Staszkiewicz Finance

A Quantitative Introduction
1. Auflage 2014
ISBN: 978-0-12-801760-9
Verlag: Elsevier Science & Techn.
Format: EPUB
Kopierschutz: 6 - ePub Watermark

E-Book, Englisch, 194 Seiten

Many students want an introduction to finance. Those who are quantitatively-oriented learners can benefit in particular from an introduction that puts more emphasis on mathematics and graphical presentations than on verbal descriptions. By illustrating core finance facts and concepts through equations and graphical material, Finance: A Quantitative Introduction can help people studying business management, marketing, accounting, and other subjects. By using few lengthy verbal explanations and many illustrations, it can teach readers quickly and efficiently. - Chapter-concluding questions (with answers) and case studies enhance its utility as a textbook and a reference - Mixture of theory and problem-solving contains enough mathematical tools to help readers assess facts and evaluate real data in practical tasks - Short, simple presentation is perfect for non-native English speakers

Piotr Staszkiewcz is a Polish economist interested in auditing and financial markets. He is a public auditor registered at KIBR (Polish Audit Association). He earned his Ph.D. in macroeconomics from Wroclaw Economic University in 2003. From 2003 to 2005 he served as a member of the Management Board of Low Silesia Chamber of Auditors. In 2009 he was appointed to the Polish Auditor Examination Commission by the Polish Ministry of Finance. He is also a fellow of the Polish Economic Association.

Autoren/Hrsg.

Staszkiewicz, Piotr

Staszkiewicz, Lucia

Leseproben

Chapter 2

Market Participants

Abstract

Financial intermediaries provide customers with financial instruments that cannot efficiently be obtained by making direct transactions on security markets.

Keywords

intermediates

stock exchange

business model

IPO

order

execution

investment activities

short selling

2.1. Financial intermediaries

Financial intermediaries provide customers with financial instruments that cannot efficiently be obtained by making direct transactions on security markets.

Consider:

An investment fund collects money from small investors and invests a lump sum into a security, thereby achieving a price discount due to the size of the order. This would not be achievable if a single investor were to invest directly in the same instruments.

Intermediaries are institutions that require, usually, authorization to operate in regulated financial markets. They include the following:

• Central banks

• Banks

• Investment banks

• Broker-dealers

• Mutual funds (USIT’s)

• Insurance companies

• Pension and retirement funds

• Commodity dealers

• Locals

• Other institutional investors

• Non-institutional intermediaries

The previous list indicates typical organized (or legal-based) entities; however, there are number of structures based on contractual agreements such as: consortia, special purpose vehicles (used, e.g., for securitization), financial conglomerates, and joint venture schemes, which build up another layer for non-institutional intermediaries. Analysis of such a structure is beyond the scope of this book.

2.2. Business models

Typical business models for the financial intermediaries are presented in the following table:

Name

Idea of Activity

Gain Earned on

Typical Customer

Basic Customer Benefit

Deposit Bank

Collects deposits at lower rates and extends the credits on higher rates. Usually there is a difference in the maturity of the credits and deposits

The difference between the rates and mismatch of maturities

Retail customer

Professional knowledge not required, product is easy but expensive

Investment Bank

Provides financing in return for financial instruments

Fees

Corporate

Lower cost of financing

Insurance Company

Accepts risk from individuals in return for a premium

Premium

Mixed

Risk transfer

Broker/Agent

Usually represents client in front of many institutions. Works on behalf of client. Brokers do act as intermediaries and do not keep inventory

Commission

Mixed

Selection costs

Dealer/Principal

Usually represents an institution in front of many clients. May buy assets on their own account and resell to clients. Dealers do keep an inventory (e.g., IPO securities, new cars)

Commission plus capital gain resulting from mismatch of time between acceptance and execution of order

Mixed

Product expertize

Mutual fund

Collects assets from clients and manages a lump sum fund

Success fee Management fee

Mixed

Acquisition of assets on gross sales (discounts available)

Asset manager

Manages a fund

Success fee Management fee

Wealthy individuals Mutual funds

Risk management

State collateral provider

Provides collateral to business to stimulate the economy. An institutional policy tool

Economic policy instrument

Business

Risk transfer

Stock exchange

Maximizes the potential turnover

Transaction costs (charge)

Only stock members (usually broker-dealers)

Credibility of the transaction

Settlement and clearing house

Matches and settles the transaction. Protects the liquidity and execution of the transaction

Transaction costs (charge)

Corporate

Evidence of transaction. Ownership is certain

Custodian (deposits)

Provides the infrastructure for the market. Maintains the record of assets and safeguard assets

Commission

Corporate (rare retail)

Safeguards assets, limits conflict of interest

Information provider

Collect information from issuer, stock exchange, government, statistical offices and provides it to the public

Advertising fees Database access fees Tailored report fees

Mixed

Enhance information efficiency

Government

Finances the state deficit, reinvests the state surplus

Management of cost of public debts or return from investments

Corporate (rare retail)

Benchmark for market, Risk-free assets provider

Central bank

Impacts FX and interest rates via open market operation. Supervises micro requirements

Stability of prices

Corporate

Benchmark Last resort source of liquidity

Local authorities

Similar to government at local level

As government but on local level

Corporate

Low risk assets provision

2.2.1. Transaction Facilitators (TF)

A TF is not an intermediary in its purest form, but is a service provider which stimulates, facilitates, or safeguards transactions on the market. Various transaction facilitators’ classes are given in the following table.

Type

Main Product

Fee Charged to

Example of a Worldwide Company

Credit ratings

Estimate the credit risk

Issuer*

Standard and Poor’s

Auditor

Ensures the fairness of financial data

Ultimate owner

KPMG

Commercial lawyers

Legal compliance

Company

White and Case

Business consulting

Strategy

Company

Boston Consulting Group

* The business model of the credit ratings agencies has changed since the "Xerox" age. Prior to the selfcopying (invention of the Xerox machines), the business was dedicated to investors. The main product was an independent assessment of credit risk and the formulation of the purchase or disposal of assets by the investor. Once information technology advanced, the investor buying information could relatively easily and quickly share it with other investors, thus the value of information decreased substantially over time and reduced the potential demand for credit rating agencies. In return, the agencies attracted the issuer market by extending knowledge and consulting services to include how to upgrade their issue or structure rating. This case created a natural conflict of interests and is deemed to be one of the fundamental reasons for the 2007–08 financial crisis.

2.3. Initial public offering (IPO)

Example:

Draw the process for the IPO and subsequent trading and withdrawal from market. Explain the role of intermediaries for industry while issuing and trading shares on the public market.

Solution:

Step

Purpose

Who

Role

Step 1

Identify an entity in need of financing

Company itself Professional advisors (auditors, tax, legal, strategic advisors), banks (investment), broker-dealers

Identify the needs, draw solution, optimize cost of financing

Step 2

Prepare the internal due diligence

Company and advisor, usually investment bank, or broker-dealer

Prepare the company for organization changes, implement reporting, internal system of control, prepare financial and quality information

Step 3

Draw the prospectus

Either investment bank or broker dealer as the leader of a consortium of advisors

Auditor – audit at least 3 years’ of financial statements; legal – confirm the structure and legal status of entity; management consultants – prepare the qualitative aspects of issue, including risk assessment and prospect project management

Step 4

Draw the issue strategy

Underwriter (investment bank or broker-dealer)

Either to enter the transaction without support (direct offer to market, if...