Due To Deregulation, Liberalization and Globaliza- tion The Traditional Bank Business Has Changed...
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Due To Deregulation, Liberalization and Globaliza-tion The Traditional Bank Business Has Changed Dramatically. Banks can enter a business that had been off limits before Deepening of Capital markets connected corporates directly to the market. Corporate Finance business has suffered from highly specialized securities firms and institutional asset managers. Traditional Sources Of Bank – Profits Have Shifted Bank Deposits are decreasing. Liabilities as bank loans are also decreasing on the assets – side (Table 1,2). On the other side negotiable liabilities have increased (tradable securities on the asset side) (Table 3,4).
Due To Deregulation, Liberalization and Globaliza- tion The Traditional Bank Business Has Changed Dramatically. Banks can enter a business that had been
Due To Deregulation, Liberalization and Globaliza- tion The
Traditional Bank Business Has Changed Dramatically. Banks can enter
a business that had been off limits before Deepening of Capital
markets connected corporates directly to the market. Corporate
Finance business has suffered from highly specialized securities
firms and institutional asset managers. Traditional Sources Of Bank
Profits Have Shifted Bank Deposits are decreasing. Liabilities as
bank loans are also decreasing on the assets side (Table 1,2). On
the other side negotiable liabilities have increased (tradable
securities on the asset side) (Table 3,4).
Slide 2
Table 1. Bank Deposits in percent of total bank liabilities In
Most G7-Countries Bank Deposits in Percent of Total Liabilities
were Decreasing During the Last Twenty Years
Slide 3
Table 2. Bank Loans in percent of total Bank Assets In Some
G7-Countries also Bank Loans as in Percent of Total Bank Assets
Decreased
Slide 4
Table 3. Negotiable Liabilities in percent of total Bank
Liabilities Banks are Using More and More Capital Market
Instruments to Refinance Their Businesses
Slide 5
Table 4. Tradable Securities Holding in percent of Total Bank
Assets Banks Have Also Entered resp. Enlarged Their Asset
Management Businesses
Slide 6
Three Major Changes In The Composition Of Banks Balance Sheets
Displacement of lending by other activities. Growth of
off-balance-sheet assets in percent of total assets. Displacement
of deposit loan-income by other operating income. Changes Are
Reflected By Desegementation And Restructuring E xpanding into
other markets (Securities) to face competition to the Asset
Management Industry. Entering the insurance markets Entering Asset
Management business providing investment management services and a
wider range of financial services to their customers. All this
changes are reflected by heavily increasing M & A
activities.
Slide 7
Table 5. Balance Sheet Information of Top 50 Banks in percent
as noted Source of Bank Profits Have Shifted From Interest Related
Income to Other Income
Slide 8
Traditionally banks intermediate between borrowers and savers
by using deposits, securities firms were providing the distribution
of new issues of equity and debt to public. On the supply side,
Nonbank financial institutions have entered the traditional bank
business. Insurance Comp., Investment banks, even telcos and food
companies are providing bank-services. On the demand side,
households were bypassing banks by investing directly to those
investment firms which could cause of theire specializtion more
effective handle the savings. As a result from this, the
nonbank-sector became larger and larger. (Table 6,7). In the United
States the nonbank-sector is managing (1995)11,5 trillion US$
compared to 5 Trillion $ in the banking sector. The Traditional
View of Financial Intermediation Has Eroded
Slide 9
Table 6. Assets of Institutional Investors Institutional
Investors Were Steadily Growing at High Average Rates
Slide 10
Table 7. Assets of all Institutional Investors in % of GDP
Institutional Investors Were Steadily Growing at High Average
Rates
Slide 11
Globalization Financial Markets Are Facing Closer Integration
Liberalization and Development of Information Technologies prepared
the way to globalization and integration Securities Portfolios
became far more internationally diversified (Table 8). The growth
in gross portfolio flows increased by almost more than 200 times.
