Fixed Income Presentation by chenshu

VIEWS: 21 PAGES: 29

									The First Seoul International Derivative
Securities Conference

New Trends and Applications of Derivatives
Products within Asset Management

Brendan Bradley – Market Consultant
Thursday, 28 August 2003
Agenda


    Development of the European Derivatives Market


    Market Trends in the Investment Fund Industry


    Techniques using ETFs, Options & Futures




                                                      2
Global Distribution Network


      America        Europe   Asia-Pacific




                                             3
  Eurex Product Offering
  Volume in 2000-2002


                                              = Growth Rate
                                                2000 - 2002
Million contracts
900
                                               Other Capital Market
                                32    +3%
                                               Products
750
                         39    191    +26%     Euro-Bund Futures
600
                        178
                               115    +83%     Euro-Bobl Futures
450             31
                        100    109    +154%    Euro-Schatz
                151                            Futures
300                      93
                63             211    +178%    Index Products
                43      132
150             76
                        133    143    +61%     Equity Options
                89
   0
               2000     2001   2002
                                                                4
Eurex Product Offering

Volume Distribution, 2nd Quarter 2003



                                  Index Products
                                       25%
                                     (Change
                                    Y-o-y: 42%)


  Fixed Income
    Products
       57%
     (Change
   Y-o-y: 46%)
                                   Equity Products
                                        18%
                                      (Change
                                     Yoy: 32%)




                                                     5
Product Offering

Major European Index Futures:
Traded Contracts and Notional Volume 2002


            Traded Contracts in mn.                Notional Volume in bn. EUR


 DJ EURO                                   DJ EURO
 STOXX 50                             86   STOXX 50                                 2,483
 Eurex                                     Eurex
 CAC 40                       26           DAX
                                                                                2,006
 Euronext Paris                            Eurex

 DAX                                       FTSE 100
                         20                                               1,210
 Eurex                                     Euronext.Liffe

 FTSE 100                                  CAC 40
                        17                                              1,001
 Euronext.Liffe                            Euronext Paris

 MIB 30                                    MIB 30
 Idem               5                                             681
                                           Idem




                                                                                            6
Product Offering
 Major European Index Options:
 Traded Contracts and Notional Volume 2002


             Traded Contracts in mn.                  Notional Volume in bn. EUR


 CAC 40                                 84   DJ EURO                               1,152
 Euronext Paris                              STOXX 50
                                             Eurex
 DAX                                         FTSE 100
                                   44                                               965
 Eurex                                       Euronext.Liffe

 DJ EURO                                     DAX
                              39                                                   941
 STOXX 50                                    Eurex
 Eurex
                                             AEX                      371
 FTSE 100
                       13                    Euronext
 Euronext.Liffe
                                             Amsterdam
 AEX
                   8                         CAC 40                 321
 Euronext
                                             Euronext Paris
 Amsterdam




                                                                                         7
Increased Sector Influence


   Globalisation; interdependencies have increased (“global players”)

   Introduction of the European Monetary Union in 1999

   Global sector influences account for 20 % of stock performance
    (25 % in Pan-Europe) in developed countries, while local market
    effects explain only 10 %

   Increased active management of funds in general

   Yet: so far no global sector trading; USA: sector approach has never
    materialised (apart from NASDAQ100), rather stock-picking




                                                                     8
       Increased Sector Influence

          Sectors increasingly offer better opportunity to outperform

          Diversification can be achieved with less focus on country-specific
           risk and more emphasis on sector-allocation



   Relative Return                                                       Relative Return (based on STOXX sectors)
15%                                                               15%

10%                                                               10%
                                                                                                          HCA          THE
                                        Spain                                                                   TEL
 5%                                                                5%                                    INN
                France                                                                                     RET
                          Netherlands                                                          IGS       CHE  ENGFSV
 0%                                                                0%                          BAK
                                 Italy                                                                   NCG     MDI
                             Belgium              Ireland                                                    FOB
-5%                  Germany                                      -5%                                      ATO
                                Portugal                                                                CNS
                                                                                                     CGS
-10%                                                              -10%
                                                                                                          UTS
-15%                                                              -15%
    0%       5%       10%        15%        20%      25%    30%       0%         5%      10%       15%         20%    25%    30%
                         Tracking Error Risk                                                Tracking Error Risk

       Source: Goldman Sachs Research

                                                                                                                             9
Increased Sector Influence

    Sectors offer better diversification than countries


                          Average correlation between European countries has risen while
                          average correlation between European sectors has been falling
                   1.0
                                                                    Countries    Sectors
                   0.9
                   0.8
                   0.7
     Correlation




                   0.6
                   0.5
                   0.4
                   0.3
                   0.2
                   0.1
                   0.0
                      1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

    Diversification can now be achieved with less focus on country-specific risk and more
    emphasis on sector-allocation.

