Hamdard Institute of management and

sciences (HIMS)

Subject: - Types of securities

Group Members Name

Nadeem Ul Haq Khan

Mirza Affan Baig

Samit Zafar

Submitted to: Prof. Aun Ali

 LETTER OF TRANSMITTAL

18-05-2011

Prof. Aun Ali

Course Instructor, Methods of Business Research,
Hamdard University,
Karachi.

Dear Sir,
Our report was on the topic, “Type of securities”. We find all the data on
internet that’s why we makes no representation concerning and does not
guarantee the source, originality, accuracy, completeness or reliability of
any statement, information, data, finding, interpretation, advice, opinion
or View presented. We have got great benefit of on working over this
course report. It helped us widening our vision, improving our quality of
work, building self reliance work and gives a vital experience in order to
improve our analytical skills. We hope it’s up to your expectations and
fulfils all the requirements given by you.

Obediently,
Nadeem Ul Haq
Mirza Affan
Samit Zafar
 LETTER OF ACKNOWLEDGE

18-05-2011

First and foremost, we would like to thanks ALLAH Almighty for

giving us capability and strength to complete this report on time.

I am extremely grateful to my course instructor Mr. Aun Ali for

imparting the knowledge and giving us guidance at every stage of our

report, without which our report will be incomplete.

Obediently
Nadeem Ul Haq
Mirza Affan
Samit Zafar
MBA-3
HIMS
CONTENT Page

BONDS
 Corporate bonds
 Money market instruments
 Euro debt securities
 Bearer and Registered Bonds
 General Obligation and Revenue Bonds
 Treasury Bonds
 Treasury Notes
 Treasury Bills
 Participating Bonds
 Convertible Bonds
 Zero Coupon Bonds
 High Yield (Junk) Bonds
 Warrant Bond (Bonds with warrants)
 Indexed Bonds
 Sinking Bond Funds
 Commercial Paper
 Mortgaged backed Securities

EQUITIES
 Common Stock
 Preferred Stock
 Par Value
 Book Value
 Classes of Stock
 Stock Splits
 Dividends
 Ex-Dividend
 DRIPS
 Treasury Stock
 Depository Receipts
 COMMODITIES

DERIVATIVES
 Futures
 Options
 Covered calls
 Uncovered calls
 Index options
 Warrants
 Swaps
 Repurchase Agreements
 Bonds

This market trades in the debt instruments issued by governments,

government agencies, such as municipalities, and corporations. The
bond market usually attracts more interest from professional and
institutional investors than from the general public. Institutional
investors include pension funds, insurance companies, bank trust
Departments and collective investment schemes. A bond is a long-term
loan issued in the form of a negotiable security by a corporation,
government, or government agency. Bonds are loans from the
bondholder (buyer) to the issuer (seller). A bond is a promise by the
issuer to pay back the amount loaned to it (called principal) plus an
agreed to amount of interest on or before a stated date. The interest may
be paid periodically during the life of the loan or all at once when the
loan is paid back. Bonds are also called fixed income instruments,
because the amount of income that the bond will generate is fixed by the
stated interest rate of the bond. The date when the loan becomes due is
called the maturity date of the bond. The loan is represented by a
physical piece of paper and if it pays interest periodically during the life
of the loan, the certificate may also consist of coupons. Coupons are
detachable from the bond certificate itself, usually by a perforation, and
are presented to the paying agent of the issuer, usually a commercial
bank, for payment. For this reason they are called coupon bonds. While
coupon bonds are no longer widely used, the amount of interest that a
bond pays is still known as the coupon rate and the bond is still known
as a coupon bond.
 Corporate bonds
Corporate bonds represent the debt of commercial or industrial entities.
Debentures have a long maturity, typically at least ten years, whereas
notes have a shorter maturity. Commercial paper is a simple form of
debt security that essentially represents a post-dated check with a
maturity of not more than 270 days.

