business knowledge

Finance knowledge

Trading---At the core of our business model is Trading, which involves the buying and selling of financial tools to generate profit. Trading takes place in our Global Markets division, which spans collateralised financing, commodities, emerging markets, equity-linked products, fixed income, foreign exchange and portfolio and liquidity management.

Trade life cycle:

Trade origination->trade execution -> trade validation ->trade confirmation ->Clearing ->Settlement.

Business questions (derivs)

Level 1

• What is a Share?

In financial markets, a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT's.
It is commonly used to refer to equity shares.

• What is a Dividend?

Dividends are payments made by a corporation
to its shareholder members. When a corporation earns a profit or surplus, that
money can be put to two uses: it can either be re-invested in the business
(called retained earnings), or it can be paid to the shareholders as a
dividend. Many corporations retain a portion of their earnings and pay the
remainder as a dividend.

• What is a Call Option

The buyer of a call option has the right but
not the obligation to buy the agreed quantity of the underlying from the seller
of the option at a certain time for a certain price(strike price).The seller
however has the obligation to sell the underlying based on the buyer's
decision.

• Define a Put Option.

The buyer of the put option has the right but
not the obligation to sell the agreed quantity of the underlying to the seller
of the option at a certain time for a certain price(strike price).The seller
however has the obligation to buy the underlying based on the buyer's decision.

• What is the difference
  between an Option and a Future?

A futures contract gives the holder the obligation to make or take delivery under the terms of
the contract, whereas an option grants the buyer the right, but not the obligation for the same.The
owner of an options contract may exercise the
contract, but both parties of a futures contract must fulfill the contract on the settlement date.

• What is a Bond?

A bond is a debt security, in which the
authorized issuer owes the holders a debt and, depending on the terms of the
bond, is obliged to pay interest (the coupon) and/or to repay the principal at
a later date, termed maturity.Thus a bond is a loan: the issuer is the
borrower, the bond holder is the lender, and the coupon is the interest.

• Give some examples of
  "corporate actions"?

A corporate action is an event initiated by a
public company that affects the securities (equity or debt) issued by the
company.Some examples of a corporate actions could be dividend (for equity
securities) or coupon payment (for debt securities (bonds)), call(early
redemption) of a debt security, stock splits.

• What's the difference
  between an ordinary and preference share?

Preference shareholders are often entitled to
a fixed dividend (issued with the rate of dividend fixed at the time of issue)
while ordinary shareholders may receive a dividend after the payment of the
fixed dividend to the preference shareholders.
Preference shareholders cannot normally vote at general meetings while ordinary
shareholders do.

• Explain the term 'hedging
  your positions'?

There are two kind of positions(long or short)
that one can hold. A hedge is an investment that is taken out specifically to
reduce or cancel out the risk in another investment. Thus if we own a
security(have a long position) then we profit if the security rises in value ,
however we would want to hedge (protect) ourselves from the loss if the value
of the security falls by making another financial investment.

• What does 'OTC' mean
  when describing an option?

Over-the-counter options are traded between
private parties, often well-capitalized institutions, that have negotiated
separate trading and clearing arrangements with each other. These options are
not Exchange traded.

Level 2

• What does it mean when
  a stock goes Ex-Dividend

A security that is trading without the
dividend (cash or stock) included in the contract price is said to have gone
ex-dividend.
The ex-dividend date is the date on or after which the seller and not the buyer
will retain the right to receive a dividend.This is two stock business days
prior to the record date (dividend payment date).

• What is an Interest
  Rate Swap?

An interest rate swap is a derivative in which
one party exchanges a stream of interest payments for another party's stream of
cash flows.In an interest rate swap, each counterparty agrees to pay either a
fixed or floating rate denominated in a particular currency to the other
counterparty.

• What is an Equity
  Swap?

An equity swap is a swap where a set of future
cash flows are exchanged between two counterparties.One of these cash flow
streams can be pegged to floating rate of interest or pay a fixed rate . The
other will be based on the performance of a share of stock or stock market
index.