Source: Goldman Sachs Research                                                                10
Turnover Data

Account Distributions:
Euro STOXX 50, DAX and Bund Futures


            Market
                     Proprietary   Agency
            Making


   FESX    34.05%     17.93%       48.02%

   FDAX     30.59%    19.62%       49.79%

   FGBL     21.23%    36.78%       41.99%




                                            11
Agenda


    Development of the European Derivatives Market


    Market Trends in the Investment Fund Industry


    Techniques using ETFs, Options & Futures




                                                      12
Market Trends in the
Investment Fund Industry


                 Transaction Cost
                     Pressure


   Changes                               Increasing
      in                                Importance
  Investment
                 Asset Manager             of Risk
     Style                              Management


                Decreasing Market
                     Returns /
                Increasing Volatility
                                               13
Asset Management Priorities

         Recent Priorities              Future Investment Priorities
    Maximise relative return           Increased focus on total
     and asset allocation                return and funded status
    Rebalance to strategic             Revisit strategic allocation –
     allocation                          impact of lower equity risk
    Seek return from equity risk        premium
     premium (beta risk)                Tilt return source to alpha risk
    Slower growth in                    because of uncertainty of
     international investing             equity risk premium
    Build process to improve           Declining dollar reason to
     risk management and risk            reconsider international and
     budgeting                           global asset allocation
                                        Greater attention to
                                         addressing risk exposures –
                                         equity market declines, credit,
                                         stock/bond correlation.

                                                                       14
Priority List for Asset Managers - Where is
the Focus?


    Evaluate hedging a portion of equity exposure and also utilizing
     the interest rate derivatives market to reduce the liability risk of
     falling interest rates.
    Increase weights on “alpha“ or enhanced index management
    Add weight to alternative investments/absolute total return
     strategies
    Reduce trading costs from “smarter trading“ in existing strategies
     and in manager transitions
    Utilize more “macro-orientated“ tactical asset allocation, balanced
     strategies, hybrid debt/equity strategies
    Incorporate volatility-selling derivatives strategies to enhance
     returns in more moderate return markets.




                                                                       15
 Market Trends in the Investment
 Fund Industry


                Transaction Cost
                    Pressure



                                        Increasing
Alternative
                                       Importance
Investment      Asset Manager             of Risk
 Strategies
                                       Management



              Increasing Allocations
                 to Fixed Income

                                               16
Market Trends in the Investment
Fund Industry


 Pressure on decreasing transaction costs
  Futures/options have lower commissions and market impact as well as
   tight bid-ask spreads
 Increase in the use of alternative investment strategies
  Futures/options allow fast exposure adjustments, greater leverage,
   and are easier to sell short
 Increasing allocations to fixed income
  Futures/options can be used to implement allocation decisions without
   liquidating the underlying holdings
 Increasing importance of risk management
  Futures/options enable accurate management of risk exposure



                                                                  17
Agenda

    Development of the European Derivatives Market


    Market Trends in the Investment Fund Industry


    Techniques using ETFs, Options & Futures




                                                      18
 Benefits & Sources of Return from
 Futures

Trading Cost   Lower commisions than stocks reduce the cost of initiating
               a position.


 Liquidity     Higher liquidity often means lower market impact cost.


               Initial margin requirements are typically 8-10% of notional
Leverage
               investment versus stock and ETF margins of 50%


  Market       Can get exposure to markets that have restrictions on
  Access       stock investment.

Shortening     No "up-tick" rule for shorting. Cash settlement eliminates
               the risk of a “short squeeze"

Fair Value     Outright and calender spread „cheapness“/“richness“
 Pricing
               provides enhancement opportunity

                                                                        19
Techniques

Asset allocation using highly efficient Xetra and
Eurex products
                                  Tracking
                                 Benchmarks


         Transition                                    Cash
        Management                                   Equitization




        Event Hedging
             and                                    Sector Rotation
      Risk Neutralization                             Strategies

                                 Tactical Shifts
                                   Between
                                 Asset Classes




                                                                      20
Dow Jones Euro STOXX 50
     Assumption - 1 year time horizon following events of 9/11 for a Pan European (Euro Zone) equity focused fund (mandate style
     could be market neutral, long/short, opportunistic or macro) using ETFs, futures and/or options.