Money market instruments

Money market instruments are short term debt instruments that may
have characteristics of deposit accounts, such as certificates of deposit,
and certain bills of exchange. They are highly liquid and are sometimes
referred to as "near cash". Commercial paper is also often highly liquid.

Euro debt securities

Euro debt securities are securities issued internationally outside their

domestic market in a denomination different from that of the issuer's
domicile. They include Eurobonds and euro notes. Eurobonds are
characteristically underwritten, and not secured, and interest is paid
gross. A euro note may take the form of euro-commercial paper (ECP)
or euro-certificates of deposit.

Government bonds

Government bonds are medium or long term debt securities issued by

sovereign governments or their agencies. Typically they carry a lower
rate of interest than corporate bonds, and serve as a source of finance for
governments. U.S. federal government bonds are called treasuries.
Because of their liquidity and perceived low risk, treasuries are used to
manage the money supply in the open market operations of non-US
central banks.

Sub-sovereign government bonds

Sub-sovereign government bonds, known in the U.S. as municipal
bonds, represent the debt of state, provincial, territorial, municipal or
other governmental units other than sovereign governments.

Supranational bonds
Supranational bonds represent the debt of international organizations
such as the World Bank, the International Monetary Fund, regional
multilateral development banks and others.

Bearer and Registered Bonds

Bearer and Registered Bonds are also identified by the way they are
owned. Bearer bonds, for example, belong to the person who holds them
and ownership is not otherwise recorded.
Eurobonds are issued in this format. While this form of ownership
carries the risk of losing the certificate, it offers the highest degree of
anonymity and that is why in some countries, the United States for
example, they are no longer allowed. The other common type of format
is a fully registered bond, either in certificate form or in book entry. The
owner’s name is recorded with a transfer agent and interest payments are
made either by check or electronic credit. The book entry method, where
no certificate is issued and ownership is merely recorded in a ledger, is
growing in popularity because it reduces transfer costs, simplifies
handling, and decreases the probability of losing the certificate or having
it stolen. The reason a bond is called a debt instrument is because there
are no ownership rights in a bond. The promise to pay is what
distinguishes bonds from stocks. The holder of a bond is a creditor, the
holder or a stock is an owner. Although the holders of corporate bonds
lack voting rights and have no participation in net profits, they may
demand full payment of their bonds even if it means forcing the
company into bankruptcy. Owners of stock have no such claim. In the
case of liquidation or bankruptcy of the issuer, the bondholders are paid
before shareholders. Bondholders are said to have a superior claim on
the assets of the issuer. They are superior creditors in the eyes of the
law.

General Obligation and Revenue Bonds

General obligation bonds usually refer to government bonds and are

backed by the full faith and credit of the taxing power (country,
municipality, etc.) that issues them. Revenue bonds are payable only
from some specific source of taxes (highways tolls, water bills, etc.) and
are not subject to the general taxing power of the issuer.

Treasury/Government Bonds

A country’s long term financing needs are met by issuing bonds that
mature from anywhere after one year up to essentially as long as a
country wants and to which the public is willing to commit its money.
Average lengths run to 20 or 30 years and are called long-term bonds.
These long-term bonds are watched closely by the market as an
indication of where long-term interest rates will be heading. Long -term
bonds may be subject to being called before they mature. Callable
means that the issuer has the right to pay off the bond sooner than the
maturity date. If a bond is subject to being called before it matures, both
dates are mentioned in its listing. Thus a bond that pays 5% and matures
in June 2010, but is callable after June of 2005 is referred to as the 5% of
June 2005-2010. Treasury’s usually issue split-date callable bonds
during periods of high interest rates in order to have the opportunity to
pay them off sooner if interest rates drop The government would then
issue new bonds at a lower rate.

Treasury/Government Notes

Notes usually have a maturity of from 2 to 10 years and are known as

intermediate term investment instruments. Notes are not callable before
their maturity date. Notes usually pay interest semiannually.