Cross border transactions in Bonds and Equities reached up to
between seven and one times GDP. In the US those transactions
between US and foreign investors totaled 17 Trillion US$. (see
Table 9) or 213% of the US - GDP. Although investment portfolios
are fare away from beeing adequately internationally diversified,
i.e. portfolios still do not reflect the the structure of the world
market capitalization (USA: 42%, Japan 15%, UK: 9%, other
industrial countries: 23%, emerging markets: 11%)
Slide 12
Mirroring this expansion firms also turned to international
markets to raise funds (see Table 10). Even the volume of
outstanding issues of international debt securities reached to 3,7
Trillion US $, sixfold larger than in 1985. Financial Globalization
has been a counterpart to international trade. The foreign exchange
market has far outpaced the growth of trade. In 1995 an annual
worldwide trade volume of 6,1 Trillion US$ was faced by a daily
market turnover of 1,2 Trillion US $. (see T.11.) Nonresidents
holdings of public debt also increased substantially (see Table 12)
Globalization Financial Markets are Facing Closer Integration
Slide 13
Table 8. Gross and Net Flows of Foreign Direct and Portfolio
Investment (G7) Foreign Net and Portfolio Investments (in bn
$)
Slide 14
Table 9. Cross Border Transactions in Bonds and Equities Cross
Border Transactions of Bonds and Equities
Slide 15
Table 11. Foreign Exchange Trading Foreign Exchange Trading
(Turnover in bn $ per day)
Slide 16
Table 12. Nonresidents Holdings of Public Debt (in percent of
total public debt) Nonresidents Holdings of Public Debt (in % of
Total Debt)
Slide 17
Accompanying all this, we can observe extending linkages
between international Exchanges (Eurex, CBOT and Eurex) OTC- and
Exchange traded markets will merge New Markets for unbundling and
trade of risks will emerge Actually the risk market volume is
estimated to reach up to a volume of more than 130 Bio US$ /year
(notional amount outstanding per end of year). This would be more
than the total volume of all traded bonds, equities and bank assets
Outlook to new market propositions In future we will face an
ongoing increase of methods and products concerning risk markets,
also dealing new kinds of risks like: Catastrophe Risks (ART) will
change insurance markets Credit Risks will change the business
potential of credit business. Private Income Risks
Slide 18
New Trends New Markets New Chances New Risks
Slide 19
New Markets and Products for Unbundling, Pricing, Trading and
Managing Risks Example: U.S. bank has given a floating rate Yen
denominated loan to a Japanese bank. Risk Exposure of U.S. bank:
Foreign Exchange Risk Interest Rate Risk Credit Risk Risk
Management Tools: Currency Swap (Y/US$) Interest Rate Swap (V/F)
Credit Default Swap Credit-risk loaded floating- rate,
Yen-denominated loan Riskless, fixed rate dollar denominated
security
Slide 20
How Risk Management Works US Bank Japanese Bank 100 Bio Y at
LIBOR LIBOR Payed in Y Payback in Yen LIBOR in Yen Fixed rate in
Yen US$ Receiver Yen - Payer Interest Rate Swap Currency Swap
Floating Rate Yen Loan Fixed Rate Dollar Loan OTC - Market Credit
Default Swap Floating Rate Yen Credit
Slide 21
Growth in Global Security Issues, 1990-2003 Global debt &
equity U.S. Issuers worldwide $ Bn
Slide 22
Derivatives - Notional Amount Outstanding per 12/1987 to
12/2005
Slide 23
Markets are Interlinked Example: Spot and Futures Market
Slide 24
Spot Future - Parity Today, one (theoretical) Index-Future is
sold at 5,500 (1 per Index-point). Long and Short-positions can be
described by a profit and loss diagram: 5,500 Index Profit Loss
Long Future = Buyer Short Future = Seller If you are Long-Future,
then you may claim for delivery of one index at a price of 5,500 at
the maturity of the index- future. That means, if the index at
delivery is quoted at more than 5,500, you will win from your
futures position. Spot Future Parity Index Arbitrage (Example)
Slide 25
Spot Future - Parity You hold an Index-Portfolio, currently
valued at 5,500 (1 Index-point = 1 ). If the annual risk free rate
r f is at 3.5 % and the expected dividends on your Index portfolio
are at 100 (d = 100/5,500), an Index Future with one year to
maturity has a fair price of: To prevent our Index-Portfolio from
losses, we could hedge the price risk by taking a short future
position (selling a future at 5,592.40). Spot Future Parity Index
Arbitrage (Example)
Slide 26
Spot Future - Parity Assets Payoff 1 Payoff 2 Payoff 3 Payoff 4
Payoff 5 Stock Portfolio+4500,00+5000,00+5500,00+6000,00+6500,00
Dividends+100,00 Short Future+1092,40+592,40+92,40-407,60-907,60
Total+5692,40 The total expected payoffs from your portfolio will
depend on the fu- ture state of the environment (see below payoffs
1-5). A decreasing stock market will be compensated by profits from
the short future po- sition, increasing stock prices will be
outbalanced by losses due to pay- ment obligations from the future.