• What is the difference
  between a European, American and Bermudan style of exercise?

A European option may be exercised only at the
expiry date of the option, i.e. at a single pre-defined point in time.
An American option on the other hand may be exercised at any time before the
expiry date.
A Bermudan option is an option where the buyer has the right to exercise at a
set (always discretely spaced) number of times.This is intermediate between a
European and an American option.

• Place these
  instruments into order of complexity: Share, Future, European option, American option,
  Asian option, Himalayan Altiplano

Share
Future
European option
American option
Asian option
Himalayan Altiplano

• What is a Straddle?

A straddle is an investment strategy involving
the purchase or sale of particular option derivatives that allows the holder to
profit based on how much the price of the underlying security moves, regardless
of the direction of price movement.
A long straddle involves going long, i.e., purchasing, both a call option and a
put option on some stock, interest rate, index or other underlying. The two
options are bought at the same strike price and expire at the same time.
Limited max loss but unlimited profits
A short straddle is a non-directional options trading strategy that involves
simultaneously selling a put and a call of the same underlying security, strike
price and expiration date.Limited max profit but potentially high losses.

• What is a Strangle?

An options strategy where the investor holds a
position in both a call and put with different strike prices but with the same
maturity and underlying asset. This option strategy is profitable only if there
are large movements in the price of the underlying asset.

• Two methods of option
  delivery are "Cash" and "Physical". Explain these terms.

Cash - On option expiry date option seller
delivers cash amounting to the difference between the market and strike price
of the option to the buyer of the option.
Physical - On option expiry date option seller delivers the underlying to the
buyer of the option.

• What is the difference
  between a bond and a warrant?

A warrant is a security that entitles the
holder to buy stock of the company that issued it at a specified price, which
is usually higher than the stock price at time of issue.Warrants are frequently
attached to bonds or preferred stock as a sweetener.

• What's the difference
  between a future and a forward?

Futures contracts are exchange-traded and,
therefore, are standardized contracts. Forward contracts, on the other hand,
are private agreements between two parties and are not as rigid in their stated
terms and conditions.
Because forward contracts are private agreements, there is always a chance that
a party may default on its side of the agreement. Futures contracts have
clearing houses that guarantee the transactions, which drastically lowers the
probability of default to almost never.

Level 3

• What is special about
  an Asian Option?

An Asian option (or average value option) is a
special type of option contract. For Asian options the payoff is determined by
the average underlying price over some pre-set period of time. This is
different to the case of the usual European option, where the payoff of the
option contract depends on the price of the underlying instrument at maturity.

• What is a Convertible
  Bond?

A convertible bond (or convertible debenture)
is a type of bond that can be converted into shares of stock in the issuing
company, usually at some pre-announced ratio. It is a hybrid security with
debt- and equity-like features. A convertible bond has a lower coupon rate as
compared to a normal bond but he is compensated with the ability to convert the
bond to common stock, usually at a substantial discount to the stock's market
value.

• What is a Rights
  Issue?

A company can opt for a rights issue to raise
capital , under this existing shareholders have the privilege to buy a
specified number of new shares from the firm at a specified price within a
specified time. A rights issue is offered to all existing shareholders
individually and may be rejected, accepted in full or accepted in part. Rights
are often transferable, allowing the holder to sell them on the open market.

• Would you expect a
  rights issue to affect an option contract? If so, what effect might it have on
  contract price and specification?

Yes.A rights issue is likely to dliute the
quantity of the contract and the price.So, if option was to buy 100 shares at 1
dollar each
and there was a 1:1 rights issue contact would change to be 200 shares at 50c
each so overal notional remains the same, i.e 100 dollars

• What is the difference
  between "Clean" and "Dirty" bond pricing

The clean price is the price of a bond
excluding any interest that has accrued since issue or the most recent coupon
payment.The dirty price is the price of a bond including the accrued interest.When
bond prices are quoted on a Bloomberg Terminal or Reuters they are quoted using
the clean price.

