECURITIES INNOVATIONS
7.5.1. Reallocation of Investment Risk/More Desirable Pattern of Cash Flows
7.5.2. Reductions in Taxes
7.5.3. Reductions in Agency Costs
7.5.4. Reductions in Transaction Costs
7.5.5. Satisfying Regulatory Restrictions
7.5.6. Example of a Securities Innovation that Solved a Difficult Corporate Finance Problem
7.5.7. Dividend Policy
7.6. COMMON EQUITY INNOVATIONS
7.6.1. Reallocation of Investment Risk
7.6.2. Reductions in Agency Costs
7.6.3. Reductions in Taxes
7.7. SUMMARY
7.8. REFERENCES
8. An Arbitrage Perspective of the Purpose and Structure of Financial Markets
8.1. RISK SHARING
8.2. STRUCTURE OF FINANCIAL MARKETS
8.3. ARBITRAGE: PURE VERSUS RELATIVE
8.4. FINANCIAL INSTITUTIONS: ASSET TRANSFORMERS AND BROKER-DEALERS
8.5. PRIMARY AND SECONDARY MARKETS
8.6. MARKET PLAYERS: HEDGERS VERSUS SPECULATORS
8.7. SUMMARY
8.8. REFERENCES
9. Complete Markets
9.1. ECONOMIC ORIGINS OF COMPLETE MARKETS
9.2. COMPLETE MARKETS IN FINANCE
9.3. SECURITIES PRICING IN COMPLETE MARKETS
9.4. PRICE INFORMATION IN COMPLETE MARKETS
9.5. MISSING MARKETS AND FINANCIAL INNOVATION
9.6. THE MEAN-VARIANCE THEORY IN COMPLETE MARKETS
9.7. SUMMARY
9.8. REFERENCES
10. Introduction to Islamic Finance
10.1. WHAT IS ISLAMIC FINANCE?
10.2. PROHIBITIONS AND THEIR IMPLICATIONS
10.2.1. Riba
10.2.2. Ina versus Murabaha
10.2.3. Gharar
10.2.4. Forwards and Insurance
10.3. NOMINATE CONTRACTS: FROM BASIC BUILDING BLOCKS TO COMPLEX STRUCTURES
10.3.1. Murabaha
10.3.2. Ina and Tawarruq
10.3.3. Securitization and Ijara
10.3.4. Sukuk
10.3.5. Partnerships: Musharaka and Mudaraba
10.3.6. Benchmarking to LIBOR
10.3.7. Short-Term Sukuk and Salam
10.3.8. Parallel Salam
10.3.9. Miscellaneous Structures
10.3.10. Derivatives
10.3.11. The First U.S. Sukuk
10.4. SUMMARY
10.5. REFERENCES
2. Common Stock
11. The U.S. Equity Markets
11.1. EXCHANGE MARKET STRUCTURES
11.1.1. Order-Driven Markets
11.1.2. Quote-Driven Markets
11.1.3. Order-Driven versus Quote-Driven Markets
11.2. CHANGES IN EXCHANGE OWNERSHIP AND TRADING STRUCTURES
11.3. THE U.S. STOCK MARKETS: EXCHANGES AND OTC MARKETS
11.3.1. National Exchanges
11.3.2. Nasdaq Stock Market: The OTC Market
11.3.3. Other OTC Markets
11.3.4. Options Markets
11.3.5. Other Stock Exchange Markets
11.4. OFF-EXCHANGE MARKETS/ALTERNATIVE ELECTRONIC MARKETS
11.4.1. Electronic Communications Networks
11.4.2. Alternative Trading Systems
11.5. THE CURRENT NYSE STOCK MARKET
11.5.1. Background
11.5.2. The Prelude to the NYSE Hybrid Market
11.5.3. The NYSE Hybrid Market
11.5.4. Impact of the NYSE Hybrid Market
11.5.5. Euronext NV
11.5.6. American Stock Exchange
11.6. EVOLVING STOCK MARKET PRACTICES
11.6.1. Order-Handling Rules
11.6.2. Smart Order Routers
11.6.3. SEC Regulation NMS
11.6.4. Internalization
11.6.5. Alternative Display Facility
11.6.6. Trade-Reporting Facility
11.6.7. Direct Market Access
11.6.8. Algorithmic Trading
11.7. BASIC FUNCTIONING OF STOCK MARKETS
11.7.1. Price Reporting
11.7.2. Regulation
11.7.3. Clearance and Settlement
11.7.4. Tick Size
11.7.5. Short-Selling Rules
11.7.6. Block Trades
11.7.7. Commissions
11.8. SUMMARY
11.9. APPENDIX: KEY DATES
11.10. ACKNOWLEDGMENTS
11.11. REFERENCES
12. The Information Content of Short Sales
12.1. SHORT SALES: REPORTING, FREQUENCY, AND CONSTRAINTS
12.2. ACADEMIC THEORY VERSUS THE TECHNICAL ANALYST'S VIEW
12.3. THE EMPIRICAL EVIDENCE
12.3.1. Predicting Short-Term Returns with Short Interest: The Early Evidence
12.3.2. Predicting Short-Term Returns with and without Hedging and Traded Options
12.3.3. Predicting Long-Term Returns with Short Interest
12.3.4. Determinants of Short Interest: Strategies, Profitability, and Information Content
12.3.5. The Costs of Short Selling as Limits to Arbitrage
12.3.6. Short-Sales Transactions and the Implications of More Frequent Reporting
12.4. SOME PRACTICAL IMPLICATIONS
12.5. SUMMARY
12.6. REFERENCES
13. Emerging Stock Market Investment
13.1. ECONOMIES IN TRANSITION
13.1.1. Emerging Market Countries
13.1.2. The Process of Emergence
13.1.3. Why the Process Will Continue
13.1.4. Why Progress Is Uneven
13.2. INVESTMENT CHARACTERISTICS
13.2.1. Factors Favoring Higher Returns
13.2.2. Factors Favoring Lower Portfolio Risks
13.2.3. Implementation Obstacles
13.3. INVESTMENT APPROACH
13.3.1. Investment Strategies
13.4. RELATED RESEARCH
13.5. SUMMARY
13.6. REFERENCES
14. Listed Equity Options and Futures
14.1. LISTED EQUITY OPTIONS
14.1.1. Basic Features of Listed Options
14.2. EQUITY FUTURES CONTRACTS
14.2.1. Stock Index Futures Contracts
14.2.2. Single-Stock Futures
14.3. SUMMARY
14.4. REFERENCES
15. OTC Equity Derivatives
15.1. PRODUCT FUNDAMENTALS AND APPLICATIONS
15.2. OTC OPTIONS AND WARRANTS
15.2.1. First-Generation OTC Options
15.2.2. Exotics: Second-Generation OTC Options
15.2.3. Using Exotics
15.3. EQUITY-LINKED DEBT INVESTMENTS
15.4. EQUITY SWAPS
15.5. SUMMARY
15.6. REFERENCES
16. Volatility Derivatives
16.1. REALIZED VOLATILITY DERIVATIVE CONTRACTS
16.1.1. Illustration of the Computation of the Settlement Price of a Realized Volatility Swap
16.1.2. CBOE Futures Exchange Realized Volatility Futures Contract
16.1.3. Volatility versus Variance Contracts
16.1.4. Expected Return/Risk Management Applications