Loss Profit 5592,40 Index Short Future Spot Future Parity Index
Arbitrage (Example)
Slide 27
Spot Future - Parity Assets Payoff 1 Payoff 2 Payoff 3 Payoff 4
Payoff 5 Stock Portfolio+4500,00+5000,00+5500,00+6000,00+6500,00
Dividends+100,00 Short Future+1092,40+592,40+92,40-407,60-907,60
Total+5692,40 Initially you have paid 5,500 for your stock
portfolio. Taking the short future position, the final outcome of
your portfolio will be 5,692,40 , whatever the stock price will be,
i.e. you will earn 192,40 which equals 3.5%. Obviously, this profit
is riskless: Spot-Future- Parity Spot Future Parity Index Arbitrage
(Example)
Slide 28
Spot Future - Parity Rising future prices will due to arbitrage
trading - induce rising spot prices. For example, a future traded
at 6,000 is (relative to a spot market price of 5,500) clearly
overpriced, if the stock price remains unchanged at 5,500 . In this
case, smart traders will make arbitrage profits of 407,50 per
contract and bring back the market to equilibrium: Actiont0t0 t1t1
Borrow money at r F (3,5%)+ 5,500.00- 5,692.50 Buy/Sell Stock
Portfolio- 5,500.00+ Stock Sell/Buy Future at 6,0000+ 6,000.00 -
Stock Total0+ 307,50 Note, that the arbitrage profit equals the
difference between a fair- and mispriced future (6,000 5,592,40)
plus Dividends. Higher Future prices will lead to massivly
increased demand at spot markets until spot prices and futures are
back to equilibrium. Spot Future Parity Index Arbitrage
(Example)
Slide 29
Spot Future Parity Financial Market Stability Spot Markets and
Future (Forward) Markets are interlinked. Mispriced spot or future
market instruments will affect both markets. Future market
speculations that drive futures prices will also drive spot market
prices due to arbitrage trading (et vice versa). Speculation on
futures markets, resulting in higher future prices will induce
higher spot market prices due to arbitrage trading. Finally this
may result in spot market bubbles that jeopardizes the allocation
mechanism of real goods markets. Spot Future Parity Index Arbitrage
(Example)
Slide 30
Management of Operational Risks: Weather Derivatives
Slide 31
Weather Derivatives History Weather Derivatives occured in 1997
in the USA after the El Nio effects. (Aquila Energy, Kansas
City/Missouri). At the end of 1998 first Weather Derivatives were
issued in Germany Since 1998 Weather Futures and Weather - Options
are traded at the Chicago Mercantile Exchange. In August 2001
London International Financial Futures Exchange (LIFFE) started
trading Weather Futures. Eurex planned to launch weather related
derivatives in 2004.
Slide 32
Weather Derivatives German Temperature Index Xelsius
Slide 33
Weather Derivatives German Temperature Index Xelsius
Slide 34
HDD Interval = Max { 0, 18C - Temp } CDD Interval = Max { 0,
Temp - 18C } Example: On December, 12th 2001 the average
temperature in Berlin has been - 6 C. This day the Index shows 24
HDD. Weather Derivatives German Temperature Index Xelsius
Slide 35
Weather Derivatives In many cases operational income is
directly weather related
Slide 36
The annual turnover (Business Unit Heating Energy) of the
former Berlin Energy - Supplier BEWAG (now VATTEN- FALL) 1999 /
2000 mounted to 771 Mio DM. The winter season 1999/2000 showed
2.425 HDD. This equals an average turnover per HDD of 320 TDM. If
the winter would have been warmer (for example at only 2000 HDD)
this would have caused a lower turnover of approx. 425 HDD x 320
TDM = 136 Mio DM. Insofar BEWAGs operational income is directly
related to the average temperature in winter season. Weather
Derivatives In many cases operational income is directly weather
related
Slide 37
Weather Derivatives The Payoff-Profile from Heating Business
remembers to the payoff profile of a financial future. Example: If
2500 HDD would represent an average cold winter, then a higher
number of HDD would create additional turnovers, whereas a lower
number would lead to a smaller turnover.
Slide 38
Weather Derivatives In this example the risk of warmer winters
(i.e. < 2500 HDD) could be hedged by weather futures. At a
Standard of 100 per HDD, a weather future on the basis of 2500 HDD
has a contract value of 2500 x 100 = 250 T. Given a profit-margin
of approx. 20% (turnover at 2500 HDD = 2500 x 320 TDM = 800 Mio DM
(400 Mio ) i.e. a total average profit of 160 Mio DM or 80 Mio
resp. an average profit per HDD of 32 T) BEWAG could hedge the
weather risk selling 320 weather futures at an Index of 2500
HDD.
Slide 39
Weather Derivatives If BEWAG takes the short-position this
could result in the following scenarios: Operational Income Income
from HDD Turnover (Mio ) Profit (Mio ) Short Future (Mio ) Total
Profit (Mio ) 2000 320 64 16 80 2100 336 67 12,8 80 2200 352 70 9,6
80 2800 448 90 -9,6 80 2900 464 93 -12,8 80 3000 480 96 -16 80
Slide 40
Weather Derivatives Payoff-profiles of a hedged (operational)
business are similiar to the payoff- profiles of a future hedged
trade.