Business questions (Cash Equities)

• What is a Share?

In financial markets, a share is a unit of
account for various financial instruments including stocks, mutual funds,
limited partnerships, and REIT's.
It is commonly used to refer to equity shares.

• What is a Dividend?

Dividends are payments made by a corporation
to its shareholder members. When a corporation earns a profit or surplus, that
money can be put to two uses: it can either be re-invested in the business
(called retained earnings), or it can be paid to the shareholders as a
dividend. Many corporations retain a portion of their earnings and pay the
remainder as a dividend.

• What does it mean when
  a stock goes Ex-Dividend

A security that is trading without the
dividend (cash or stock) included in the contract price is said to have gone
ex-dividend.
The ex-dividend date is the date on or after which the seller and not the buyer
will retain the right to receive a dividend.This is two stock business days
prior to the record date (dividend payment date).

• Give some examples of
  "corporate actions"?

A corporate action is an event initiated by a
public company that affects the securities (equity or debt) issued by the
company.Some examples of a corporate actions could be dividend (for equity
securities) or coupon payment (for debt securities (bonds), call(early
redemption) of a debt security, stock splits.

• What is clearing?

Clearing denotes all activities from the time
a commitment is made for a transaction until it is settled.Processes included
in clearing are reporting/monitoring, risk margining, netting of trades to
single positions, tax handling, and failure handling.

• Orders Describe a
  limit order?

A limit order is an order to buy a security at
no more (or sell at no less) than a specific price. This gives the customer
some control over the price at which the trade is executed, but may prevent the
order from being executed.

• Describe a market
  order?

A market order is a buy or sell order to be
executed by the broker immediately at current market prices.

• Describe a stop order?

A stop order (also stop loss order) is an
order to buy (or sell) a security once the price of the security has climbed
above (or dropped below) a specified stop price. When the specified stop price
is reached, the stop order is entered as a market order (no limit).

• What is FIX?

The Financial Information eXchange (FIX)
protocol is an electronic communications protocol for international real-time
exchange of information related to the securities transactions and markets.

• What's the difference
  between an ECN and an exchange?

ECN is an Electronic Communication Network
An electronic system that attempts to eliminate the role of a third party in
the execution of orders entered by an exchange market maker or an
over-the-counter market maker, and permits such orders to be entirely or partly
executed.An ECN connects major brokerages and individual traders so that they
can trade directly between themselves without having to go through a middleman.
NASDAQ, NYSE Arca and Globex are examples of electronic market places.
Exchange - An exchange
is a highly organized market where (especially) tradable securities,
commodities, foreign exchange, futures, and options contracts are sold and
bought. Exchanges bring together brokers and dealers who buy and sell these
objects.

• Give examples of
  symbol, RIC, and CUSIP; optional SEDOL and ISIN.

RIC - Reuters
Instrument Code: The RIC is made up
primarily of the security's ticker symbol, optionally followed by a period and
exchange code based on the name of the stock exchange which uses that ticker.
BARC.L :Barclays PLC (London Stock Exchange)
BCS.N :Barclays PLC (New York Stock Exchange)
IBM.N :International Business Machines Corp (New York Stock Exchange)
WMT.N :Wal-Mart Stores Inc (New York Stock Exchange)
CUSIP
- Committee on Uniform Security Identification Procedures - Also stands for the 9-character
alphanumeric security identifiers that they distribute for all North American
securities for the purposes of facilitating clearing and settlement of trades.
The first six characters are known as the "base" (or
"CUSIP-6"), and uniquely identify the issuer,next two identifies the
type of the instrument and last one character checks accuracy for the previous
eight.
037833100 :Apple Inc
931142103 :Wal-Mart
SEDOL - Stock Exchange Daily Official List:* A list
of security identifiers used in the United Kingdom and Ireland for clearing
purposes.The numbers are assigned by the London Stock Exchange, on request by
the security issuer.SEDOLs serve as the NSIN for all securities issued in the
United Kingdom and are therefore part of the security's ISIN.SEDOLs are seven
characters in length, consisting of two parts: a six-place alphanumeric code
and a trailing check digit.
0263494:BAE Systems
ISIN
- The International Securities Identification Number: Is a unique global code that identifies
instruments in different countries to facilitate cross-border trading.ISINs are
12 character identifiers that have a CUSIP or CINS embedded in them, which
always appear in position 3 to 11.
The first two are ISO Country Code, next 9 are the CUSIP code and last one
character is check.
US0378331005 :Apple Inc