16.2. IMPLIED VOLATILITY DERIVATIVES CONTRACTS
16.2.1. Illustration of How to Estimate VIX Futures Price
16.2.2. Expected Return/Risk Management Applications
16.2.3. CBOE VIX Options
16.3. SUMMARY
16.4. APPENDIX: CONSTRUCTION OF THE CBOE'S MARKET VOLATILITY INDEX (VIX)
16.5. REFERENCES
3. Fixed Income Instruments
17. Bonds: Investment Features and Risks
17.1. SECTORS OF THE BOND MARKET
17.2. FEATURES OF BONDS
17.2.1. Maturity
17.2.2. Par Value
17.2.3. Coupon Rate
17.2.4. Accrued Interest
17.2.5. Provisions for Paying Off Bonds
17.2.6. Options Granted to Bondholders
17.2.7. Currency Denomination
17.3. YIELD MEASURES
17.3.1. Current Yield
17.3.2. Yield to Maturity
17.3.3. Yield to Call
17.3.4. Yield to Put
17.3.5. Yield to Worst
17.3.6. Cash Flow Yield
17.4. RISKS ASSOCIATED WITH INVESTING IN BONDS
17.4.1. Interest Rate Risk
17.4.2. Call and Prepayment Risk
17.4.3. Credit Risk
17.4.4. Liquidity Risk
17.4.5. Exchange Rate or Currency Risk
17.4.6. Inflation or Purchasing Power Risk
17.5. SUMMARY
17.6. REFERENCES
18. Residential Mortgages
18.1. OVERVIEW OF MORTGAGES
18.1.1. Key Attributes that Define Mortgages
18.1.2. Prepayments and Prepayment Penalties
18.2. MORTGAGE LOAN MECHANICS
18.3. RISKS ASSOCIATED WITH MORTGAGES AND MORTGAGE PRODUCTS
18.3.1. Prepayment Risk
18.3.2. Credit and Default Risk
18.4. SUMMARY
18.5. REFERENCES
19. Reverse Mortgages
19.1. HOW A REVERSE MORTGAGE WORKS
19.2. PROGRAMS
19.2.1. HECM Program
19.2.2. Fannie Mae Home Keeper
19.2.3. Proprietary Products
19.3. SUMMARY
19.4. REFERENCES
20. U.S. Treasury Securities
20.1. TYPES OF MARKETABLE TREASURY SECURITIES
20.1.1. Fixed-Principal Treasury Securities
20.2. TREASURY AUCTION PROCESS
20.3. SECONDARY MARKET
20.3.1. Price Quotes for Treasury Bills
20.3.2. Quotes on Treasury Coupon Securities
20.4. STRIPPED TREASURY SECURITIES
20.5. SUMMARY
20.6. REFERENCES
21. Federal Agency Securities
21.1. FEDERALLY RELATED INSTITUTIONS
21.1.1. Tennessee Valley Authority
21.2. GOVERNMENT-SPONSORED ENTERPRISES
21.2.1. Types and Features of GSE Securities
21.2.2. Programmatic GSE Issuance Platforms
21.2.3. Description of GSEs and Securities Issued
21.2.4. Fannie Mae
21.2.5. Freddie Mac
21.2.6. Federal Home Loan Bank System (FHL Banks)
21.2.7. The Federal Agricultural Mortgage Corporation (Farmer Mac)
21.2.8. Federal Farm Credit Bank System (Farm Credit)
21.2.9. Sallie Mae
21.2.10. Financing Corporation (FICO)
21.2.11. Resolution Trust Corporation (REFCORP)
21.2.12. Farm Credit Financial Assistance Corporation (FACO)
21.2.13. Repo Transactions Market in GSE Debt Collateral
21.2.14. Credit Risk
21.2.15. Yield Spreads
21.3. SUMMARY
21.4. REFERENCES
22. Municipal Securities
22.1. ISSUERS AND ISSUANCE PROCEDURES
22.2. TAX-EXEMPT AND TAXABLE MUNICIPAL SECURITIES
22.3. TAX PROVISIONS AFFECTING MUNICIPAL SECURITIES
22.3.1. Treatment of Original-Issue Discount
22.3.2. Alternative Minimum Tax
22.3.3. Deductibility of Interest Expense Incurred to Acquire Municipals
22.4. TYPES OF MUNICIPAL SECURITIES
22.4.1. Tax-Backed Debt
22.4.2. Revenue Bonds
22.4.3. Special Bond Structures
22.5. MUNICIPAL BOND YIELDS
22.6. FLOATING-RATE MUNICIPAL SECURITIES
22.7. RISKS ASSOCIATED WITH INVESTING IN MUNICIPAL BONDS
22.8. SUMMARY
22.9. REFERENCES
23. Corporate Fixed Income Securities
23.1. CORPORATE BONDS
23.1.1. Secured Debt and Unsecured Debt
23.1.2. Provisions for Paying Off Bonds
23.1.3. Speculative-Grade Bonds
23.1.4. Secondary Market
23.1.5. Private-Placement Market for Corporate Bonds
23.2. MEDIUM-TERM NOTES
23.2.1. Primary Market
23.2.2. Structured MTNs
23.3. PREFERRED STOCK
23.3.1. Tax Treatment of Dividends
23.4. SUMMARY
23.5. REFERENCES
24. The Eurobond Market
24.1. EUROBONDS
24.2. FOREIGN BONDS
24.3. EUROBOND INSTRUMENTS
24.3.1. Conventional Bonds
24.3.2. Floating-Rate Notes
24.3.3. Zero-Coupon Bonds
24.3.4. Convertible Bonds
24.3.5. Eurowarrants
24.4. THE ISSUING PROCESS: MARKET PARTICIPANTS
24.4.1. The Borrowing Parties
24.4.2. The Underwriting Lead Manager
24.4.3. The Co-lead Manager
24.4.4. Investors
24.5. FEES, EXPENSES, AND PRICING
24.5.1. Fees
24.5.2. Expenses
24.5.3. Pricing
24.6. ISSUING THE BOND
24.6.1. The Gray Market
24.6.2. Alternative Issue Procedures
24.7. COVENANTS
24.7.1. Negative Pledge
24.7.2. Disposal of Assets Covenant
24.7.3. Gearing Ratio Covenant
24.8. TRUST SERVICES
24.8.1. Depositary
24.8.2. Paying Agent
24.8.3. Registrar
24.8.4. Trustee
24.8.5. Custodian
24.8.6. Fiscal Agent
24.8.7. Listing Agent
24.9. FORM OF THE BOND
24.9.1. Temporary Global Note
24.9.2. Permanent Global Note
24.9.3. Definitive Note
24.9.4. Registered Bonds
24.10. CLEARING SYSTEMS
24.11. SECONDARY MARKET
24.12. LEGAL AND TAX ISSUES
24.13. EUROBONDS AND SWAP TRANSACTIONS
24.14. SETTLEMENT
24.15. SUMMARY
24.16. REFERENCES
25. The Euro Government Bond Market
25.1. THE EUROZONE: THE FASTEST-GROWING GOVERNMENT BOND MARKET
25.1.1. Country Breakdown
25.1.2. Maturity Breakdown
25.2. EURO GOVERNMENT BOND PRIMARY MARKET
25.2.1. Measures to Improve Market Liquidity
25.2.2. Bond Auctions: Sizes, Maturities, and Types of Bond
25.2.3. Exchange Auctions and Buybacks
25.2.4. Other Key Characteristics of the Primary Markets