Treasury/Government Bills

T-bills, or bills, are the shortest term Treasury security and usually
mature in 3, 6, 9 or 12 months. T-bills carry no coupon rate of interest
but are sold at a discount from par. Par is the face amount of the bond.
This means that the price paid for a T-bill is less than its value at
maturity. Thus a 12 month T-bill yielding 5% would be sold at a 5%
discount from the face value of the bond.

Participating Bonds

These bonds not only bear a fixed rate of interest, but also have a profit-
sharing feature. The bondholder is entitled to participate along with
shareholders in earnings of the corporation to the extent described in the
bond contract. These are used widely in Europe and are usually issued
by weak companies as an added inducement to attract buyers.
 Convertible Bonds

Usually all that the bondholder is promised is the principal and interest.
There is an exception to this rule and it is called a convertible bond. This
is a bond that at its maturity, or some other stated date, may be
converted to a stated number of common shares in a corporation. A new
corporation without much money or track record for paying off bonds or
a corporation with a low credit rating might offer convertible bonds
because the borrowing costs of straight bonds would be prohibitive.
Convertible bonds rank below conventional bonds but ahead of any
equity in their claim on the assets of a company.

Zero Coupon Bonds

Zeros, as they are frequently referred to, are issued at a discount from
their par value. Unlike a conventional bond, zeros pay no interest
between issuance and redemption but only at maturity. Although the
bondholder forfeits immediate income from the zero, the yield to
maturity is computed on the assumption that the coupon interest is
reinvested at the prevailing rate when received. Consequently, as interest
rates fall the reinvestment is presumed to be at the lower rate, reducing
the yield but increasing the price of the bond. Likewise, if interest rates
rise, the bond’s price will fall, but the coupons are reinvested at the
higher rate, raising the yield to maturity. With no cash flow from coupon
payments to act as a cushion, zero prices swing rapidly up and down in
response to even minor changes in the interest rate. In times of high
interest rates, zeros are very popular in order to lock in those high rates.
 High Yield (Junk) Bonds

The top four rankings of any rating service are usually known as
investment grades. Bonds in these categories may generally be bought
for fiduciary accounts unless specifically restricted. Fiduciary accounts
include pension plans and some bank trust accounts. Any bond below
investment grade is referred to as a “junk” bond. But, in the terms of the
market, it is called a high-yield bond. It is called junk, because it
describes the quality of the bond. Brokers and dealers prefer the term
high yield because it sounds better and also because it describes the
yield. The yield is how much a bond pays, or the interest rate. The bond
must pay a high level of interest because of its low rating. The risk of the
issuer not being able to pay off the bonds is high, so the potential return
to the investor must also be high in order to justify taking the risk. The
low rating is a result of the rating service determining that the issuer is
not in sound financial shape and may not be able to honor its
commitment to pay off the bonds.

Warrant Bonds or Bonds with Warrants

These bonds contain the right (warrants) to purchase shares of common

stock at a specified price. Usually the warrant price is higher than the
current market price.

Indexed Bonds

These bonds are used in periods of high inflation. The interest payments
are indexed to the inflation rate.

Sinking Bond Funds

This is not technically a separate category of bonds. Any bond issue may
have a “sinking” feature. With this feature, the issuer agrees to set aside
a certain amount of money each and every year for the eventual
retirement of the bond issue. A bond issue is retired when it is fully paid.
After a specified period, redemptions may begin and bonds may be
called. This results in the shortening of the life of the issue so that even
if an issue was originally offered with a 20-year maturity, the bonds
might be called after 10 or 15 years. Because the sinking fund deposits
are to be used only for the retirement of a specific outstanding issue, the
existence of a “sinker” increases the bond’s safety and marketability.
Payments by the issuer to a sinking fund are mandatory and the failure to
make them in a timely manner could threaten the issuer with default.
Bondholders should not assume that a sinking fund absolutely protects
them from loss, although it may help increase the level of confidence
that the bonds will be fully paid.

Commercial Paper

Commercial paper is short- term debt issued by a corporation.