Slide 41
Weather Derivatives Options Put - Options Hedging with weather
futures means not only to eliminate operational risks but also to
eliminate the chance of having a better result than hedged. To
avoid this, one could lmake use of weather options (as traded at
LIFFE). To minimize option premiums, options frequentlly contain
caps or floors. Long Put at a Strike of 2500 HDD 2500 HDD Short Put
at a Strike of 2500 HDD Cap at 2300 HDD
Slide 42
Long Call at a Strike of 2500 HDD 2500 HDD Short Call at a
Strike of 2500 HDD Floor at 2700 HDD Weather Derivatives Options
Call - Options To buy a put at a strike of 2500 HDD leads to
compensations when the average number of HDD is below 2500 HDD. To
buy a call wouold mean, that the buyer can claim fo
compensation-payments if the number of HDD is above 2.500 HDD.
Slide 43
Max. Chance Max. Risk Weather Collar Short Call 2700 HDD and
Long Put at 2300 HDD
Slide 44
Weather Collar ( Short Call 2700 HDD and Long Put at 2300 HDD)
A Zero Cost Weather Collar (Short Collar) can be designed to
restrict the volatility of weather related profits wo to the
boundaries of an upper and lower limit.
Slide 45
Management of Operational Risks: Non Performing Loans and
Credit Risk Marktes
Slide 46
Topics Covered: NPLs in China and Germany Origin and Dynamics
of NPLs Centralized Problem Solving Approaches Decentralized
Problem Solving Approaches Outlook
Slide 47
300 Mrd. Germany: At a Total Volume of 3,500 bn. Loans
Outstanding approx. 300 bn. are Non Performing (estimated in
2004)
Slide 48
Referring to Fundamental Data (Profits) German Stock Markets
Were Overvalued From 1997-2001
Slide 49
Although Investments (Plant, Machinery) Were Decreasing Loans
to Enterprises Remained High
Slide 50
After the Bubble Bad Debt and Bad Debt Losses Increased
Slide 51
Solving the Problem Stock Problem Securitisation Workout
Smaller Proportions transferred to Bad Banks Write-off 1/3rd of
Total Volume will be transferred Tax Deductible, frequently in
Combin. With Securit. Flow Problem Enforcement of Controlling
Measures New Regulations Issued By Supervisory Authority Due to
Measures in Portfolio Management Extended & Improved Approval
Procedure Due to Introduction of Rating Systems Credit
Restrictions
Slide 52
China: In 2002 Total NPL Amounted to $ 770 bn. Which
Corresponded to 61% of GDP or 37% of Total Loans Total Outstanding
LoansTotal Non Performing Loans Approx. 2,508 bn $ 168 bn $ 602
bn
Slide 53
Origin and Characteristics of NPL NPL Flow Future loans to
debtors, that will not be able to serve the loan Stock Bad loans
undertaken in the past Policy directed Policy loans Directed by
government to support policy. Before 1986 not lending authority,
until 1994/95 obliged to finance budget deficits. Since 1995 by
State Dev. Banks Lending to SOEs Loans to SOEs SOE show an
accelerated leverage risk due to ex- treme D/E ratios at low
profitability. But: 50% of industrial output, 70% of employment,
80% of total capital stock. Financial System Weak Banking Poor risk
and portfolio management, high sys- temic risk, no diversifi-
cation, no adjustments for approp. Risk pre- miums possible; AMCs
close to SOBs (1:1)
Slide 54
NPL Stock Flow Solve the Stock Problem: Debt-Bond Swaps
Securitisation Cash Funding Debt Equity Swaps Amortisation
(write-off) Stock and Flow Problems Need Different Approaches Solve
the Flow Problem: Credit Ceilings Efficient Legal Framework
Operational Restructuring Centralized Bad Bank Hard Budget
Constraints
Slide 55
Market for Credit Derivatives Source: British Bankers
Association (in Bio. US$)
Slide 56
Basics of Credit Derivatives Asset Swaps Investor Risk Buyer
Reference Value (z.B. Bond) pays fixed Swap-rate (Coupon Rate)
Receives fixed rate receives LIBOR + var. Premium (spread) The
Investor protects his portfolio against credit quality degradations
by a simple swap construction: using a interest swap the investor
swaps fixed income from his portfolio into variable + premium
payments from the risk buyer.