25.3. SECONDARY MARKET AND INTRA-EURO SPREAD DETERMINANTS
25.3.1. Sovereign Credit Ratings
25.3.2. Other Intra-Euro Bond Spread Drivers
25.3.3. Bond Swap Spreads and Their Relationship to Peripheral Spreads
25.3.4. Market Volatility as a Spread Driver
25.3.5. Other Related Markets
25.3.6. Interest Rate Swaps as the Benchmark Curve for Eurozone Government Bonds
25.4. SUMMARY
25.5. REFERENCES
26. The German Pfandbrief and European Covered Bonds Market
26.1. THE PFANDBRIEF MARKET
26.2. HISTORY OF THE PFANDBRIEF
26.3. KEY FEATURES OF INVESTOR INTEREST
26.3.1. Reduction of Credit Risk
26.3.2. Liquidity
26.4. MARKET INSTRUMENTS
26.4.1. Global Pfandbriefe
26.4.2. Structured Pfandbriefe
26.4.3. MTN and CP Programs
26.4.4. Clearing
26.5. KEY DIFFERENCES BETWEEN COVERED BONDS AND ABSs OR MBSs
26.6. MARKET PARTICIPANTS
26.7. THE CREDIT RATING APPROACH TOWARDS PFANDBRIEFE
26.8. THE EUROPEAN COVERED BOND MARKET
26.8.1. France
26.8.2. Spain
26.8.3. Luxembourg
26.8.4. Ireland
26.9. SUMMARY
26.10. REFERENCES
27. Commercial Paper
27.1. CHARACTERISTICS OF COMMERCIAL PAPER
27.1.1. Direct Paper versus Dealer Paper
27.1.2. The Secondary Market
27.2. COMMERCIAL PAPER CREDIT RATINGS
27.2.1. Yields on Commercial Paper
27.3. ASSET-BACKED COMMERCIAL PAPER
27.3.1. Legal Structure
27.3.2. Basic Types of ABCP Conduits
27.3.3. Credit and Liquidity Enhancement
27.3.4. Extendable Note Commercial Paper
27.3.5. The ABCP Market Outside the United States
27.3.6. Foreign Currency Denominated Commercial Paper
27.4. SUMMARY
27.5. REFERENCES
28. Money Market Calculations
28.1. DAY COUNT CONVENTIONS
28.1.1. Day Count Basis
28.1.2. Actual/Actual
28.1.3. Actual/360
28.1.4. 30/360
28.2. DISCOUNT INSTRUMENTS
28.2.1. Yield on a Bank Discount Basis
28.2.2. CD Equivalent Yield
28.2.3. Bond-Equivalent Yield
28.3. INTEREST AT MATURITY INSTRUMENTS
28.3.1. Converting a CD Yield into a Simple Yield on a 365-Day Basis
28.3.2. Converting a Periodic Interest Rate into an Effective Annual Yield
28.4. SUMMARY
28.5. REFERENCES
29. Convertible Bonds
29.1. CONVERTIBLE BOND MARKET
29.2. GENERAL CHARACTERISTICS OF CONVERTIBLE BONDS
29.3. ANALYZING CONVERTIBLE SECURITIES: THE TRADITIONAL APPROACH
29.3.1. Conversion Value versus Straight Value
29.3.2. Market Conversion Price
29.3.3. Measuring the Convertible Bond's Income Advantage
29.3.4. Measuring the Convertible Bond's Downside Risk
29.4. CONVERTIBLE BONDS AS AN INVESTMENT
29.5. OTHER TYPES OF CONVERTIBLES
29.5.1. Mandatory Convertibles
29.5.2. Reverse Convertibles
29.6. CONVERTIBLE BOND ARBITRAGE
29.7. SUMMARY
29.8. REFERENCES
30. Syndicated Loans
30.1. OVERVIEW OF THE SYNDICATED LOAN
30.1.1. Types of Syndications
30.2. THE SYNDICATION PROCESS
30.2.1. The Information Memo or "Bank Book"
30.2.2. The Loan Investor Market
30.3. PUBLIC VERSUS PRIVATE
30.3.1. CREDIT RISK: AN OVERVIEW
30.3.2. Default Risk
30.3.3. Loss-Given-Default Risk
30.4. SYNDICATING A LOAN BY FACILITY
30.5. PRICING A LOAN IN THE PRIMARY MARKET
30.5.1. Pricing Loans for Bank Investors
30.5.2. Pricing Loans for Institutional Players
30.6. MARK-TO-MARKET'S EFFECT
30.7. TYPES OF SYNDICATED LOAN FACILITIES
30.8. SECOND-LIEN LOANS
30.9. COVENANT-LITE LOANS
30.10. LENDER TITLES
30.11. SECONDARY SALES
30.11.1. Assignments
30.11.2. Primary Assignments
30.11.3. Participations
30.12. DERIVATIVES—LOAN CREDIT DEFAULT SWAPS
30.13. PRICING TERMS
30.13.1. Rates
30.13.2. Fees
30.13.3. Voting Rights
30.14. COVENANTS
30.15. MANDATORY PREPAYMENTS
30.16. COLLATERAL
30.16.1. Springing Liens/Collateral Release
30.16.2. Change of Control
30.16.3. Asset-Based Lending
30.16.4. Loan Math: The Art of Spread Calculation
30.17. SUMMARY
30.18. REFERENCES
31. Emerging Markets Debt
31.1. EMERGING MARKET DEBT INSTRUMENTS
31.1.1. Emerging Market External Debt
31.1.2. Emerging Market Local Debt
31.1.3. Emerging Market Corporate Debt
31.1.4. Emerging Market Credit Derivatives
31.1.5. Emerging Market Bond Indices
31.2. SOVEREIGN CREDIT ANALYSIS
31.2.1. Economic Considerations
31.2.2. Political Considerations
31.2.3. Willingness to Pay
31.2.4. Sovereign Credit Perspective
31.3. SUMMARY
31.4. REFERENCES
32. Introduction to Mortgage-Backed Securities
32.1. CREATING DIFFERENT TYPES OF MBS
32.1.1. Agency MBS Creation
32.1.2. Private-Label Securitization
32.2. MBS TRADING
32.2.1. MBS Market Structure
32.2.2. Financing and the Dollar Roll Market
32.3. CASH FLOW STRUCTURING
32.4. SUMMARY
32.5. REFERENCES
33. Structuring Collateralized Mortgage Obligations and Interest-Only/ Principal-Only Securities
33.1. NON-CASH-FLOW ASPECTS OF CMOs
33.2. COLLATERALIZED MORTGAGE OBLIGATIONS AS RULES
33.3. PRINCIPAL-PAY TYPES
33.4. INTEREST-PAY TYPES
33.5. SEQUENTIAL BONDS
33.6. PRO RATA BONDS
33.7. SCHEDULED BONDS
33.8. SEQUENTIAL PACs AND OTHER COMBINATIONS
33.9. INTEREST ONLY AND PRINCIPAL ONLY
33.10. SENIOR/SUBORDINATED STRUCTURES
33.11. SUMMARY
33.12. REFERENCES
34. Commercial Mortgage-Backed Securities
34.1. INVESTMENT CHARACTERISTICS OF TRADITIONAL (CASH) CMBS
34.2. BASIC COMMERCIAL LOAN AND CMBS DEAL STRUCTURES
34.2.1. Typical Loan Features
34.2.2. Cash Flow
34.2.3. CMBS Bond Structure
34.2.4. Super-Senior and Super-Duper Senior Bonds
34.2.5. CMBS Relative Value
