Lecture Notes: Structured Products, Investment Funds, and Financial Concepts

Structured Products

• Designed to offer capital protection and participate in high-risk investment returns.
• Capital Protection: Provided mainly through derivatives such as swaps, futures, and options.
• Derivatives: Based on other assets like commodities, stocks, and bonds.
• Debenture Stock: In the UK, refers to secured corporate bonds.

Investment Funds and Marketing Laws

• US Established Funds in Europe: Must follow local marketing and tax laws.
• If a UK fund wants EU investors, it must comply with rules in the target country (e.g., Germany).

Legal Financial Documents

• Trusts: Used to set aside funds for future beneficiaries, such as disabled children.
• Codicil: An addendum to a will or a contract.
• Power of Attorney: Allows one person to act on behalf of another as long as they are alive and of sound mind.

Portfolio Construction

• Key Factor: Client's risk tolerance is essential when constructing a portfolio.
• Verification of Identity: Done at the business relationship establishment stage, not during portfolio construction.

Investment Mix for Risk-Averse Investors

• Appropriate Mix: 50% cash, 50% gilts.

Arbitrage Pricing Theory (APT)

• Main Points: APT uses multiple factors that are uncorrelated (e.g., inflation, interest rates, GDP). Not equivalent to single CAPM.

Market Abuse

• Common Offense: Spreading rumors about stock performance to manipulate market prices.

Fiduciary Duty

• Best Execution: Ensuring transactions are conducted in the best interest of the client.

Power of Attorney

• Allows transaction management on behalf of another person who is alive and of sound mind.

Additional Contributions to Pension Schemes

• Flexible Option: Free-Standing AVC offers greater choice of provider and investment direction.

Unit Trusts

• Units Sold By: The manager of the unit trust fund, not by the trustee or depository.

Investment Styles

• Belief in Market Inefficiency: Leads to adopting an active investment style.

Financial Advice on Protection (Insurance)

• Importance: Quantify assets to ensure appropriate insurance cover.

Definition of Money

• Key Feature: Acceptable as a means of settling debt.

Financial Ratios

• Interest Cover: pbit (Profit Before Interest and Tax) / Interest Payable.
• Price Earnings Ratio (PE): Market Price per Share / Earnings per Share.
• Price to Book Ratio: Market Price / NAV per Share.
• Geometric Mean: Multiply data set values, add 1 to each, and find the nth root, then subtract 1.

Bonds

• Coupon Payment Calculation: Bond nominal value × coupon rate ÷ 2 for semi-annual payments.

Options

• Put Option Break even: Share price equal to exercise price minus premium.

Dividend Yield

• Calculation: Firm’s dividend yield = dividend per share / share price.

Market Inefficiency: Active Management

• Belief in market inefficiency necessitates active management.