• What is VWAP? How does
  it work?

VWAP is a trading acronym for Volume-Weighted
Average Price, the ratio of the value traded to total volume traded over a
particular time horizon (usually one day). It is a measure of the average price
a stock traded at over the trading horizon.

• What is MOO? What is
  the cut off time for new MOC orders and MOC corrections?

A buy or sell order in which the broker is to
execute the order at the market's opening, but does not guarantee the trade
will be executed at the listed opening price but the trade will be executed
within a range of prices, or not at all.
A Market-on-Close (MOC) order is a market order that is submitted to execute as
close to the closing price as possible.
All MOC orders must be received at NYSE (and at AMEX) by 15:40 ET.
New York Stock Exchange (NYSE) rules also prohibit the cancellation or
reduction in size of any market-on-close (MOC) order after 15:40 ET.

• Name some market
  places where trades can be executed.

NASDAQ
NYSE Euronext
Hong Kong Stock Exchange
Tokyo Stock Exchange
London Stock Exchange

• What is SS tick rule?

The Short Sell tick rule.The short sale rule
means that short sales can only be made in rising markets. This rule is
designed to prevent raiders from selling short to drive a stock down.

• What is the purpose of
  booking and settlement?

Trading or booking involves entering into
contracts of sale and purchase.
Settlement of securities is the process whereby securities or interests in
securities are delivered, usually against payment, to fulfill contractual
obligations, such as those arising under securities trades,

• Name some mandatory
  regulatory reports.

Auditor's report on the financial statements
Balance Sheet
Income statement
Statement of retained earnings
Statement of cash flows:
Management discussion and analysis (MD&A)
Quarterly and Annual Reports.

Trade life cycle

1, Order Origination

• Orders are received from Clients by Sales Trader

– By Phone or
– Electronically
• New Orders are entered into Order Management System ( ‘Trade Capture’)

Execution traders then collect Orders from Sales Traders, Use various avenues to execute the orders

– Exchange
– OTC
– Internal inventory / Trader Book etc
Return execution reports back to Sales Trader
Ticketing: Unique Id is assigned to each trade and create Ticket with all the trade information, Ticket ID is used for all further references 
during trade processing.

Comparison: Report Trade information to Order Comparison System, Trade can’t be processed until it is matched with street side report. Unmatched trades are reported back and usually fixed manually.

Confirmation: At the end of the trading day paper confirmations are mailed to clients, Confirmation contains complete details of the trade and Clients use this as transaction record

Booking: All processed orders are entered into firms books. Updates Client positions, financial accounts and firms records and financials.

BO_Clearing: Clearing agency issues Contract to both parties.

BO_Accounting: Maintains the client accounts: Manage the client funds in their accounts. Responsible for calculating balance and maintain required funds based on the account types

BO_Cashiering: Responsible for exchanging Securities and Funds between trading parties

Exchange connectivity testing in BC:

Upstream->CMA_Consolidated Market Access->Exchanges

Different exchanges use different protocols, so CMA translates the upstream message into requried format and then route to exchange. Exchange will send executionreport_ack/partialFill/Fill back to CMA. In test environment, exchange is either manually operated or with auto-crossing feature(inventory). On agreed testing period, QA will cooperate the tester in exchange side to do the testing. If there is problem with the msg received from exchange, QA needs to talk to them.