Slide 57
Credit Default Swap (C.D.S.) Risk Seller (Protection buyer)
Risk Buyer (Protection seller) Reference value (e.g. Bond) Premium:
bps x Notional Value Credit Event ? Yes: Compen- sation No: No Com-
pensation
Slide 58
Total Rate of Return Swap (Synthetic Sales or Short Sales of
Loans) Total Rate Receiver (Riskbuyer) Total Rate Payer
(Riskseller) Reference Value (e.g. Bondes, Indices Asset baskets,
Loans) LIBOR +/-Spread Fixed Interest Rates positive Market price
changes negative Market price changes
Slide 59
Credit Linked Notes (CLN) Risk Buyer (e.g.Investor) Risk Seller
(e.g. Bank) Referencial Assets (e.g. Bonds, Indices, Asset baskets,
Loans) Fixed Rate CLN Repayment of C.L.N. possibly minus
compensation if Credit Event Notional Value of CLN
Slide 60
Credit Spread Put Construction of strike-spreads Example: 5-y.
Corp.Bond: 5,95% 5-y. Swap-rate ( fix against 6-M-EURIBOR) : 5,50%
Credit Spread: 0,45% = 45 base points At an agreed strike-spread of
45 bps, the short side will pay a compensation, if the spread
increases. Strike Spread: 45 bps 90 bps Spread increases: Loan
Devaluation ExecutionForfeiture 25 bps Spread decreases: Improved
C. Qual.
Slide 61
Credit Spread Put Mechanism Put Buyer (Long) (Protection buyer)
Put Seller (Short) (Protection seller) Option price in base points
Right to deliver an Asset-Swap-Pakets at LI +/- Credit Spread Put
Buyer (Long) (Protection buyer) Put Seller (Short) (Protection
seller) Execution Reference- value Payment par Reference value LI
+/- Credit Spread Fixed Rate (Ref. Val.)
Slide 62
What is A Credit Event ? The ideal case would be a reference
value (e.g. a bond) that is highly correlated with the secured
loan. Down-grading Risk of Convertibility Market Inefficiencies
Insolvency Payment Delay Payment Reluctance Cross Default
Restructuring
Slide 63
Credit Default Swap / Option Settlement Versions Cash
Settlement: CDP = (Par - recovery value) CDP = (Par - Marktpreis
nach Credit Event) CDP = (Synthetischer Preis - recovery value)
Binary: Zahlung eines kontrahierten Festbetrags Physical
Settlement: Lieferung Referenzwert zum Festbetrag bzw. gegen
Zahlung von par
Slide 64
Extension of Risk Management by Credit Derivatives Market Risks
Risk of Default Insolvency Risk Spread Risk Credit Default Swap
Credit Spread Put Total Rate of Return Swap
Slide 65
Alternative I: ABS Transactions (True Sale) Bank (Originator /
Seller) S.P.V. (Buyer) Sale of a Credit Pool Price of the Credit
Pool Investors Price of Bonds Issuance of ABS Coupon-Payments;
Redemption minus Losses on ABS
Slide 66
Market Securitisation of Credit Risks (Europe 2002 in Mrd.
$)
Slide 67
Alternative II: Synthetic Sales by Collateralized Debt
Obligations (C.D.S.) Bank (Originator) S.P.V. (Buyer) Swap-Prmie
Ausfallgarantie per CDS Investoren Bondpreis Emission CLN
Kuponzahlung Rckzahlung CLN abzgl. Kreditausflle Sicherheiten Pool
Anlage der Emissionserlse
Slide 68
Fazit Die Problemkreditbearbeitung wird zuknftig deutlich
strker von risikoprventiven und/oder risikokurativen
Managementaufgaben geprgt sein. Im risikoprventiven Bereich erwarte
ich einerseits eine intensive Auseinandersetzung mit
portfolio-orientierten Risikostrategien, andererseits eine sprbare
Zunahme des Transfers von Adressen-risiken Im risikokurativen
Bereich erwarte ich eine strkere Akzentuierung eines fundamentalen
(Kredit-)Sa- nierungsmanagements auch unter Einbeziehung
bankexterner Funktionen
Slide 69
Management of Operational Risks: Capital Markets and
Refinancing of Insurance Industry
Slide 70
Alternativer Risiko Transfer (A.R.T.) Katastrophen - Derivate
Katastrophen Anleihen (Cat Bonds) Act of God - Bonds
A.R.T. - Produkte Finanztitel originr derivativ Bonds Principal
Coupon Options Futures Underlying Verknpfung mit
versicherungstechnischem Risiko GCCI, PCS (Property Claims
Services) - Indices Principal und / oder Coupon at Risk
Slide 76
A.R.T. - Produkte Struktur eines CAT - Bonds mit S.P.V.
