Rally in Equities Markets Puts Pressure on Bonds

NEW YORK - Prices of U.S. govern­ment securities were lower as gains in European and U.S. equities markets lured investors back into stocks.

A sharp rebound in European stock markets sent Treasurys lower early in the day as investors dumped bonds in favor of equities. The three major stock indexes in Europe rallied Tuesday, with the Frankfurt DAX Index rising 2.7%, the Paris CAC-40 Index gaining 2.8% and the Financial Times-Stock Exchange 100 Share Index jumping 1.9%.

U.S. traders continued that trend, bet­ting that bonds would continue to lose lus­ter in anticipation of a stock-market rally.

"Since the bond market had rallied so much recently in the face of falling equi­ties, people expect the (Treasurys) mar­ket to fall when they see the stock mar­ket rising," said Michelle Girard, Treasury market strategist at Prudential Securities in New York.

By midafternoon, though, technology stocks on the Nasdaq Stock Market had faltered, forcing bond traders to cover short positions.

Earlier Tuesday, a set of retail-sector economic indicators showed a slowing in activity that is generally friendly for bonds, but the market showed little reac­tion.

The Bank of Tokyo-Mitsubishi's Retail Chain Store Sales Index fell 0.2% in the week ended Oct. 21 from the previous week. It was the first time in four weeks that sales at U.S. retailers had declined on a week-to-week basis.

Store sales generally were below ex­pectations for the majority of American retailers, "which caused many retailers to scale back their monthly expectations as well," said Michael Niemira, econo­mist at Bank of Tokyo-Mitsubishi Ltd.in New York.

Redbook Research's latest indicator of national retail sales showed sales up 0.4% in the first three weeks of October compared with the same period in Sep­tember. But the report said that sales had softened from a higher pace earlier in the month.

VOCABULARY:

treasuries - казначейские ценные бумаги (векселя [treasury bills] и облигации [treasury bonds])

lose lus­ter – терять привлекательность

Redbook - еженедельный обзор розничных продаж, представляющий результаты исследования объемов розничных продаж крупных супермаркетов (ам.)

56. Golf IPO Expected to Raise $380m

A public offering of Japan's biggest golf course operator, which is owned by US investment fund Lone Star, will raise US$380m amid an increase in leisure spending and renewed interest in the sport, writes Reuters in Tokyo.

Lone Star is selling about one-third of Pacific Golf International Holdings in Japan's first initial public offering of a golf course management company.

It comes at a time when Japan's economy is rebound­ing and Tokyo shares are at five-year highs.

A rise in consumer spend­ing has also led to an increase in membership fees for golf courses, where busi­ness people strike deals and partnerships and work out problems.

The golf market in Japan is worth more than Y2,000bn (US$17bn), almost equal to that of the US.

Pacific Golf’s IPO follows Lone Star's sale in October of one-third of Tokyo Star Bank.

Also in October it agreed to sell a mortgage business to Sumitomo Trust & Bank­ing.

Pacific Golf yesterday set a price of Y112.000 a share for its IPO.

That was at the top end of the tentative price range of Y102.000 to Y112.000 set last month.

The IPO price values Pacific Golf at 43 times expected earnings – against 17.3 for golf-related products distributor Maruman Co.

Japan's golf market was hit hard after the country's economy burst in the early 1990s.

Nearly 600 Japanese golf courses went under between 1991 and March this year, according to golf maga­zine publisher Ikki Publish­ing.

VOCABULARY:

at 43 times expected earnings – price/earnings ratio = 43

VOCABULARY CHECK

1) Акции с высоким уровнем отношения цены к доходу (выше 20) обычно принадлежат молодым быстрорастущим компаниям, не имеют больших дивидендов и несут большой риск.

2) Cводный индекс Нью-Йоркской фондовой биржи - взвешенный показатель движения курсов акций компаний, зарегистрировавших свои бумаги на Нью-Йоркской фондовой бирже.

3) Дивиденд - это часть прибыли компании, распределяемая среди акционеров.

4) Наиболее известный индекс промышленных акций Доу-Джонса включает акции 30 ведущих промышленных компаний.

5) Актуарный индекс всех акций "Файненшл таймс" - самый широкий индекс в Великобритании, охватывающий около 750 акций.

SECTION 4 DERIVATIVES

LEAD-IN

Derivative is a financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts including swaps, futures, options, forwards and various combinations thereof.