         3950

         3750

         3550

         3350
                                2                  3                                                        5
         3150

         2950                                                                                  4                       6
                  1                                                                                                                7
         2750

         2550

         2350

         2150
       .1 01

       .1 01

       .1 01

       .1 01

       .1 01

       .1 01

       .1 01

       .0 01

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

       .0 02

               2
                                                                                                                                       8




             00
     05 .20

     19 .20

     02 .20

     16 .20

     30 .20

     14 .20

     28 .20

     11 .20

     25 .20

     08 .20

     22 .20

     08 .20

     22 .20

     05 .20

     19 .20

     03 .20

     17 .20

     31 .20

     14 .20

     28 .20

     12 .20

     26 .20

     09 .20

     23 .20

     06 .20

     20 .20

           .2
         9

         0

         0

         1

         1

         1

         2

         2

         1

         1

         2

         2

         3

         3

         4

         4

         5

         5

         5

         6

         6

         7

         7

         8

         8

         9

         9
       .0
     21




      Cash equitization – re-investing funds generated by previous         Transition management/asset re-allocation – where the mandate
 1 sale of equities via ETFs or the futures contract. Could also       5   allows, sale of index futures and buying of fixed income futures to
      have been re-balancing net short position.                           re-allocate exposure from net equity to net bonds.

      Dynamic selling of index call and/or put options during range        Potential arbitrage opportunities between ETFs and futures and/or
 2    bound period to provide income enhancement.                      6   tailored baskets of stocks v. ETF/future.

      Sector overlay strategies – sale of Telecommunications               Sale of index call options for income enhancement as volatility
                                                                       7
 3    ETFs/futures to neutralize exposure to this sector within the        reaches record levels in conjunction with net short position.
      portfolio.
                                                                           Sale of index put options and/or specific individual stock options to
      Hedging – sale of ETFs/futures and/or buying index put           8   provide potential buying point for short equity positions and adding
 4    options to hedge net long position within the fund.                  income enhancement.


                                                                                                                                           21
 Benefits & Sources of Return from
 ETFs

Trading Cost   Typically better or equal to cost of trading underlying
               stocks

 Liquidity     At least as good as underlying stock ; often better


               Capital from "upstairs markets“ and daily arbitrage
 Capital
               process keeps pricing efficient.

               Products are available on most of the futures indexes
  Many
               plus equity benchmarks for size, style and sector plus
 Indexes
               fixed income and more to come.

 Market         Can get exposure to markets that have restrictions on
 Access         stock investment. Can trade when local market is closed.

Shorting        No up-tick rule for shorting


                                                                         22
 Impact Analysis


                                                                                     Mkt Impact
                                                                         Avg. Bid\Ask €50 Mln
UNDERLYING                         Avg. Daily Volume   Total Market Cap       (/2)    Portfolio 1st Yr Comm. Total Costs
DJ EURO STOXX 50 equities in total   € 7,481,662,192 € 1,414,810,000,000    8 bps      30 bps       5 bps*     35 bps
                   % of Cash Total           100.00%            100.00%                5 Mins

ETFs (all use multiple exchange listings unless noted) Avg. Daily Volume Assets under Mgmt
DJ EURO STOXX 50 Master Unit                                 € 38,502,724     € 658,263,988
EasyETF EURO STOXX 50 (Euronext only)                           € 175,334       € 53,214,884
IndEXchange DJ EURO STOXX 50 EX                              € 28,803,443     € 804,475,034
EURO STOXX 50 LDRS                                           € 12,918,408     € 983,860,578
Fresco EURO STOXX 50                                          € 4,509,935     € 134,500,684
   TOTAL - DJ EURO STOXX 50 ETFs                             € 84,909,844   € 2,634,315,167    4.59 bps       30 bps ** 10 bps + 35 bps     75 bps
                               % of Cash Total                     1.13%              0.19%

FUTURES                               Avg. Daily Volume                    Open Interest                  ~ 2100 Contracts
DJ Euro STOXX 50 Future on Eurex        € 8,769,100,000                 € 35,013,000,000       2.38 bps       14.29 bps 16.67 bps ***      33.34 bps
                           % of Total           117.21%                           2.47%                        5 Mins      (2.4 bps x 7)

     TOTAL OF ALL THREE CLASSES                 € 16,335,672,036 € 1,452,457,315,167

* traded as an agency portfolio trade.
** assumes active arbitrage/efp market.
*** asumes ZERO "roll risk".