34.3. RISK CHARACTERISTICS OF COMMERCIAL REAL ESTATE COLLATERAL
34.3.1. Property Types
34.3.2. Diversification
34.3.3. Geography
34.3.4. Measurement and Analysis of Diversification
34.3.5. Prepayments
34.4. STRUCTURAL NUANCES OF CMBSs
34.4.1. ARD Loans
34.4.2. Appraisal Reduction
34.4.3. Servicing and Conflicts of Interest
34.4.4. Interest Shortfalls and Recovery of Advances
34.4.5. A/B Notes and Mezzanine Loans
34.4.6. Additional Debt
34.5. SUMMARY
34.6. REFERENCES
35. Nonmortgage Asset-Backed Securities
35.1. CREDIT CARD RECEIVABLE-BACKED SECURITIES
35.1.1. Cash Flow
35.1.2. Performance of the Portfolio of Receivables
35.2. EARLY AMORTIZATION TRIGGERS
35.3. AUTO LOAN-BACKED SECURITIES
35.3.1. Cash Flows and Prepayments
35.3.2. Structures
35.4. STUDENT LOAN ASSET-BACKED SECURITIES
35.4.1. Collateral
35.4.2. Structures
35.5. SBA LOAN-BACKED SECURITIES
35.6. AIRCRAFT LEASE-BACKED SECURITIES
35.6.1. Aircraft Leasing
35.6.2. Servicing
35.6.3. Defaults
35.6.4. Enhancement Levels
35.7. FRANCHISE LOAN-BACKED SECURITIES
35.7.1. Security Characteristics
35.7.2. Major Sectors
35.7.3. Risk Considerations
35.8. RATE REDUCTION BONDS
35.8.1. Structure
35.8.2. Enhancement Levels
35.8.3. Unique Risks
35.9. SUMMARY
35.10. REFERENCES
36. Synthetic Asset-Backed Securities
36.1. CREDIT DERIVATIVES AND ABS MARKETS
36.2. PAY-AS-YOU-GO CDS
36.3. MARKET CONSIDERATIONS
36.4. ABS CDS AND CASH BOND VALUATION
36.5. SUMMARY
36.6. REFERENCES
37. Catastrophe Bonds
37.1. CATASTROPHE RISK MANAGEMENT
37.1.1. Traditional Reinsurance
37.1.2. Catastrophe Risk Layers
37.2. CAPITAL MARKET DEVELOPMENTS
37.2.1. Government Initiatives
37.2.2. Securitization of Catastrophe Risk
37.3. STRUCTURE OF CATASTROPHE BONDS
37.4. RATING AGENCY AND MODELING CONSIDERATIONS
37.4.1. An Uncorrelated Asset Class
37.5. MARKET DEVELOPMENTS
37.6. MARKET PARTICIPANTS
37.7. SUMMARY
37.8. ACKNOWLEDGMENTS
37.9. REFERENCES
38. Collateralized Debt Obligations
38.1. UNDERSTANDING CDOs
38.1.1. Four Attributes of a CDO
38.1.2. A CDO Structural Matrix
38.1.3. Parties to a CDO
38.2. CASH FLOW CDOs
38.2.1. Distribution of Cash Flows
38.2.2. Restrictions on Management: Safety Nets
38.2.3. Credit Ratings
38.2.4. Call Provisions in CDO Transactions
38.3. SYNTHETIC ARBITRAGE CDOs
38.3.1. Full-Capital Structure Synthetic Arbitrage CDOs
38.3.2. Single-Tranche CDOs
38.3.3. Standard Tranches of CDS Indices
38.4. SUMMARY
38.5. REFERENCES
39. Interest Rate Futures and Forward Rate Agreements
39.1. SHORT-TERM INTEREST RATE FUTURES CONTRACTS
39.1.1. Eurodollar Futures
39.1.2. Fed Funds Futures Contract
39.2. LONG-TERM INTEREST RATE FUTURES CONTRACTS
39.2.1. Treasury Bond Futures
39.2.2. Swap Futures Contracts
39.2.3. 10-Year Municipal Note Index Futures Contract
39.3. FORWARD RATE AGREEMENTS
39.3.1. FRA Basics
39.3.2. FRA Mechanics
39.4. SUMMARY
39.5. REFERENCES
40. Interest Rate Swaps
40.1. THE PLAIN VANILLA SWAP
40.1.1. Swap Payments versus Cash Flows
40.1.2. Swap Quote Conventions
40.1.3. Entering Into a Swap and Counterparty Risk
40.2. RISK/RETURN CHARACTERISTICS OF AN INTEREST RATE SWAP
40.3. INTERPRETING A SWAP POSITION
40.3.1. Package of Futures (Forward) Contracts
40.3.2. Package of Cash Market Instruments
40.4. DESCRIBING THE COUNTERPARTIES TO A SWAP
40.5. BEYOND THE PLAIN VANILLA SWAP
40.6. SUMMARY
40.7. REFERENCES
41. Interest Rate Options and Related Products
41.1. BASIC OPTION CONTRACT
41.2. EXCHANGE-TRADED VERSUS OTC OPTIONS
41.3. FUTURES OPTIONS
41.4. OVER-THE-COUNTER INTEREST RATE OPTIONS
41.4.1. Options on a Specific Security
41.4.2. Spread Options
41.5. COMPOUND OPTIONS
41.6. CAPS AND FLOORS
41.6.1. Caps
41.6.2. Floors
41.6.3. Collars
41.6.4. Risk and Return Characteristics
41.7. SUMMARY
41.8. REFERENCES
42. Introduction to Credit Derivatives
42.1. DERIVATIVES: THE BUILDING BLOCK OF CREDIT DERIVATIVES
42.2. SECURITIZATION: THE OTHER BUILDING BLOCK
42.3. MEANING OF CREDIT DERIVATIVES
42.3.1. Quick Guide to Basic Jargon
42.3.2. Synthetic Lending
42.3.3. Motivations of the Parties
42.4. ELEMENTS OF A CREDIT DERIVATIVE
42.4.1. Bilateral Deals and Capital Market Deals
42.4.2. Reference Asset or Portfolio
42.4.3. Structured Portfolio Trade
42.4.4. Basket Trades
42.4.5. Index-Based Credit Derivative Trades
42.4.6. Protection Buyer
42.4.7. Protection Seller
42.4.8. Funded and Unfunded Credit Derivatives
42.4.9. Credit Event
42.4.10. Notional Value
42.4.11. Premium
42.4.12. Tenure
42.4.13. Loss Computation
42.4.14. Threshold Risk or Loss Materiality Provisions
42.4.15. Cash and Physical Settlement
42.5. QUICK INTRODUCTION TO THE TYPES OF CREDIT DERIVATIVES
42.5.1. Credit Default Swap
42.5.2. Total Return Swap
42.5.3. Credit-Linked Notes
42.5.4. Credit Spread Options
42.6. CREDIT DERIVATIVES AND TRADITIONAL FINANCIAL GUARANTEE PRODUCTS
42.6.1. Credit Derivatives and Guarantees
42.7. CREDIT DERIVATIVES AND SECURITIZATION
42.8. SUMMARY
42.9. REFERENCES
43. Fixed Income Total Return Swaps
43.1. ECONOMICS OF A TOTAL RETURN SWAP
43.1.1. Total Return Swap Compared to an Interest Rate Swap
43.1.2. Illustration
43.2. APPLICATIONS OF A TOTAL RETURN SWAP
43.2.1. Creating a Synthetic Repo
43.2.2. Use in the Bank Loan Market
43.3. TOTAL RETURN INDEX SWAPS