One use of derivative securities is as a tool to transfer risk. For example, farmers can sell futures contracts on a crop to a speculator before the harvest. The farmer offloads (or hedges) the risk that the price will rise or fall, and the speculator accepts the risk with the possibility of a large reward. The farmer knows for certain the revenue he will get for the crop; the speculator will make a profit if the price rises, but also risks making a loss if the price falls.

A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated. The forward price will usually give a good market estimation of the price in the future.

A futures contract is a form of forward contract that has been standardised for a wide range of uses. It is traded on a futures exchange. Futures may also differ from forwards in terms of margin and delivery requirements.

Afutures contract is an order that you place in advance to buy or sell an asset or commodity. The price is fixed when you place the order, but you don’t pay for the asset until the delivery date. Futures markets have existed for a long time in commodities such as wheat, soybeans and copper. The major development of the 1970s occurred when the futures exchanges began to trade contracts on financial assets such as bonds, currencies and stock market indexes.

Participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities—buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculaterather than exchange physical goods (which is the primary activity of the cash/spot market). That is why futures are used as financial instruments by not only producers and consumers but also speculators.

A futures contract is an agreement between two parties: a short position, the party who agrees to deliver a commodity, and a long position, the party who agrees to receive a commodity. In every futures contract, everything is specified: the quantity and quality of the commodity, the specific price per unit, and the date and method of delivery. The “price” of a futures contract is represented by the agreed-upon price of the underlying commodity or financial instrument that will be delivered in the future.

When you open a futures contract, the futures exchange will state a minimum amount of money that you must deposit into your account. This original deposit of money is called the initial margin. When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract.

The initial margin is the minimum amount required to enter into a new futures contract. If your margin account drops to a certain level because of a series of daily losses, brokers are required to make a margin call and request that you make an additional deposit into your account to bring the margin back up to the initial amount.

An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

The two types of options are calls and puts:

A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.

A put gives the holder the right to sell an asset at a certain price within a specific period of time. Putsare very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the optionexpires.

A swap is essentially an agreement in which counterparties (generally two) agree to exchange future cash flows arising from financial instruments. For instance, a borrower agrees to exchange fixed interest payments on a loan with another borrower’s variable interest payments, each borrower thus making the type of payments that suits them better.

VOCABULARY

COMPREHENSION QUESTIONS:

1) What is a derivative? What do derivative transactions include?

2) What aim do the speculators pursue?

3) What do the hedgers want?

4) What is the difference between a futures and a forward contract?

5) Do buyers and sellers in the futures market exchange physical goods?

6) What is the initial margin?

7) When are brokers required to make a margin call?

8) What is an option?

9) Which of the options, a call, or a put, gives its holder the right to sell an asset within a specific period of time?

10) When are currency swaps used?

VOCABULARY PRACTICE

Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in index futures. Through a combination of poor judgment on his part, lack of oversight by management, a naive regulatory environment and unfortunate outside events, Leeson incurred a 1.3 billion dollar loss that bankrupted the centuries old financial institution.

One should keep in mind that one purpose of derivatives is as a form of insurance, to move risk from someone who cannot afford a major loss to someone who could absorb the loss, or is able to hedge against the risk by buying some other derivative.

Futures are explicitly designed to allow the transfer of risk from those who want less risk to those who are willing to take on some risk in exchange for compensation.

A hedger buys or sells in the futures market to secure the future price of a commodity intended to be sold at a later date in the cash market. This helps protect against price risks.

Other market participants, however, do not aim to minimize risk but rather to benefit from the inherently risky nature of the futures market. These are the speculators, and they aim to profit from the very price change that hedgers are protecting themselves against. Hedgers want to minimize their risk no matter what they're investing in, while speculators want to increase their risk and therefore maximize their profits.

Suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange.

TEXT TO TRANSLATE:

57. Future Perfect

IF YOU believe what you read in newspapers, derivatives (op­tions, swaps and so on) are new, complex, risky and nasty—and of value only to those who make money selling them. In the mid-1990s, indeed, rapid growth in derivatives markets (not to men­tion some spectacular losses by those that used them) prompted concerns among regulators that derivatives might pose a threat to the global financial system.

In recent years these worries have abated, as regulators have be­come better acquainted with such instruments and even the most com­plex can be broken down into two easily understood blocks: forward contracts, in which one party agrees to buy something from an­other at a specified future date for a specified price; and option con­tracts, in which one party agrees to provide the right—but not the obli­gation—to another to buy or sell something in the future.