Commercial paper has a maturity date of less than one year, sometimes
just a few months. It is an unsecured promissory note and may be issued
at a discount to the par value. Interest on commercial paper is usually
paid only at the maturity date.

Mortgage backed securities

Mortgages are a conveyance of title to property that is given as security
for the payment of a debt. When a person obtains a mortgage on a house
he or she actually signs two instruments. The first is the note that is a
simple promise to pay, like any other note. The mortgage document is
the document that transfers title of the house to the name of the
institution or person lending the money as security for the note. The
house is put up as security in order that the lender will have an asset
behind the note in case the debtor defaults on the payments. If the debtor
does default, the lender has the right to sell the house in order to cover
the debt. Mortgages are combined with other mortgages to create what is
called mortgage backed securities. These securities are backed by the
mortgages attached. The payments are passed through from the debtor to
the investor. These mortgages can then be sold in the open market and
do not have to be held until the entire debt is paid off. The process of
converting assets into a negotiable security for resale in the financial
markets is known as securitizing the asset. Mortgage backed securities
may be sold with the principal and interest, principal only, or interest
only being passed through to the buyer.

EQUITIES
The principal focus of securities regulation is on the equities market
because it attracts much more interest from the general public which is
usually less sophisticated than professional or institutional investors.
This market trades shares of common stocks issued by corporations.

Common Stock

All corporations issue a stock that has the last claim on the corporation’s
assets. The most frequently used term for this kind of stock is common
stock, although in the United Kingdom and Australia they are called
ordinary shares. It is the first security to be issued and the last to be
retired. Common stock represents the chief ownership of a corporation
and usually is the only issue that has a vote in managing the corporation.
Should a company go bankrupt, holders of senior securities like bonds
and preferred stock will be paid first. Common stock owners, therefore,
may receive nothing for their shares in the event the corporation
becomes bankrupt or is forced into liquidation. Common stock is also
usually the only stock that can vote for the members of the board of
directors of a corporation, although there are exceptions, such as some
issues of preferred stock.
 Preferred Stock

The term preferred stock is almost a misnomer. This type of stock

usually does not have any voting rights and is often retired after a certain
period of time, usually about 10 years. The “preference” comes in that
these shares are entitled to dividend payments or claims on assets in the
case of bankruptcy before any payment to the common stock holders,
but still only after all bondholders have been paid. Dividends are
usually, but not always, cumulative. Dividends are a distribution to
stockholders declared by a corporation’s board of directors based upon
profits. Dividends may be declared either in cash or additional stock.
Cumulative means that if a dividend payment is missed because there
are no profits to pay the dividend, the preferred stock holders must be
paid all missed dividends before the common stock holders can be paid
anything. Preferred stock may also be issued in a form known as
convertible preferred stock. This means that the preferred stock may be
converted into common stock (much like a convertible bond). When a
convertible preferred stock is issued it usually has voting rights equal to
the terms of convertibility.

Par Value

Common stock is issued with a par, face or stated value. These terms are
of more concern to the accountants than they are to the investor. Par
value is usually arbitrarily fixed based upon some financial or tax
criteria. Par value is usually set as low as possible. Some stock carries no
par value. If there is a listed par value for a stock, the only significance
to the investor is that the stock cannot be issued by the corporation for
less than its par value. Any stock issued below the par value is known as
watered stock. Depending upon the laws of each country, an investor
who purchases watered stock may be liable to the corporation for the
difference between the par value and what the investor actually paid. Par
value for stock is only relevant with respect to the original issue by the
company. The stock may sell at any price above or below the stated par
value in subsequent trades in the secondary market.
Unlike stock, par value for bonds is very important and is the face
amount of the bond.

Book Value

Book value is the stated value of the assets of the corporation behind
each share of common stock. It is determined by adding the par value,
capital surplus and retained earnings, subtracting any intangible assets
and dividing by the number of shares outstanding. The importance of
book value is not universally agreed upon. Some believe that it is
important as a test to determine the investment value of the stock. If the
market value, the price at which the stock is selling on the open market,
is less than the book value, speculators believe that some raider may
purchase the company and sell it off in pieces. The value of the separate
pieces is known as its breakup value and in this case the breakup value
would be more than the book value. Others believe that the book value is
not a very accurate value. They believe that since the assets of a
corporation are carried on the books at cost less depreciation, the actual
replacement costs of these assets, or their value if sold, may not be fairly
reflected.