43.3.1. Indexing a Credit Spread Sector by an Active Asset Manager
43.3.2. Active Strategies
43.3.3. Risk Control
43.4. SUMMARY
43.5. REFERENCES
44. Bond Market Transparency
44.1. BENEFITS OF AN OPEN SYSTEM
44.2. DISPARITY OF MARKET PRICING
44.2.1. U.S. Treasury and Agency Securities
44.2.2. Corporate Bonds (Investment and Non-Investment Grade)
44.2.3. Mortgage-Related Securities
44.2.4. Municipals
44.2.5. Other
44.3. BUYER BEWARE: ALL PRICES ARE NOT CREATED EQUAL
44.3.1. Market Indications
44.3.2. Matrix Pricing
44.3.3. Option-Adjusted Spread Calculation
44.4. THE DEBATE ON PRICE TRANSPARENCY
44.4.1. Arguments in Favor of Price Transparency
44.4.2. Arguments Opposed to Price Transparency
44.5. A RAPIDLY EVOLVING MARKET
44.5.1. Execution Reporting
44.5.2. Best Execution
44.5.3. Trading Styles
44.6. SUMMARY
44.7. REFERENCES
45. Bond Spreads and Relative Value
45.1. BOND SPREADS
45.1.1. Swap Spread and Treasury Spread
45.1.2. Asset Swap Spread
45.1.3. Zero-Volatility Spread
45.2. THE ASSET SWAP CDS PRICE
45.2.1. Asset Swap Pricing
45.2.2. Asset Swap Pricing Example
45.2.3. Pricing Differentials
45.2.4. Cash-CDS Basis
45.3. SUMMARY
45.4. REFERENCES
46. The Determinants of the Swap Spread and Understanding the LIBOR Term Premium
46.1. DETERMINANTS OF THE SWAP SPREAD
46.1.1. Determinants of the Spread
46.2. MAGNITUDE OF THE TERM PREMIUM
46.2.1. Illustration
46.3. OBSERVATION OF MACRO-LEVEL ECONOMIC AND POLITICAL FACTORS ON SWAP SPREADS
46.4. SUMMARY
46.5. REFERENCES
4. Real Estate
47. Real Estate Investment
47.1. REAL ESTATE MARKET
47.2. KEY CHARACTERISTICS OF REAL ESTATE
47.2.1. Debt-Equity Hybrid
47.2.2. Holding Value
47.3. REAL ESTATE INVESTMENT
47.3.1. Investment Characteristics of Each Quadrant
47.4. WHY REAL ESTATE?
47.4.1. Reduce Aggregate Portfolio Risk
47.4.2. Realize a High Absolute Rate of Return
47.4.3. Hedge Inflation
47.4.4. Reflect the Larger Investment Universe
47.4.5. Deliver High Cash Flows
47.5. SPECIAL TOPICS IN REAL ESTATE
47.5.1. Issue of International Investing
47.5.2. Issue of Leverage
47.5.3. Emerging Issue of Derivatives
47.6. RELATIONSHIPS ACROSS THE QUADRANTS: IS REAL ESTATE REAL ESTATE?
47.7. SUMMARY
47.8. REFERENCES
48. Investing in Commercial Real Estate for Individual Investors
48.1. IMPORTANCE OF LOCATION
48.2. IMPORTANCE OF DIVERSIFICATION
48.3. SPECIFIC ADVANTAGES TO INVESTING IN COMMERCIAL REAL ESTATE
48.3.1. Financial Leverage
48.3.2. Operating Leverage
48.3.3. Inflation Resistance
48.3.4. Tax Advantages
48.3.5. Investing in Real Estate Is Like Owning Your Own Business
48.3.6. Debt in an Inflationary World Is Good
48.3.7. Compounding Cash Flows
48.4. SPECIFIC DISADVANTAGES RELATING TO REAL ESTATE
48.4.1. Lack of Liquidity
48.4.2. Understanding of Financial Statements
48.4.3. Difficulties in Determining Property Value
48.4.4. Overextended Borrowing
48.4.5. Management Expertise Required
48.5. BUSINESS ORGANIZATIONAL FORM
48.5.1. Sole Proprietorship
48.5.2. General Partnership
48.5.3. Limited Partnership
48.5.4. Limited Liability Partnership
48.5.5. Limited Liability Limited Partnership
48.5.6. Registered Limited Liability Partnership
48.5.7. Limited Liability Company
48.5.8. C Corporation
48.5.9. Subchapter S Corporations
48.5.10. Closed Corporations
48.5.11. Professional Corporations
48.5.12. Professional Associations
48.5.13. Service Corporations
48.5.14. Multiple Forms
48.5.15. Franchiser or Franchisee
48.6. SUMMARY
48.7. REFERENCES
49. Types of Commercial Real Estate
49.1. APARTMENT COMPLEXES
49.1.1. Condominiums
49.2. TIMESHARES
49.3. UNDEVELOPED LAND
49.3.1. Raw Land
49.3.2. Developing Land
49.4. SELF-STORAGE FACILITIES
49.5. RESTAURANTS
49.6. SHOPPING CENTERS
49.6.1. Types of Shopping Centers
49.7. RECREATIONAL FACILITIES
49.8. OFFICE BUILDINGS
49.8.1. Types of Office Buildings
49.9. PARKING LOTS
49.9.1. Parking Market Segments
49.10. HOTELS AND MOTELS
49.11. INDUSTRIAL SITES
49.12. SUMMARY
49.13. REFERENCES
50. Commercial Real Estate Loans and Securities
50.1. LOAN ORIGINATION
50.1.1. Underwriting a Loan
50.1.2. The Master and Special Servicers
50.2. PROPERTY-LEVEL LOANS
50.2.1. First-Lien Commercial Mortgage Loans
50.2.2. Mezzanine Loans
50.2.3. Other CRE Loans
50.3. COMMERCIAL MORTGAGE-BACKED SECURITIES
50.3.1. Prepayment and Extension Risk
50.3.2. Interest Shortfalls
50.3.3. Types of CMBS Deals
50.4. REIT SECURITIES
50.5. EVALUATING CREL AND CMBS
50.5.1. Property-Level Analysis
50.5.2. Loan-Level Analysis
50.5.3. CMBS Bond-Level Analysis
50.6. SUMMARY
50.7. REFERENCES
51. Commercial Real Estate Derivatives
51.1. USES AND USERS OF COMMERCIAL REAL ESTATE DERIVATIVES
51.1.1. Exposure to the Real Estate Asset Class
51.1.2. Harvesting Alpha
51.1.3. Portfolio Balancing
51.1.4. Relative Value Investing
51.1.5. Efficient Leverage
51.2. EXAMPLE: FORWARD CONTRACT
51.3. HARVESTING ALPHA EXAMPLE
51.4. CAPITAL RETURN SWAP EXAMPLE
51.5. REAL ESTATE INDICES
51.6. INCOME AND CAPITAL RETURNS
51.7. APPRAISAL-BASED INDICES
51.8. TRANSACTIONS-BASED INDICES
51.9. SUMMARY
51.10. APPENDIX: NUMERICAL EXAMPLE OF HOW THE REPEAT-SALES INDEX WORKS
51.11. REFERENCES
5. Alternative Investments
52. Alternative Asset Classes
52.1. SUPER ASSET CLASSES
52.1.1. Capital Assets