Versicherungs- nehmer Versicherer Special Purpose Vehicle
Investoren Kapitalmrkte Refinanzierung des Schadenausgleichs
Tilgung, Zinsen Kapital Tilgung Zinsen Wert- papiere Prmien
Schadens- ausgleich
Slide 77
A.R.T. - Produkte Ausstattungsmerkmale Cat-Bonds Pionierprodukt
war der Cat-Bond (Hagelbond) der Winterthur Versicherung (WinCat).
Der erste WinCat Bond enthielt folgende Formulierung: Die Zahlungen
auf den Zinscoupon entfallen, wenn die Winterthur whrend der
Beobachtungs-periode, die jeweils vom 1. November bis zum 31.
Oktober des Folgejahres dauert, als Folge min-destens eines groen
Hagel- oder Sturmereignisses fr mehr als 6,000 Motorfahrzeuge ihrer
Motorfahrzeug-Kasko- versicherung Leistungen erbringt. Dabei werden
Schden, die innerhalb eines Kalendertages auftre- ten, dem gleichen
Schadensereignis zugeordnet.
Slide 78
A.R.T. - Produkte Beispiel Cat-Bonds 1997 plazierte ein SPV
(United Services Automobile Association und Residential
Reiunsurance Limited) einen Cat- Bond ber 477 Mio USD in zwei
Tranchen mit jeweils einjhriger Laufzeit: Die erste Tranche war
nominalwert- geschtzt (Class A-1, LIBOR + 273 bps) und umfate 164
Mio USD, die zweite Tranche (Class A-2, LIBOR + 576 bps) ber 333
Mio USD unterlag Tilgungsrisiken. Die Zahlungsstrme der Tranchen
waren auf Hurricane Katastrophenschden bedingt, soweit diese in
ausgewhlten Regionen einen Gesamtbetrag von 1 Mrd. USD bersteigen.
Erreichen die Hurricane - Schden ein Volumen von 1,5 Mrd. USD,
verlieren die Class-A-2 Investoren ihr gesamtes Kapital.
Slide 79
A.R.T. - Produkte Optionsprodukte/ Beispiel An der Chicago
Board of Trade werden seit 1992 indexbasierte Optionsprodukte, Puts
und Calls, gehandelt. Der zugrunde-liegende Index ist der PCS -
Property Claims Services - Schadensindex. Jeder Indexpunkt
reprsentiert einen Marktschaden von 10 Mio USD. Beispiel: Ein
Erstversicherer mchte sein Sturmrisiko / Florida reduzieren. Er
nutzt hierzu den an der CBOT gehandelten Florida PCS - Call Spread
100 / 150, d.h. er kauft Call Optionen auf einen PCS - Indexstand
100 und verkauft gleichzeitig Call Optionen auf einen PCS -
Indexstand von 150.
Slide 80
A.R.T. - Produkte Wirkung eines 100/150 Call Spreads auf den
PCS-Index
Slide 81
A.R.T. - Produkte Optionsprodukte/ Beispiel Szenario A: Liegt
der PCS -Index aufgrund der in Florida aggregierten Marktschden bei
weniger als 1 Mrd. USD, verfallen beide Optionen. Per saldo sind
Prmien von 5 Mio USD verloren. Szenario B: Marktschden bersteigen 1
Mrd. USD, bleiben jedoch niedriger als 1,4 Mrd. USD: Die Long Call
Position bei einem Strike-Index von 100 gert ins Geld, die
Short-Position verfllt wertlos. Schadensausgleich wird im Idealfall
kompensiert durch A.R.T. Gewinne. Szenario C: Die Marktschden
liegen bei mehr als 1,4 Mrd. USD. Der Wertzuwachs der Long-Position
wird kompensiert durch Verluste aus der 140er Short-Position.
Slide 82
Alternativer Risiko Transfer A.R.T. - Refinanzierung der
Versicherer / Rckversicherer ber die Kapitalmrkte erffnet Chancen
zur Kapazittser- weiterung und Versicherung bislang
unversicherbarer Risiken. A.R.T. bietet Instrumente, die aufgrund
ihrer Kovarianzpro- file gut in viele Anlageportfolios passen
wrden. A.R.T. bieten sich an zur kapitalschonenden Risikodiver-
sifkation der Versicherer bzw. zur Ergnzung von klassischen
Investor - Portfolios aus traditionellen Finanzmarktprodukten.
A.R.T. Produkte sind schwierig zu bewerten. Es exisitiert kein
allgemein anerkanntes Preisbildungsmodell, Investoren verhalten
sich deshalb abwartend. A.R.T. Markt ist klein und entwickelt sich
zgerlich.
