security market line slope market are Briefly discussed in this section below. The securities market is important part of Macroeconomics.
Italy, XIII century. A wealthy wine merchant goes to Palestine. He brings 5,225 livres in silver to the Venetian port. Fearing for the safety of the money, he gives it to a Venetian bank, in return receiving a bill of exchange in the amount of 5180 livres. The payer is a branch of the bank in the city of Jaffa. Define:
1) How much will the contents of the treasury of the Venetian bank increase after this operation?
2) In the treasury of the branch of the Venetian bank in Jaffa — 12,800 silver livres. How much money will be left there after the branch pays off the debt?
3) What will be the bank’s total profit from this operation?
So, the Venetian bank wrote a bill of exchange, receiving 5225 livres in silver in return. It was by this amount that the contents of his treasury increased. However, when the wine merchant gets to Jaffa, he will be presented with a draft of 5180 livres. Obviously, after the branch treasurer pays the amount indicated in the bill to the merchant, the following will remain in the treasury: 12800-5180 = 7620 livres.
The specificity of this operation lies in the fact that the contents of the bank’s treasury in Venice itself increases, and in Jaffa it decreases. It may seem that if a few more such operations are carried out, the Mediterranean branch will be left without any money at all. However, this is not the case: travelers float back and forth. The main thing in such cases is that the treasury has enough money to pay off potential remittances.
Derivative securities or derivatives are those securities, the rights and obligations of which are associated with the securities.
Derivative securities can also be viewed as documenting a variety of contracts and agreements associated with “classic” securities such as stocks and bonds. As mentioned above, derivative securities include:
• depositary receipts;
A warrant is a security that gives its owner the right to purchase, within a specified period of time, a certain number of ordinary shares at a predetermined price.
The emergence of a warrant is associated with a situation when a joint-stock company provides certain potential shareholders with certain benefits: having received a warrant, such a shareholder postpones the payment date. Later, if the share price rises above the exercise price of the warrant, its owner can sell this security simply by making a profit.
There are two options for granting warrants to investors:
1) free, when warrants are simply attached to bonds. In this case, the investor buys the bond at a certain price, and a warrant is applied to the bond;
2) for a fee, when an investor, purchasing a bond, simultaneously pays for the purchase of a warrant. In this case, the investor immediately acquires a package consisting of bonds and warrants.
At the time the warrants are issued, their execution price exceeds the market price of the shares that can be purchased under the warrants. Therefore, for a certain period of time, warrant holders do not use them, since shares are cheaper on the market. If the market price rises and exceeds the strike price, then it makes economic sense to use a warrant and purchase shares at the strike price. Thus, a warrant is a call option giving the right to purchase shares in the future. In this regard, the pricing of warrants can be approached from the position of the option theory. A warrant, like an option, has a lower cost boundary and an upper price boundary.
The warrant price changes simultaneously with the change in the share price.
In this case, the value of the increase in the price of the warrant is usually equal to the sum of the change in the price of shares. As a result, the profitability of operations with warrants is significantly higher than with shares. Operations with warrants are performed with the aim of:
• Extraction of high income due to the effect of leverage, which is calculated by the forumule:
where Ra is the market price of ordinary shares; Рв is the market price of the warrant;
• creating conditions for the future acquisition of shares at a fixed price;
• reducing the risk when forming a controlling stake;
• obtaining additional income from the difference in the prices of a share and a warrant and using these funds in the financial market until the acquisition of additional shares.
A strip is a security that is a zero-coupon bond that is redeemed through interest payments on a block of government bonds held by the company that issued the strips.
Futures is an obligation to deliver a security at a specified date in the future.
An option is the right to sell or buy a security at a specified time at a fixed price in exchange for a premium.
Futures and options emerged to hedge against price risks and as a planning tool integrated into the market economy. Currently, futures and options hold a key position in the world of securities.
Government securities (GS) are a form of the existence of government internal debt. These are debt securities issued by the state.
Although in their economic essence all types of government securities are debt securities, in practice, each independent government securities gets its own name, which makes it possible to distinguish it from other types of bonds.
Usually, in addition to the term “bond”, the terms “treasury bill”, “certificate”, “loan”, etc. are used. Each country uses its own terminology for issued government securities.
The release of GS into circulation can be used to solve the following main tasks:
1) financing the state budget deficit on a non-inflationary basis, i.e. without additional release of money into circulation, in a broad sense, or in the following cases: when budget expenditures on a certain calendar date exceed the funds at its disposal on the same date (cash deficit); when income receipts for a month or quarter turn out to be less than the funds required in the same period to finance budget expenditures (seasonal deficit); when, at the end of the year, budget revenues are less than its expenditures and this deficit is not covered by budget revenues next year (annual deficit);
2) financing of targeted state programs in the field of housing construction, infrastructure, social security, etc .;
3) regulation of economic activity: money supply in circulation, impact on prices, inflation, costs and investment directions, economic growth, balance of payments, etc.
State securities usually have two very large advantages over any other securities and assets.
Firstly, this is the highest relative level of reliability for invested funds and, accordingly, the minimum risk of losing fixed capital and income from it. Secondly, the most favorable taxation in comparison with other securities or areas of capital investment. There are often no taxes on transactions with government securities and on income received.
Placement of government securities is usually carried out:
1) through central banks or ministries of finance. Depending on the type of bonds issued, the main investors are: population, pension and insurance companies and funds, banks, investment companies and funds;
2) in paper (blank) or paperless forms (in videorecords on accounts in authorized depositories). There is a clear tendency to increase the issue of GS in paperless form;
3) by various methods: auction trading, open sale to everyone at fixed prices, closed distribution among a certain circle of investors, etc.
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security market line slope
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