52.1.2. Assets that Can be Used as Economic Inputs
52.1.3. Assets that Are a Store of Value
52.1.4. Real Estate
52.2. ASSET ALLOCATION
52.2.1. Asset Classes and Asset Allocation
52.2.2. Strategic versus Tactical Allocations
52.2.3. Efficient versus Inefficient Asset Classes
52.2.4. Constrained versus Unconstrained Investing
52.2.5. Asset Location versus Trading Strategy
52.2.6. Alternative Beta and the Efficient Frontier
52.2.7. Asset Class Risk Premiums versus Trading Strategy Risk Premiums
52.3. SUMMARY
52.4. REFERENCES
53. Hedge Funds
53.1. HEDGE FUNDS VERSUS MUTUAL FUNDS
53.2. CATEGORIES OF HEDGE FUNDS
53.3. HEDGE FUND STRATEGIES
53.3.1. Market Direction Hedge Funds
53.3.2. Corporate Restructuring Hedge Funds
53.3.3. Convergence Trading Hedge Funds
53.3.4. Opportunistic Hedge Fund Strategies
53.4. SHOULD HEDGE FUNDS BE PART OF AN INVESTMENT PROGRAM?
53.5. IS HEDGE FUND PERFORMANCE PERSISTENT?
53.6. A HEDGE FUND INVESTMENT STRATEGY
53.6.1. Opportunistic Hedge Fund Investing
53.6.2. Hedge Fund of Funds
53.6.3. Absolute Return
53.7. SELECTING A HEDGE FUND MANAGER
53.7.1. Investment Objective
53.7.2. Investment Process
53.7.3. What Makes the Hedge Fund Manager so Smart?
53.8. SUMMARY
53.9. REFERENCES
54. Introduction to Venture Capital
54.1. ROLE OF A VENTURE CAPITALIST
54.1.1. Relationship of the Venture Capitalist to Her Investors
54.1.2. Restrictions on the Management of the Venture Capital Fund
54.1.3. Restrictions on the Activities of the General Partner
54.1.4. Restrictions on the Type of Investments
54.1.5. Venture Capital Fees
54.2. THE BUSINESS PLAN
54.2.1. Executive Summary
54.2.2. The Market
54.2.3. The Product or Service
54.2.4. Intellectual Property Rights
54.2.5. The Start-up Management Team
54.2.6. Operations and Prior Operating History
54.2.7. Financial Projections
54.2.8. Amount of Financing
54.2.9. Exit Plan
54.3. CURRENT STRUCTURE OF THE VENTURE CAPITAL INDUSTRY
54.3.1. Sources and Uses of Venture Capital Financing
54.3.2. Venture Capital Investment Vehicles
54.3.3. Life Cycle of a Venture Capital Fund
54.3.4. Specialization within the Venture Capital Industry
54.4. STAGE OF FINANCING
54.4.1. Angel Investing
54.4.2. Seed Capital
54.4.3. Early-Stage Venture Capital
54.4.4. Late-Stage/Expansion Venture Capital
54.4.5. Mezzanine Stage
54.4.6. J Curve for a Start-up Company
54.5. SUMMARY
54.6. REFERENCES
55. Assessing Hedge Fund Investment Risk in Common Hedge Fund Strategies
55.1. FIXED INCOME STRATEGIES
55.1.1. Government Bond Arbitrage
55.1.2. Mortgage-Backed Security Arbitrage
55.1.3. Corporate Bond Arbitrage
55.1.4. Emerging Markets
55.2. EVENT-DRIVEN STRATEGIES
55.2.1. Capital Structure Arbitrage
55.2.2. Distressed Securities
55.2.3. Merger Arbitrage
55.3. EQUITY STRATEGIES
55.3.1. Long/Short Equity
55.3.2. Multistrategy
55.3.3. Equity Market Neutral
55.3.4. Convertible Arbitrage
55.4. SUMMARY
55.5. ACKNOWLEDGMENTS
55.6. REFERENCES
56. Diversify a Portfolio with Tangible Commodities
56.1. THE BENEFITS OF TANGIBLE COMMODITIES
56.1.1. The Historical Returns of Commodities Are Similar to Those of Equities
56.1.2. Returns of Commodities Are Not Correlated with Those of Equities and Bonds
56.1.3. Add Commodities to Your Portfolio for Increased Risk-Adjusted Return
56.1.4. Commodities Can Protect a Portfolio during Periods of Uncertainty
56.2. HOW TO GET COMMODITY EXPOSURE
56.3. SUMMARY
56.4. REFERENCES
57. The Fundamentals of Commodity Investments
57.1. MARKET PARTICIPANTS
57.2. COMMODITY SECTORS
57.3. COMMODITIES AS AN ASSET CLASS OF THEIR OWN
57.3.1. Prospects for Commodity Market Participation
57.3.2. Buying the Physical Good
57.3.3. Commodity Stocks
57.3.4. Commodity Funds
57.3.5. Commodity Futures Indices
57.3.6. Commodity Futures
57.4. COMMODITY EXCHANGES
57.5. RISK AND PERFORMANCE CHARACTERISTICS
57.6. PORTFOLIO OPTIMIZATION WITH COMMODITIES
57.7. SUMMARY
57.8. REFERENCES
58. Art Finance
58.1. ART MARKET INDICES
58.2. ART AS AN ALTERNATIVE ASSET CLASS
58.3. ART FUNDS
58.4. SUMMARY
58.5. REFERENCES
59. Investing in Life Settlements
59.1. INVESTMENT CHARACTERISTICS
59.1.1. Higher Expected IRR/Longer Duration
59.1.2. Low Correlation to Other Asset Classes
59.1.3. High Credit Quality
59.2. VALUATION
59.2.1. Variance Estimates
59.3. ELEMENTARY LIFE INSURANCE
59.3.1. Elementary Life Annuity
59.3.2. Forward Values
59.3.3. Elementary-Level Premium
59.3.4. Substandard Health
59.3.5. Elementary Life-Settlement Valuation
59.4. PORTFOLIO OF LIFE SETTLEMENTS
59.5. SUMMARY
59.6. REFERENCES
6. Investment Companies, ETFs, and Life Insurance Products
60. Investment Companies
60.1. TYPES OF INVESTMENT COMPANIES
60.1.1. Open-End Funds (Mutual Funds)
60.1.2. Closed-End Funds
60.1.3. Unit Trusts
60.2. FUND SALES CHARGES AND ANNUAL OPERATING EXPENSES
60.2.1. Sales Charges or Loads
60.2.2. Annual Operating Expenses (Expense Ratio)
60.2.3. Multiple Share Classes
60.3. ADVANTAGES OF INVESTING IN MUTUAL FUNDS
60.4. TYPES OF FUNDS BY INVESTMENT OBJECTIVE
60.5. THE CONCEPT OF A FAMILY OF FUNDS
60.6. TAXATION OF MUTUAL FUNDS
60.7. REGULATION OF FUNDS
60.8. STRUCTURE OF A FUND
60.9. RECENT CHANGES IN THE MUTUAL FUND INDUSTRY
60.9.1. Distribution Channels
60.9.2. "Mix and Match" (Open Architecture)