        Source: Citigroup

                                                                                                                                                 23
Product Applications




                              Cash Flow
                             Management


 Arbitrage Strategies                               Hedging




                        Futures & Options

  Yield Curve/Spread
                                               Return Enhancement
       Strategies


                            Asset Allocation




                                                                    24
       Product Applications
       (German Government Bonds – Price Indexes)


             125

                                                                                                                                                                                          2 Year Debt                                                        10 Year Debt
             120              1
                                                    2

             115
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             110

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             105                                                                                        4



             100
                   01.01.99
                              01.03.99

                                         01.05.99

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                                                                       01.09.99

                                                                                  01.11.99

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                                                                                                                                                                                                                                                                                                          01.01.03
1 Cash Flow Management – re-investing coupons using                                                                                                                                  Asset allocation – buying 10-year Euro Bund futures and selling
  interest-rate futures contracts                                                                                                                                             4 European equity index futures to implement portfolio restructuring
2 Hedging – selling 10-year Euro Bund Futures in expectation of                                                                                                                 from equities to bonds.
  rising interest rates or buying protective out-of-the-money put                                                                                                             5 Yield curve/spread strategies – Adjusting the duration of a portfolio
  options on 10-year Euro Bund futures.                                                                                                                                         by buying 10-year Euro Bund Futures and selling 2-year Schatz
3 Return enhancement – selling covered call options on Euro                                                                                                                     Futures without changing the underlying portfolio.
  Bund futures when the rates are expected to stay constant or                                                                                                                6 Arbitrage – exploiting price differentials between futures and
  rise                                                                                                                                                                          underlyings, or taking advantage of futures mispricing

                                                                                                                                                                                                                                                                                                                     25
Product Applications
Alternative Investment Strategies




 Global Macro Strategies    Fixed Income Arbitrage         Managed Futures




  e.g. top-down tactical        e.g. relative value     e.g. typically directional
   allocation approach       strategies to capitalise    or systematic trading
         exploiting             on price spreads           strategies to profit
     macroeconomic               between similar               from market
        movements                  instruments                 momentum




                           ABSOLUTE RETURNS



                           TRADITIONAL FIXED-
                           INCOME PORTFOLIO
                                                                                     26
Key Risk Exposures in Hedge Funds



   Fixed Income Arbitrage –      Market, Credit, Liquidity and Model

    Risks hedged with futures -   Market, Liquidity and Model

   Global Macro -                Market, Diversification and Model

    Risks hedged with futures -   Market, Liquidity and Model

   Equity Long/Short -           Market, Liquidity, Diversification and
    Model

    Risks hedged with futures -   Market, Liquidity and Model




                                                                      27
Eurex Derivative Products in
Alternative Investments

     Exhibit 1. Trend-Following vs. Buy-and-Hold for Commodity and Financial Futures Contracts


     Panel A. 1992-2002
                                  Long-Only                             Trend-Following Strategy          Diff. (Trend - Long)
                    Annual Standard   Correlation Correlation   Annual Standard Correlation Correlation    Annual Standard
     Equity Index   Return Deviation    S&P500 TSY Bond         Return Deviation     S&P500 TSY Bond       Return Deviation
     FTSE              3.2%   15.4%        74.2%      -10.4%      -1.5%    12.8%       -18.1%    13.6%         -4.7%      -2.7%
     NIKKEI           -8.0%   22.6%        40.7%        0.1%       7.8%    17.1%       -19.3%     1.5%        15.8%       -5.5%
     SP500             6.4%   15.3%      100.0%        -3.7%       0.0%    13.2%       -12.4%    23.2%         -6.4%      -2.1%
     DAX               2.4%   23.4%        69.2%      -14.0%     13.3%     19.6%       -24.9%    19.5%        10.9%       -3.8%
     Fixed Income
     TSY Bond         9.0%      8.3%        -3.7%     100.0%      5.1%     7.1%         0.7%     39.9%        -3.9%      -1.2%
     LIBOR*           6.2%      1.9%         2.0%      50.2%      6.1%     1.7%        -3.7%     21.8%        -0.1%      -0.2%
     BOBL             7.7%      3.3%        -8.5%      60.8%      6.9%     2.9%       -10.6%     28.1%        -0.8%      -0.4%
     Bund             8.4%      5.1%        -2.9%      66.2%      7.7%     4.2%        -0.3%     31.3%        -0.7%      -1.0%