Classes of Stock

Sometimes a corporation will issue more than one class of common

stock. The difference between the classes is usually based upon their
voting rights. Some classes have superior (called weighted) voting
rights. Some classes have no voting rights at all. Different classes are
usually labeled by letters such a class A or class B.
 Stock Splits

A stock split occurs when a company divides its shares. The split has no
effect on the company’s net worth or the value of the shareholder’s
investment. A split just spreads the investment over more shares. For
example, if a corporation with 1 million shares outstanding should
increase that number to 2 million, then it would be said that the
corporation split the shares 2 for 1 and the price of the share would be
divided by 2.
Therefore, the owner of 100 shares of this company that were priced at
US$10.00 would, after the split, own 200 shares priced at US$5.00.
Corporations usually split a stock in order to lower the price and
increase the potential number of owners by making the stock more
affordable. A company usually wants to broaden ownership in order to
meet some exchange rule or to make itself more visible to the
investment community. By being owned by a larger number of investors
and being more affordable, it is easier for a broker to sell those shares to
others.
A reverse stock split, on the other hand, reduces the number of shares
and increases the price of the stock. Some exchanges require a minimum
stock price to be listed and a reverse split may be done to comply with
this requirement. Very low priced shares are frequently referred to as
“penny stocks”, even though they may be selling for more than that and
are not very well regarded by the investment community. A reverse
stock split would raise the price of the stock and perhaps the profile of
the company in the market place. Reverse stock splits may indicate that
a company is in financial trouble.
 Dividends

Dividends, earnings from stocks, are declared by the board of directors

and usually paid in either cash or additional shares. A corporation’s
dividend policy depends upon such factors as cash position, growth
prospects, stability of earning, capital spending needs and reputation.
Many investors buy stocks because of the company’s dividend history
and rely on the cash distributions for income. Generally, the larger and
older companies pay dividends in cash and the smaller and newer
companies pay dividends, if they pay them at all, in additional shares.
Since cash dividends are paid out of current earnings of the company,
the smaller and newer companies that find it necessary to retain the cash
for future growth cannot afford to pay cash dividends. Dividends may
also be paid in the form of other property, such as shares in another
company such as a subsidiary.

Ex-Dividend

A stock is said to be selling ex-dividend when the dividend declared by

the company is not available to the purchaser of the stock. The dividend
is usually not available to the purchaser because the stock was bought
too late for the purchaser to be the record holder of the security on the
date necessary to receive the dividend (the record date). On days when a
stock trades ex-dividend, its market price is reduced by the amount of
the dividend. The purchaser buys at the price of the stock minus the
price of the dividend.

DRIPS

Dividend Re-Investment Plans, or DRIPS as they are commonly known,

are plans that are sponsored by most large companies. These plans allow
the shareholder to reinvest all cash dividends directly into the purchase
of additional shares of the corporation.
These shares are purchased directly from the corporation in the primary
market. The reinvestment is automatic and handled by the corporation.
No share certificates are issued, the shares are book entry holdings, and
usually include fractional shares that could not be purchased in the
secondary market.

Treasury Stock

Shares that have been issued to the public in the primary market and
then repurchased by a company from its own shareholders in the
secondary market are referred to as treasury shares because they are
returned to the treasury of the company. These shares have no voting
rights, receive no dividends and are not used in the computation of
earnings per share in the corporation’s financial records. The corporation
may use treasury stock for employee stock purchase plans, to fund
executive stock options or bonuses, as a vehicle to acquire the assets of
another corporation through an exchange of stock tender offer, or simply
as an investment because the board of directors believes that the stock is
under priced and may even be below book value.
Treasury stock, or the acquisition of treasury stock, may also be used as
a defense against a raid on the company. By taking a large amount of
stock out of the market, the management would have greater control
because treasury stock cannot be voted against management.