Neither is exactly new. Aristo­tle mentions options in "Politics"; and there was an active market in tulip options in Amsterdam in the 17th century. In the same century an organised market for future de­livery of rice was developed in Osaka. Even before that, traders at medieval fairs used arrangements that were recognisably forward contracts. Much of the arcane lan­guage merely reflects the fact that these two blocks are being applied and combined in different ways.

Forward markets are the sim­plest. In the markets for perishable commodities, their forward price is determined by expectations about future demand and supply. For financial assets, the price is de­termined by the cost of holding the asset. In foreign-exchange mar­kets, for example, the forward rate is arrived at by looking at the dif­ference between two currencies' interest rates. Since no payments are made until the contract expires, the forward rate simply re­flects the fact that one currency is paying higher interest. If it did not, somebody could buy the currency and sell it back at the same price, earning greater interest over the life of the contract. In other words, forward prices are not a market's prediction about the direction a fi­nancial asset is likely to take.

Calling the options

Options are different. They are a form of insurance. They enable a purchaser to buy or sell an asset at a certain price on a given date, but allow him to walk away if he wish­es. The right to buy is generally dubbed a "call", and to sell a "put". There is also a difference between European-style options, which can be exercised (cashed in) only when they expire, and American-style ones, which can be exercised at any time during the option's life. So, for example, if a person buys a European-style six-month call op­tion on Citigroup, he would buy an option that has a six-month life, and can be exercised at the end of six months. If Citigroup's share price falls in the meantime, he will not exercise the option.

Derivatives are traded in two types of market. The first is on ex­changes, such as the London Inter­national Financial Futures and Options Exchange (liffe), or the Chicago Board of Trade (CBOT). The second is the over-the-counter (OTC) market—that is, people and firms trading directly with one an­other.

A hedge by any other name

Many things have contributed to the 12-fold increase since 1990 in the use of derivatives. Originally, the main demand came from farmers and those to whom they sold. Farmers knew their costs; to prosper (even to sur­vive), they needed to know at what price they could sell their produce. The CBOT was set up as an agricultural exchange in 1848.

In recent decades, demand has come mainly from those who wish to hedge financial exposures. Financial markets became more volatile in the 1970s and 1980s. After the breakdown of the Bretton Woods system of fixed exchange rates in the early 1970s, exchange rates became much more volatile. This was exacerbated by the two oil shocks in that decade and by higher inflation—which also led to more volatile interest rates. Demand for instruments to guard against these risks surged.

The first currency futures were launched by the Chicago Mercan­tile Exchange's International Mon­etary Market in 1972; and the first interest-rate futures by the CBOT in 1975. Since then, derivatives ex­changes have sprung up in all de­veloped economies and in many developing ones.

Risky galore

Do derivatives make the world riskier? Certainly, some compa­nies that have used them have lost lots of money. Think, for example, of Procter & Gamble, which lost heavily in 1994 (as did several other firms) by using complex interest-rate swaps; or of Barings, a British bank that was felled in 1995 by the activities of an employee, Nick Leeson, in Japanese stockmarket futures and options markets.

Yet in such cases derivatives were not, of themselves, the main culprits. Either or both of two other problems were generally to blame. Many companies that lost money using derivatives treated their trea­sury departments, which deal with the cash coming into and out of a company and organise its bor­rowing, as a profit centre. This gave them an incentive to take risk. The second common fault has been bad risk management. In some cases—Barings is an example— this has opened the way for fraud.

Others argue that derivatives increasingly affect the instru­ments on which they are based— the tail wagging the dog. This argu­ment, too, is wrong-headed. Deriv­atives are simply another, more efficient way of dealing in the un­derlying instrument (and swaps have no underlying instrument anyway); there is no tail and no dog, since it is all one market.

VOCABULARY:

regulator – регулирующий орган, орган надзора

London International Financial Futures Exchange (LIFFE) - Лондонская международная биржа финансовых фьючерсов (ЛИФФЕ; читается «лайф»): крупнейшая в Западной Европе срочная финансовая биржа

Chicago Board of Trade (CBOT; CBT) - «Чикаго борд оф трэйд» (США): крупнейшая в мире срочная товарная биржа, специализирующаяся на зерновых и финансовых срочных сделках

volatile - неустойчивый, переменчивый, колеблющийся

volatility - неустойчивость (изменчивость цен): показатель неустойчивости конъюнктуры

exacerbate - обострять, осложнять, углублять, усиливать (кризис, недовольство)

Chicago Mercantile Exchange (CME; Merc) - Чикагская товарная биржа (ЧМЕ): вторая по объему операций в США срочная товарная биржа, специализирующаяся на продуктах и финансовых срочных сделках; финансовые сделки проводятся через ИММ.