Slide 83
Financial Markets Imbalances are Accompanied By Increasing Size
and Activity of Alternative Investments
Slide 84
Berlin KlippakademieBerlin School of Economics84 Alternative
Investment Strategies And Financial Market Stability Southwestern
University of Finance and Economics Chengdu September 2006 The only
hope to produce a superior record is to do something different. If
you buy the same securities as other people, you will have the same
results as other people John Templeton Prof. Dr. Rainer Stachuletz
Berlin School of Economics
Slide 85
Contents oBusiness models of hedge fund investors and their
current role in financial markets oTypical designs, mechanisms and
conditions of hedge funds investment strategies oDo alternative
investments jeopardize the stability of financial markets oSummary
/ Conclusions / What to do ?
Slide 86
The Universe of Alternative Investments Real Estate and Natural
Resources Private Real Estate REITs Commodities / Energy Private
Equity Strategies Venture Capital Buyouts Distressed Debt Mezzanine
Public Market Strategies Hedge Funds Multy-Strategy Funds Arbitrage
Managed Futures
Slide 87
General Characteristics of Alternative Investment Strategies
Features of Trad. Investments (e.g. Investmentfonds) Benchmark
oriented High correlation with equity- and/or bond markets Must
always be invested Transparent, regulated markets No investments in
own funds No levered investments Striktly limited use of
derivatives Features of Altern. Investments (e.g. Hedge Fonds)
Absolute Return Low or no correlation with other markets Short
sales possible Unregulated markets, offshore Investments in own
funds High levered investments Usage of derivatives
Slide 88
Hedge Funds Business Model Mostly unregulated, offshore
residing eclectic investment pools with aggressively managed short
term portfolios. Hedge Funds employ investment techniques like
short selling, leverage, and are allowed to create a variety of
synthetic positions by unlimited usage of derivatives. Often hedge
funds are set up as private partnerships, open to a limited number
of investors and require a very large initial minimum investment.
Typically hedge Funds are illiquid as they often require investors
keep their money in the fund for a minimum number of years. Hedge
funds managers typically charge a management fee (1-2% of asset
value) and a performance fee of about 20% of the capital gains and
capital appreciation.
Slide 89
Development of Hedge Funds Number and Portfolio (in Bio
US$)
Slide 90
Risk and Return Hedge Funds Investment Strategies Relative
Value ( Arbitrage ) Equity Market Neutral Convertible Arbitrage
Fixed Income Arbitrage Global Macro Managed Futures Dedicated Short
Bias Long/Short Equity Directional Event Driven Merger Arbitrage
Distressed Securities
Slide 91
PROFIT LOSS P/E - Ratio 23,9 Short Lowes at 23,9 Expected
Market 16,7 Long Home at 16,7 Expected Market Relative Value
Strategy Long / Short Equity Hedge
Slide 92
Enter spread position Relative Value Strategy Long / Short
Equity Hedge
Slide 93
Directional Strategies Non Hedge Long-/Short Directional
Strategies represent unhedged, directional speculations on growing
(long) or declining (short selling) markets. By additional usage of
debt (leverage) respectively completing short or long-positions
synthetically, the total risk and return positions can be
amplified. Exp. Market Leverage Expect. Market Short Call Long
Put
Slide 94
Event Driven Strategies (Merger Arbitrage) Merger Declaration 1
3 End of Purchase Ad hoc News at 28. April 2000 Hypovereinsbank
Bank Austria 2
Slide 95
Event Driven Strategies LongShortEquity and Merger Arbitrage
-20 -10 0 10 20 30 40 50 455055606570758085 Expected Share Price
HVB Expected Share Price Bank Austria Long Bank Austria Short
HVB
Slide 96
Event Driven Strategies (Merger Arbitrage) 9,80+ EUR 58,60-EUR
48,801 BankAustria Verkauf 28. Dezember 2000 Differenz Kauf 28.
April 2000 Aktien Anzahl + 9,80 9,80+ EUR 58,60-EUR 48,801
BankAustria Sale 28. Dezember 2000 Profit / Loss Purchase 28. April
2000 Shares Number + 9,80 Traditional Investment Fund Trade: Due to
the short selling, the Hedge Fund gains an approx. 100% higher
profit than the trad. Fund.
Slide 97
Three Popular Arguments on Hedge Fund Investments and Financial
Market Stability ? 1.Hedge Funds operate high leveraged portfolios
of mostly risky assets. As a result, market processes tend to be
more volatile and more uncertain. Thus syestemic market risk will
increase ! 2.Hedge Fund investments tend because of their sheer
size to manipulate asset prices. This will directly compromise the
pricing mechanism and thus lead to inefficient factor allocations !