Depository Receipts

Depository receipts evidence shares of a corporation that is incorporated

outside the country in which the receipts are traded. So, for example, a
company domiciled in
Japan (SONY) could list on the Jakarta Stock Exchange through the use
of Indonesian depository receipts and be traded on the Jakarta market.
Depository receipts are usually named after the country in which they
sell and are usually referred to by an acronym made up of the first letter
of the selling country followed by DR for depository receipts.
So in our example, an Indonesian would buy Sony IDRs.
Transactions in the depository receipts are made in lieu of trading in the
security itself.
The depository receipts are usually issued by a foreign branch of a
domestic bank for the shares of the underlying company held in custody
in the country of the corporation’s domicile. If authorized by law,
depository receipts could also be issued based upon deposits held in the
local central depository of the country of domicile. Depository receipts
are usually listed and traded according to the rules of the exchanges on
which they appear.
The listing of depository receipts simplifies the complicated foreign
transfer and settlement process and allows domestic investors to receive
dividends in their local currency and financial reports in their local
language.

COMMODITIES

A commodity is not technically a security, but the contract to buy or sell

the commodity is a security. Because it is the contracts to buy or sell that
are being traded, investors deal with these securities without ever seeing
the commodity that is the subject of the contract. The commodity is
described in the contract and the need to see or handle the actual
commodity does not arise. The commodities market involves the
purchase or sale of products such as oil, gold, silver, copper, and many
agricultural products. Currency markets have become the ultimate
commodity markets with worldwide influence. Interest rates and specific
stock indexes are two other of the most recently introduced subjects of
commodity contracts.
Since some commodities cannot be delivered (interest rates) and most
commodity traders don’t want the commodity delivered, (pork bellies),
commodity contracts may also be settled for cash rather than the
underlying commodity that is the subject matter of the contract. The
price of the settlement is determined by the difference in the cost of the
commodity at the time of purchase or sale and the cost of the commodity
at the time of the expiration of the contract.
Commodity positions may also be closed out by purchasing the opposite
position, rather than the commodity or cash. For example, if a trader has
bought a commodity he or she will sell the same amount of the same
commodity before the expiration of the contract.
Likewise, a seller will buy back the contract in order to avoid having to
deliver. Both traders are speculating, of course, that they will make a
profit between the first and second action.

DERIVATIVES

The word derivative means taken from something else. In securities, it

usually means taken from a direct security such as a bond or stock.
These securities are direct obligations or investments. Everything else is
derived from one of these instruments.
Financial products that were once called “hedging instruments” are now
called derivatives but are still widely used for the purpose of hedging.
The most common derivatives are futures, options, warrants, swaps and
repurchase agreements.
 Futures

Futures are contracts that create an obligation to buy or sell another

security on or before a specified future date. For example, you may hold
a futures contract to buy or sell a specified stock, bond or commodity.
Futures markets in particular and derivatives markets in general, are
more for the sophisticated investor or trader. A trader who has bought a
futures contract and has agreed to accept delivery is known as being
long.
The trader who has sold the futures contract and has agreed to make the
delivery is known as being short. The difference between the cash price
(called spot price) for a commodity and the price listed in the futures
contract is called the basis or spread.
The futures market is very sophisticated and carries with it great risk.
Mostly this risk comes from the concept of leveraging made possible by
the existence of margins.
Leveraging means that a trader may acquire for a small initial outlay
(the margin) a much larger position than that amount of money would
otherwise purchase if the entire position would have had to be paid for in
full. For example, a trader may be required to place a 10% margin on a
position. That means that the trader only has to pay 10% of the price that
the whole position would otherwise costs. Because of margins and
leverage, large profits and losses are possible in relatively small
variations in price. Because of the highly speculative nature of futures,
most exchanges place both a position limit on the number of contracts an
account may hold and a limit on the amount that the price of a contract
may fluctuate in any one day.