International Monetary Market (IMM) - Международный валютный рынок (ИММ): подразделение Чикагской торговой биржи, специализирующееся на финансовых фьючерсах на казначейские векселя и депозитные сертификаты, иностранную валюту, евродолларовые депозиты.

interest-rate swap – процентный своп: соглашение между двумя сторонами об обмене процентными платежами по кредитным обязательствами, разным по условиями, но равным по сумме; расчет проводится по разнице, а основная сумма никогда реально не меняет владельцев

profit center - «профит-центр» (центр получения прибыли): подразделение компании, которое самостоятельно получает прибыль и несет расходы

underlying asset - актив, лежащий в основе производного финансового инструмента

VOCABULARY CHECK

1) В отличие от форвардного контракта фьючерсный торгуется на бирже, имеет стандартизированные условия и обычно не предполагает физической поставки товара.

2) Спекулянты стремятся получить прибыль при возможном изменении цен.

3) Задача хеджера – минимизация ценового риска, страхование от возможных потерь.

4) Открыть длинную позицию» или «принять длинную позицию» означает купить базовую валюту, и наоборот, «открыть короткую позицию» значит продать базовую валюту. Так, на пример, совершение сделки на покупку 100 000 EURUSD означает покупку 100 000 евро за доллары. Тем самым происходит открытие длинной позиции по евро.

5) Опцион на покупку - опцион, дающий право, но не обязывающий купить фьючерсный контракт, товар или иную ценность по заранее установленной цене. Используется при игре на повышение.

SECTION 5 WRONGDOING, CORRUPTION, INSIDER DEALING

LEAD-IN

The buying or selling of a security by someone who has access to material, nonpublic information about the security is insider dealing or insider trading

Chinese walls are measures that you can take to stop knowledge in one department of your company being illegally used by another department, to buy or sell shares for example.

Price fixing occurs when a group of companies in the same market secretly agree to fix prices at a certain level, so they do not have to compete with each other.

When a group of investors work together to stop a financial market functioning as it should, to gain an advantage for themselves, it is called market rigging:

An illegal payment to persuade someone to do something is a bribe, or informally a backhander (BrE only), kickback or sweetener. To bribe someone is bribery. Someone who receives bribes is corrupt and involved in corruption.

A type of fraud where someone illegally gets money from their employer is embezzlement. One accountant sent false invoices to the company he worked for, and paid money from his company into bank accounts of false companies he had “created”. He embezzled $2 million – quite a scam.

Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source and destination of the money in question. Hiding the illegal origin of money is common – gangsters buy property with money from drugs. When they sell the property, the money becomes “legal”. But banks now help by telling when someone makes a large cash deposit.

VOCABULARY

COMPREHENSION QUESTIONS:

1) What is insider dealing (insider trading)?

2) When is insider dealing considered to be illegal?

3) Are companies’ directors the only ones who have the potential to be convicted of insider trading?

4) Why does SEC require all insiders to report all their transactions?

5) When does price fixing occur?

6) What can a group of investors do to gain an advantage for themselves in the market?

VOCABULARY PRACTICE

An example of illegal insider trading may be that you, as an assistant to the Chief Executive Officer, learn that your company is going to be taken over before it is announced to the stock exchange. Knowing that such a move is liable to cause the price to rise, you buy shares in the company and subsequently profit from the transaction. A less dramatic (but still potentially lucrative) example would be trading on the quarterly earnings/losses shortly before they are announced.

Organized criminals, in particular drug traffickers, generate large amounts of cash which they must convert and legitimize in order to benefit from, and further finance their illegal activity. This is called money laundering.

TEXT TO TRANSLATE:

58. Soros found guilty of insider trading

Billionaire financier and philanthropist George Soros has been fined 2.2m euros (Ј1.4m; $2.3m) for insider trading.

A Paris court found Mr Soros guilty of profiting from inside knowledge of a 1988 takeover bid for Societe Generale, a French bank.

Mr Soros, who was not in court, denied the allegations.

In a statement he said he was "astounded and dismayed" by the ruling, and would "appeal the decision to the highest level necessary".

"Let me repeat now what I have maintained from the start: at no point was I in possession of inside information regarding Societe Generale," he said.