60.10. MUTUAL FUNDS VERSUS EXCHANGE-TRADED FUNDS
60.11. REFERENCES
61. Exchange-Traded Funds
61.1. THE HISTORY AND STRUCTURE OF ETFs AND SOME COMPETITORS
61.1.1. Portfolio Trading
61.1.2. Toronto Stock Exchange Index Participations (TIPs)
61.1.3. Standard & Poor's Depository Receipts (SPDRs)
61.1.4. World Equity Benchmark Shares (WEBS)—Renamed iShares MSCI Series
61.1.5. ETFs AND OTHER TRADABLE BASKET PRODUCTS
61.1.6. Closed-End Funds
61.1.7. "Open" Exchange-Traded Funds
61.1.8. Holding Company Depository Receipts (HOLDRs)
61.1.9. Folios
61.1.10. Exchange-Traded Notes (ETNs) and Other Structured Products
61.1.11. A Side-by-Side Comparison of Tradable Basket Products
61.1.12. Improving ETFs
61.2. SUMMARY
61.3. REFERENCES
62. Investment-Oriented Life Insurance
62.1. INSURANCE
62.1.1. Conceptual Issues in Risk Management
62.1.2. Investment-Oriented Life Insurance Products
62.1.3. The Nature of Insurance Companies
62.1.4. General Account versus Separate Account Products
62.1.5. Overview of Cash Value Whole Life Insurance
62.1.6. Taxability of Life Insurance
62.2. INVESTMENT-ORIENTED LIFE INSURANCE
62.2.1. Cash Value Life Insurance
62.2.2. Uses of Life Insurance
62.2.3. Annuities
62.3. SUMMARY
62.4. REFERENCES
63. Stable Value Investment Options for Defined Contribution Plans
63.1. THE NEED FOR STABLE VALUE INVESTING
63.1.1. Participant Demand for Safety
63.1.2. Plan Design
63.1.3. Returns
63.1.4. Historical Legacy
63.2. TYPES OF STABLE VALUE FUNDING VEHICLES
63.2.1. Portfolio Rate General Account
63.2.2. GICs
63.2.3. Bank Investment Contracts
63.2.4. Separate Account Products
63.2.5. Synthetic GICs
63.2.6. Global Wraps
63.2.7. Pooled Funds
63.2.8. Individual CD-Type Products
63.2.9. Bond Mutual Funds and Other Alternatives
63.3. BUYERS OF STABLE VALUE PRODUCTS
63.3.1. Book-Value Accounting
63.3.2. Types of Buyers
63.4. COMMON FEATURES OF STABLE VALUE PRODUCTS
63.4.1. Interest Crediting
63.4.2. Deposit and Withdrawal Limitations
63.4.3. Transfers
63.4.4. Withdrawal Hierarchy
63.4.5. Need for Exit Provisions
63.4.6. Market Value Adjustment
63.4.7. Book Value Installments
63.4.8. Transfer-in-Kind
63.4.9. Annuitization
63.5. CONTRACT ISSUANCE
63.5.1. Annuity
63.5.2. Trust
63.5.3. Funding Agreement
63.6. PLAN SPONSOR MANAGEMENT ISSUES
63.6.1. Diversification and Credit Risk
63.6.2. Economy of Purchase
63.6.3. Withdrawal Provisions—Participant Benefits
63.6.4. Withdrawal Provisions—Plan Sponsor
63.6.5. Further Considerations at Time of Transfer
63.6.6. The Trade-off among Rate, Liquidity, and Quality
63.6.7. Book Value Accounting
63.7. ISSUER CONSIDERATIONS
63.7.1. Fully Guaranteed Contracts
63.7.2. Actively Managed Assets
63.7.3. Pooled Funds
63.8. ASSET/LIABILITY MANAGEMENT
63.8.1. Fully Guaranteed Products
63.8.2. Actively Managed Products
63.8.3. Pooled Funds
63.9. UNDERWRITING
63.10. LEGAL AND REGULATORY ISSUES
63.11. SOME HISTORICAL LESSONS LEARNED
63.11.1. Fully Guaranteed Products
63.11.2. Actively Managed Products
63.11.3. Pooled Funds
63.12. PROS AND CONS OF DIFFERENT STABLE VALUE OPTION FUNDING VEHICLES
63.13. NEW DEVELOPMENTS IN PRINCIPAL-PROTECTED PRODUCTS
63.14. SUMMARY
63.15. REFERENCES
7. Foreign Exchange
64. An Introduction to Spot Foreign Exchange
64.1. BRIEF HISTORY
64.2. FOREIGN EXCHANGE EXPOSURE
64.3. BASIC USES
64.4. CHARACTERISTICS
64.5. MAJOR PARTICIPANTS AND THEIR ROLES
64.6. SPOT FOREIGN EXCHANGE
64.6.1. Spot and Reciprocal Rates
64.6.2. European and American Terms
64.7. SPOT TRANSACTIONS
64.7.1. Bid-Offer Spreads
64.7.2. Reading Foreign Exchange Rates
64.7.3. Big Figures
64.7.4. Spread
64.7.5. Direct versus Brokered Dealing
64.8. CROSS RATES
64.9. PRICE DETERMINANTS
64.10. RISK CONSIDERATIONS
64.11. ASKING FOR A QUOTE
64.12. SUMMARY
64.13. REFERENCES
65. An Introduction to Foreign Exchange Derivatives
65.1. FOREIGN EXCHANGE FORWARD CONTRACTS
65.1.1. Definitions
65.1.2. Interest Rate Differentials
65.1.3. Periods
65.1.4. Premium or Discount
65.1.5. Calculations
65.1.6. Bids and Offers
65.1.7. To Add or Subtract
65.1.8. Forward Quotes
65.1.9. Forward Cross Rates
65.1.10. Risks Involved
65.1.11. Short-Dated Contracts
65.1.12. Long-Dated Contracts
65.1.13. Broken-Dated Contracts
65.1.14. Outright Forwards
65.2. NONDELIVERABLE FORWARDS
65.2.1. Fixing Methodology
65.2.2. How Quoted
65.2.3. Risk Management Tool
65.2.4. Availability
65.2.5. Typical Risks Encountered
65.2.6. Index-Linked Deposits
65.2.7. Summary of Characteristics
65.3. FOREIGN EXCHANGE SWAPS
65.3.1. Combinations
65.3.2. Uses
65.3.3. Formula
65.3.4. Uses of Swaps
65.3.5. Risks
65.4. CURRENCY SWAPS
65.4.1. Technique Involved
65.4.2. No Interest Payable
65.4.3. Flexibility
65.4.4. Liquid and Cost Effective
65.4.5. Exposure
65.4.6. Graphic Example
65.5. FOREIGN EXCHANGE FUTURES
65.5.1. Two-Sided Risk
65.5.2. Margin
65.5.3. Exchange Members
65.5.4. Clearing Corporation
65.5.5. Major Exchanges
65.5.6. Quoting Currency Futures
65.5.7. Ticks and Delivery Months
65.5.8. Contract Specifications