Options

Options are contracts that give the owner the right, but not the
obligation, to buy or sell a specified asset (the underlying asset or
underlying) at a specified price on or before a specified date. The holder
of an option is not obligated to buy or sell (exercise) the financial
instrument that is the subject of the option. Options for the purchase of a
security are known as call options or calls. Options for the sale of a
security are known as put options or puts. The price at which the option
can be exercised is known as the strike price or strike. The price paid for
the option is known as the premium. If an option is not exercised by the
due date it is said to lapse.
The buyer of an option is sometimes called the taker and the seller of an
option is sometimes called the writer. It makes no difference whether the
option is a put or a call.
The intrinsic value of an option is the difference between the exercise
price of the option and the market value of the underlying security. An
option is also said to have a time value that represents the volatility of
the value of the underlying stock during the time that the option is
effective.
Call options on stocks that are currently trading below the strike price
are said to be “underwater” or “out-of-the-money”. Call options on
stocks that are currently trading above the strike price are said to be “in-
the-money”. Conversely, put options that are currently trading above the
strike price are out-of-the-money and those that are trading below the
strike price are in-the-money.
Covered Calls are call options sold against the holdings of common
stock owned by the seller of the call. That is, the seller of the option
agrees to sell stock that he or she already owns at a fixed price at a
future date. If the price of the stock goes above the strike price, the
buyer of the option will exercise it and the seller will have to sell the
stock. If the price of the stock goes below the strike price the buyer of
the option will most likely not exercise the right to buy and the owner of
the stock, who is also the seller of the option, will keep the stock as well
as the money received for selling the option.
Uncovered calls, also known as naked calls, are calls against stock that
the seller of the option does not own. If the option is exercised, the seller
of the option must go into the market and buy the stock to cover the call.
In some countries, this is not legal.
Index options are contracts that permit the investor to focus on major
market moves without actually having to choose individual stocks. All
investment purchases involve a risk, some risks are greater than others.
If you choose an individual stock you run a stock specific risk that the
stock will not act in the same manner as the entire market. The market
may go up, but your stock may go down. Stock index options allow the
investor to buy (or sell) the whole market. Index options are used as a
popular hedge against a broad market rise or fall. To complicate the
matter even more, it is possible to buy a derivative of a derivative of a
security. For example, you can purchase an option on a future of a stock,
bond, commodity or an index.
In Asia, options either follow the American style or the European style.
The American style is that the option may be exercised at any time up to
and including the expiration date. The European style means that an
option may only be exercised on the expiration date.

Warrants

Warrants are standardized options but typically with a more distant

expiration date.
There are warrants on bonds, equities, commodities, and currencies.
Warrants are frequently issued as part of a bond. These bonds act much
like a convertible bond and to a large degree the price of the bond
reflects the performance of the underlying equity. The warrants allow for
the bondholder to purchase a certain stated amount of common stock.

Swaps
Swaps are contracts whereby two parties agree to make periodic
payments to each other. For example, an interest rate swap would
involve one party paying interest at a fixed rate, while the other party to
the contract would pay interest at a floating rate (such as the prime rate
in effect at the payment date). In a currency swap, one party agrees to
pay a certain amount in a stated currency and the other party makes its
payment in a different currency. Both sides, of course, are betting that
the value of their method of payments will decrease and the other side
will increase. For example, in a currency swap, two parties agree to
swap HK$1million for the equivalent amount of Singapore dollars on
the date the contract is made. The party paying on the payment date in
HK$ is betting that the value of the HK$ will fall and be worth less
when the payment is due and the value of the S$ that he will receive will
be worth more.

Repurchase Agreements

Repurchase agreements, or repos, are contracts where the party selling a

security to another party agrees to buy back that security at a future date
at a specified amount. The party selling, therefore, is betting that the
securities will be worth more than the specified amount on the date of
the repurchase and the party buying is betting that the securities will be
worth less.