"The charges against me are unfounded and without merit."

His lawyers had argued that the incident was too far in the past to achieve a fair trial.

Two of his co-defendants, Lebanese financier Samir Traboulsi and Jean-Charles Naouri, an aide to former finance minister Pierre Beregevoy, were acquitted.

Cashing in

The charges relate to a raid on Societe Generale by tycoon Georges Pebereau, who built up a substantial stake in the bank before trying to take control.

The bid failed, but not before the bank's share price had more than doubled.

Mr Soros and three other defendants, the court found, bought Societe Generale stock when it was cheap, and cashed in their investment when the price rose after the bid became public.

Two other businessmen implicated in the scandal - Edmond Safra and Robert Maxwell - have since died.

The affair was widely seen as a symptom of the corruption of public life in France under the presidency of Francois Mitterrand, from 1981 to 1995.

Mr Pebereau, who has never been charged with any offence in relation to the Societe Generale deal, was acting at the instigation of Mr Miterrand's socialist administration, which opposed the bank's privatisation under the previous government.

High profile

Mr Soros is no stranger to controversy.

He is widely known as the man who broke the pound, after helping force sterling out of Europe's exchange rate mechanism in 1992.

Mr Soros, Hungarian-born but domiciled in the US, was also reportedly the first American to earn a billion dollars in a single year.

In recent years, he has shifted his focus to his wide range of charitable projects, which concentrate on developing democracy and education in Eastern Europe.

59. Toyota Faces Insider Trading Probe Around Share Buyback

The Tokyo Stock Exchange is investigating alleged insider trading in Toyota, the world's third largest car maker, ahead of an announcement it was planning to buy back and can­cel Y250bn ($2.3bn) of its own shares.

The exchange's probe will focus on the abnormally heavy trading in the company's shares that took place between 9am and 9.40am on January 16, before the official announce­ment about the buyback at 3pm the same day.

Toyota's share price rose nearly 10 per cent in the first 10 minutes after the market opened and closed up 12.7 per cent on volume, four times higher than the previous day.

Toyota said it understood the TSE made routine enquiries into market move­ments whenever there was a major market announcement by a company.

The TSE declined to com­ment on any specific investiga­tions.

Any investigation not only puts the spotlight on disclo­sure standards within Toyota and its advisers, but calls into question moves to allow com­panies to use own share buy-backs to support their share prices.

The government is designing measures to support Japan's flagging stock market and has agreed to free up the regulations that govern share buy-backs.

Japanese companies cannot repurchase their shares except under special circumstances, for example when making pro­visions for stock option schemes or when cancelling them.

The proposals would allow companies to buy and hold their shares, similar to the Treasury Stock system used in the US.

Two policy making panels, convened to discuss market support measures, backed the idea but warned that Japan's wayward disclosure regime could create opportunities for abuse.

They urged the government to ensure that proper mea­sures were in place to prevent privileged information being leaked to the market before proposing to relax the environ­ment surrounding share buy-backs.

The government is keen to support share prices to allevi­ate the pressure on smaller shareholders. The Nikkei 225 has dropped from a high of about 20,000 last year to under 14,000.

An investigation into insider dealing ahead of Toyota's announcement could confirm fears that market support mea­sures would not benefit the people they were designed to help.

Toyota's decision to buy back its own shares was prompted by Japan's banks unwinding their holdings in the company. This put consid­erable selling pressure on its share price.

As Japanese banks continue to unwind their holdings in a number of major Japanese companies, further selling pressure on those companies' shares and the wider market is expected.

The government hoped that liberalising share buybacks would remove the discrepancy between the supply and the demand for those companies' shares.

VOCABULARY CHECK

1) Инсайдерские торговые операции – это операции с ценными бумагами на основе внутренней информации о деятельности компании-эмитента.

2) Инсайдерская торговля может быть как легальной, так и незаконной, в зависимости от степени доступности информации.

3) В инсайдерскую торговлю потенциально могут быть вовлечены не только директора компаний, но и члены их семей, брокеры и др. заинтересованные лица.

4) Комиссия по ценным бумагам и биржам (США) требует, чтобы все лица, имеющие доступ к внутренней информации о корпорации, сообщали о своих сделках.

5) Группа инвесторов может манипулировать рынком с помощью определенной стратегии для получения спекулятивной прибыли.

6) С целью выявления незаконных сделок банки в настоящее время могут предоставлять информацию о клиентах с большим количеством денег на счетах.

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