65.6. EXCHANGE FOR PHYSICAL
65.6.1. Example 1
65.6.2. Example 2
65.6.3. Point of the Exercise
65.6.4. Interbank versus Futures
65.7. SUMMARY
65.8. REFERENCES
66. Introduction to Foreign Exchange Options
66.1. FOREIGN EXCHANGE OPTIONS
66.1.1. Call Option
66.1.2. Put Option
66.1.3. Exchange-Traded Options versus Over-the-Counter Options
66.1.4. Applications of Foreign Exchange Options
66.1.5. Alternatives to Foreign Exchange Options
66.1.6. Parties and the Risks Involved
66.1.7. Currency or Dollar Call or Put Option?
66.1.8. Users of Foreign Exchange Options
66.1.9. Differences between Hedging and Speculation
66.1.10. American versus European
66.2. BASICS OF OPTION THEORY
66.2.1. In-, At-, or Out-of-the-Money
66.3. THE PREMIUM
66.4. OTHER CONSIDERATIONS
66.4.1. Pricing Theory
66.4.2. Market Conventions
66.4.3. Strike Price and Strike Selection
66.4.4. Live Price
66.4.5. Premium Conversions
66.4.6. Settlement and Exercise
66.4.7. Risks
66.5. SUMMARY
66.6. REFERENCES
8. Inflation-Hedging Products
67. Inflation-Linked Bonds
67.1. INFLATION, INVESTING, AND CONSUMPTION
67.2. INFLATION BOND BASICS: THEORY AND STRUCTURE
67.3. WHY INFLATION-LINKED BONDS?
67.3.1. Gauging Inflation Expectations and Preventing Policy Errors
67.3.2. Managing Inflation and Inflation Expectations
67.3.3. Liability Management
67.3.4. Risk Diversification
67.3.5. Active Management
67.4. BEHAVIOR OF INFLATION-LINKED BONDS
67.4.1. Return Decomposition
67.4.2. Saving the Inflation Risk Premium?
67.4.3. Low Volatility
67.4.4. Correlation
67.4.5. Triple Duration
67.4.6. Taxes
67.4.7. Asset Allocation and Portfolio Construction
67.4.8. Spending Policy
67.5. CONTINUING ISSUES
67.5.1. Why so Little Nonsovereign Issuance?
67.5.2. What Is the Future of the Inflation-Linked Bond Market?
67.6. SUMMARY
67.7. REFERENCES
68. Introduction to Inflation Derivatives
68.1. INFLATION DERIVATIVES MARKET
68.2. INFLATION BASICS
68.2.1. Inflation, Nominal Value, and Real Value
68.2.2. Real Bonds and Inflation-Linked Cash Flows: Ideal World
68.2.3. Real Bonds and Inflation-Linked Cash Flows: Practice
68.2.4. Breakeven Inflation
68.3. INFLATION PRODUCTS
68.3.1. Zero-Coupon Inflation Swap
68.3.2. Period-on-Period Inflation Swaps
68.3.3. Inflation Futures
68.4. ISDA INFLATION DERIVATIVES DOCUMENTATION
68.4.1. Delay of Publication
68.4.2. Successor Index
68.4.3. Cessation of Publication
68.4.4. Rebasing the Index
68.4.5. Material Modification Prior to Payment Date
68.4.6. Manifest Error in Publication
68.5. SUMMARY
68.6. REFERENCES
9. Inflation-Hedging Products
69. An Introduction to Securities Lending
69.1. WHAT IS SECURITIES LENDING?
69.1.1. Different Types of Securities Loan Transaction
69.1.2. Other Transaction Types
69.2. LENDERS AND INTERMEDIARIES
69.2.1. Intermediaries
69.2.2. Principal Intermediaries
69.2.3. Beneficial Owners
69.3. THE BORROWING MOTIVATION
69.3.1. Borrowing to Cover Short Positions
69.4. MARKET MECHANICS
69.4.1. Loan Negotiation
69.4.2. Confirmations
69.4.3. Term of Loan, and Selling Securities While on Loan
69.4.4. Term Trades—Fixed or Indicative?
69.4.5. Putting Securities "On Hold"
69.4.6. Settlements
69.4.7. Termination of the Loan
69.4.8. Redelivery, Failed Trades, and Legal Remedies
69.5. FINANCIAL RISKS AND RISK MANAGEMENT
69.5.1. When Taking Cash as Collateral
69.5.2. When Taking Other Securities as Collateral
69.6. SUMMARY
69.7. ACKNOWLEDGMENTS
69.8. REFERENCES
70. Mechanics of the Equity Lending Market
70.1. THE LENDING PROCESS
70.2. LENDERS
70.2.1. Lender's Rights
70.2.2. Lender's Risks
70.3. BORROWERS
70.4. THE DETERMINANTS OF REBATE RATES
70.5. SUMMARY
70.6. REFERENCES
71. Securities Lending, Liquidity, and Capital Market-Based Finance
71.1. The great_transition_the_rise_of_CAPITAL_MARKET-BASED_FINANCE
71.2. FINANCIAL COMPLEXITY AND INTENSIFICATION
71.3. THE CENTRAL ROLE OF LIQUIDITY
71.3.1. Evolution of the U.S. Securities Lending Market
71.3.2. Securities Lending: Key to Market Liquidity
71.3.3. How Securities Lending Finances Liquidity
71.3.4. Recognizing Securities Lending's Key Roles
71.3.5. Repo and Securities Lending
71.4. THE EMERGING OFFICIAL CONSENSUS: FOSTERING CAPITAL MARKETS AND SECURITIES LENDING
71.5. SUMMARY
71.6. REFERENCES
72. Repurchase Agreements and Dollar Rolls
72.1. REPURCHASE AGREEMENTS
72.1.1. The Basics
72.1.2. Credit Risks
72.1.3. Determinants of the Repo Rate
72.1.4. Special Collateral and Arbitrage
72.1.5. Participants in the Market
72.1.6. Repo/Reverse to Maturity
72.1.7. Buy/Sell-Back
72.1.8. Repo Market Structures
72.1.9. LIBOR Financed Treasury Repo
72.2. DOLLAR ROLLS
72.2.1. Background Information on Agency Pass-throughs
72.2.2. Determination of the Financing Cost
72.2.3. Illustrations of Dollar Roll Agreements
72.2.4. Risks in a Dollar Roll from the Investor's Perspective
72.3. SUMMARY
72.4. REFERENCES
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Part 5. Alternative Investments
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