3.As Hedge Funds often do not have to follow any regu- lations that
are used to be applied to onshore finan- cial institutions
(transparancy of investment styles, accounting, disclosure and
auditing, taxes etc.) investors are not sufficiently
protected.
Slide 98
monthly S&P 500 Volatility CSFB/Tremont Hedge Fund Index
Returns Source: Bloomberg 1. Do Hedge Funds Increase Market
Volatility ?
Slide 99
1. Are Hedge Fund Strategies Risky Investments ?
Slide 100
1. Do Hedge Funds Increase Systematic Risk ? 100% HF/ 0% TF 45
% HF / 55 % TP 0 % HF / 100% TP (Theoretical Portfolios of
Traditional Assets (MSCI 50%, JP Morgan Global 50%) and the
CSFB-Hedge Fund Index based on monthly figures between
1994-2004)
Slide 101
2. Hedge Funds and Market Manipulation Hedge Funds do not rely
on momentum investments and often take contrary positions. Thus,
their engagement will support the pricing mechanism while providing
liquidity and keeping the market process running. By this, Hedge
Funds help substantially to rebalance the markets and smooth
volatility. Hedge Funds, that operate in smaller markets generally
have the potential of market manipulation. In the case of arbitrage
trading or related relative value strategies, hedge funds
activities target directly to change market prices. A manipulation
of prices back to the equilibrium is desired. This may be seen
different concerning other investment strategies.
Slide 102
2. Hedge Funds and Market Manipulation In fact, only 20% of the
total investment is arbitrage tra- ding. The rest is more or less
directional. The major part of directional investments is
represented by directional equity-investments
(long-/short-only).
Slide 103
The Hedge Funds market is dominated by well experienced, well
informed and educated powerful investors (average entry investment
at 630 T$ !) like banks, pension funds, endowments and wealthy
individuals (HNI). As they are strong enough to take care of their
specific information needs, no regulation is required. 3. Need
Investors to be Protected ?
Slide 104
Investor protection seems to be a week argument, if it is
focused on the typical hedge fund investor as shown above. As hedge
funds have started to copy the profitable investment model of
private equity funds in a short term version, there are not the
hedge fund investors that need to be protected, but those long term
investors, who are affected by short term hedge fund investment
activities. Therefore, to focus investor protection on the hedge
fund investor is misleading. Investors should be protected against
hedge fund investors. 3. Need Investors to be Protected ?
Slide 105
Summary and Conclusions 1.Currently Hedge Funds control an
investment volume of about 1.2 Trillion USD, which means a
proportion of 12% of the total global fund investments. 2.Although
they are powerful, Hedge Funds are widely un- regulated, e.g. they
do not report their acitivities like other financial institutions,
mostly they dont have to fol-low minimum capital requirements,
minimum disclosure standards or minimum audit standards. In a
strong sense they do not contribute to rational decision making.
3.Due to their characteristics non regulated offshore residents,
excessive leverage, short sales and unlimited incorporation of
derivatives (synthetic assets) their investment styles and their
sheer size, hedge funds affect or have the potential to affect
market processes.
Slide 106
Summary and Conclusions 4.The total business model including
investors who provide equity, hedge fund corporations that select
investments and investment styles and investment banks which
provide the loan is highly concentrated and interlinked. That high
integrated and concen- trated business modell increases the
probability of extensively widespread cascading effects in case of
a failure (see the LTCM Case in 1998). 5.As Hedge Funds have
started to copy typically Private-Equity-Engagements even those
parts of the real economy that have not been direktly linked to
capital markets, have become the target of short term financial
investments and will be exposed to intensified leverage risks.
Slide 107
Does The Market Need Hedge Fonds ? Hedge Funds are in general
non transparent, offshore located and tax avoiding investment
strategies beyond any national jurisdiction. With the today known
market strategies that includes desireable arbitrage trading only
to a proportion of approxi- mately 20% and the observable move to
directional strategies concerning long equity positions Hedge Funds
need to be regulated to support long term oriented micro- and
macro-policy approaches. Hedge Funds have not only the potential
but also strong incentives to manipulate market processes e.g. to
generate price movements that enhance the profitability of their
underlying positions.
Slide 108
Private Equity Investments and Regulatory (Tax) Arbitrage
Private Equity means to invest in non-listed, frequently
undervalued corporations and any other (undervalued) assets. Mostly
returns result simply from tax arbitrage. Withdraw E. and replace
by D. Assets 1.000 E500 D500 (r D : 4%) Assets 1.000 D (1) 500 (r D
: 4%) D (2) 500 (r D 8%) Exp.: 60 Int. : 20 Tax:5 Profit:15 Sales
100 Exp.: 60 Int.: 60 Tax:0 Sales 100 Loss 20 Offshore Int. 40Tax 0
Profit 40