     Panel B. 1999-2002
                                  Long-Only                             Trend-Following Strategy          Diff. (Trend - Long)
                    Annual Standard   Correlation Correlation   Annual Standard Correlation Correlation    Annual Standard
     Equity Index   Return Deviation    S&P500 TSY Bond         Return Deviation     S&P500 TSY Bond       Return Deviation
     FTSE            -11.0%   16.6%        87.5%      -42.8%      -8.1%    15.4%       -41.1%     3.8%          2.9%      -1.2%
     NIKKEI          -10.0%   21.4%        53.9%      -12.7%       4.3%    16.4%       -15.4%     6.3%        14.3%       -5.0%
     SP500           -11.0%   18.2%      100.0%       -38.8%      -7.4%    15.1%       -38.9%    23.9%          3.6%      -3.1%
     DAX             -16.6%   29.3%        79.7%      -40.6%       6.8%    26.1%       -44.0%     9.7%        23.4%       -3.2%
     Euro STOXX      -11.2%   24.1%        80.7%      -43.4%      -3.7%    21.9%       -25.1%     6.1%          7.4%      -2.3%
     Fixed Income
     TSY Bond         7.4%      8.7%       -38.8%     100.0%      3.3%     7.1%        -3.6%     40.6%        -4.2%      -1.6%
     LIBOR*           5.1%      5.0%       -33.9%      78.9%      5.5%     4.2%       -12.0%     30.3%         0.4%      -0.8%
     BOBL             6.9%      2.1%       -11.3%      28.2%      6.6%     1.9%       -10.6%      7.1%        -0.3%      -0.2%
     Bund             5.8%      3.2%       -48.0%      78.4%      4.6%     3.1%       -24.4%     37.8%        -1.2%      -0.1%
     Schatz           4.9%      1.5%       -45.3%      70.2%      4.5%     1.4%       -35.1%     32.8%        -0.4%      -0.1%




                                                                                                                                  28
Adding Alternative Asset Classes
Portfolio Construction (8 Asset Class Portfolio)
                                        Portfolio   Portfolio   Portfolio   Portfolio   Portfolio   Portfolio    Naïve
                                           1           2           3           4           5           6        Portfolio
      World Large Cap Equities            60%         54%         48%         42%         36%         30%       12.50%
       Global Treasury Bonds              40%         36%         32%         28%         24%         20%       12.50%
      Commercial Real Estate              0%          10%         10%         10%         10%         10%       12.50%
     Emerging Markets Equities            0%          0%          5%          5%          5%          5%        12.50%
      Emerging Market Bonds               0%          0%          5%          5%          5%          5%        12.50%
            Hedge Funds                   0%          0%          0%          10%         10%         10%       12.50%
          Managed Futures                 0%          0%          0%          0%          10%         10%       12.50%
        Global Commodoties                0%          0%          0%          0%          0%          10%       12.50%


               TOTAL                     100%        100%        100%        100%        100%        100%        100%


            Performance
    Ann. Return (Since Inception)        5.70%       6.16%       6.34%       6.82%       7.01%       7.35%       7.91%
         Ave Monthly Return              0.50%       0.53%       0.55%       0.58%       0.59%       0.61%       0.66%
         % Positive Months              59.75%      61.01%      62.26%      64.15%      66.04%      68.55%      67.92%
                Risk
 Ann. Std Deviation (Since Inception)    9.63%       9.09%       9.22%       8.56%       7.56%       6.98%       7.30%
        Maximum Drawdown                -25.66%     -19.66%     -19.24%     -16.78%     -12.34%     -10.80%     -17.71%
    Risk Adjusted Performance
     Info Ratio (Since Inception)        0.59%       0.68%       0.69%       0.80%       0.93%       1.05%       1.08%
Source: Asset Alliance                                                                                                    29

								
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