Potential buyer of an option assumes that the stock price will rise considerably to the date of expiration of the contract. Potential option seller thinks the contrary, that the spot price of shares rises above the price it will be fixed in options contracts. By signing the contract, the option seller is at risk if the buyer has insured. The risk for the seller is that the stock price can rise over time. And then the seller will be forced to buy shares at a higher price and sell them to the buyer the option at a lower specified in the contract price. That is, the seller can lose their money. Accordingly, the seller has agreed to sign a contract, the buyer a call option must pay him a certain amount, called the premium (premium), or the option price.
The prize consists of two components: intrinsic value and time value.Intrinsic value - the difference between the current price of the underlying asset and the price of the option. Time value - the difference between the amount of premium and intrinsic value.
Put option (put option) - entitles the buyer of the option to sell the underlying asset at the exercise price in a timely manner or seller of the option to refuse the sale. Buyer purchases a put option, if you expect the fall in market value of the underlying asset. The maximum loss for the buyer of a put option only premium amount paid, the payout can be great if the spot price of the underlying asset will fall heavily [2. 171-185p.].
As for the case with call options, the outcome of the transaction for the seller put option opposite. Its maximum gain is equal to the premium in case of default option. Loss could be significant if the rate of the underlying asset will fall heavily. The option can be covered, if the seller reserves the option writing out the amount of money sufficient to purchase the underlying asset.As a seller, and the option buyer may try to sell the contract to another person. If they succeed in this, it will be deemed to be "closed" (or "liquidated", "Unleashed"), their positions and no longer participate in the option contracts. And their position on the contract is now occupied by third parties.
With options investors can generate a variety of strategies. The simplest of them - buying or selling a call option or a put. If an investor expects a significant change in the price of the underlying asset, but not sure in which direction it happens, it is advisable to buy a call option and put option [1.583-624 p.].
When an investor buys a call option (put) with a lower strike price and sells a call option (put) with a higher strike price, then it creates a strategy that is called a bull spread. Contributor will receive a small prize for the growth in the market value of the underlying asset, but his potential losses will also be small. If the investor buys a call option (put) with a higher strike price and sell a call option (put) with a lower strike price, then it will generate a bear spread.
Theoretically, options strategies offer investors a wide field for maneuvering, but in practice the possibility of different exercises is limited by the fact that most of the stock options are American, that does not give the ability to accurately determine the results of operations. The main task that must be addressed investor - this is the definition of option price. Two of the most well-known model for determining awards of options - a Black-Scholes model and binomial model (BOPM) Cox, Ross and Rubinstein.
Black-Scholes model was developed to estimate the value of European call option on shares, on which no dividends are paid. To use this formula for the valuation of stock options, on which dividends are paid, the formula with some changes. Black-Scholes formula to estimate the actual value of the option has the following form:
Vc = N(d1)Ps – E/eRT * N(d2),
где:
d1 = [ln(Ps/E)+(R+0,5σ2)T]/σ√T
d2 = [ln(Ps/E)+(R-0,5σ2)T]/σ√T = d1-σ√T
where: Vc-the actual cost of a call option; Ps - the current market price of the underlying asset, and E - the price of the option; R - continuously accrued interest without the risk per year, T - time to expiration, represented in parts per year; - the risk of basal common stock, measured by the standard deviation of stock returns, represented as continuous interest charged per year.
Attention is drawn to the fact that E / eRT - is the present value of the exercise price on the basis of continuously accrue. The value of ln (Ps / E) - is the natural logarithm of Ps / E. N (d1) and N (d2) denote the probability that the normal distribution with a mean of 0 and standard deviation equal to 1, the result will be correspondingly less than d1 and d2.
Asset values are assumed to be constant throughout the time of the option.σIn this formula, the interest rate R and standard deviation To facilitate the calculation of this formula have developed a table of values of N (d) for various d. Black-Scholes formula is often used by those attempting to detect the situation when the market price of the option is seriously different from its actual price. Option, which is sold at a significantly lower price than that obtained by the formula, is a candidate for purchase, and vice versa - one that is sold at a considerably higher price - a candidate for sale [7. 185-224 p.].
Binomial model of Cox, Ross and Rubinstein used to estimate the premium American options, first of all put option. Entire period of the option contract is divided into several time intervals. It is believed that within each of them, the underlying price can go up or down with a certain probability. Get the value of the underlying asset price for each time interval, given the data on the standard deviation of its course (build distribution tree for sale), also determine the likelihood of rising and falling exchange value of the asset at each interval time interval. Possible option price at a given time determined based on the value price of an asset on the expiry of the option. After that, consistent discounting price option (based on the likelihood of increasing and decreasing value of the asset at each time interval) get the value of its price at the conclusion of the contract. Any buyer of an option would have a guarantee that the seller fulfills its obligations when the options are exercised. The buyer of a call option wants a guarantee that the seller is able to deliver the required action, and the buyer of the put option "wants to have guarantees that the seller is able to pay the necessary sum of money.Therefore birzhi set in options trading margin requirements - the system of protection from the actions of the seller, known as "margin". Brokerage firms are allowed to install on their desire even more stringent requirements for their clients.
Many tools have the features of options, especially the call option. Consider some of them. Stock warrant (or warrants) - a call option issued by a firm on its shares. Warrants usually are issued for a longer period (five years or more) than the typical call option. Also issued perpetual warrants. Exercise price can be fixed or changed during the term of the warrants, usually upward. The initial exercise price at the time of issue the warrant, usually set well above the market price of the underlying asset. One of the differences warrant from the call option is to limit the number of warrants. Always produced only a certain number of warrants particular type. Total number usually can not be increased, and it declines as performance warrants.Execution of the warrant has a positive impact on the corporation - a corporation gets more funds, increasing the number of issued shares and reduced the number of warrants. The right seems to warrant, in the sense that it also represents a call option issued by the company on its shares. The right is also called subscription warrant. They give shareholders pre-emptive rights in respect of subscription for new ordinary shares in issue prior to their public offering. Each share outstanding, gets one right. One share purchased for a certain amount of human, plus the amount of money equal to the subscription price. To ensure that the sale of new shares, subscription price is usually set below the market rate of shares at the time of registration rights. Rights normally have a short period (two to ten weeks from the date of issue) and are free to apply before they are executed. Up until a certain date the old stocks are sold together with the rights. This means that the buyer receives the shares and rights when they are released. After this, the shares are sold without a license at a lower cost [1. 583-624 p.]
Forward contract is usually in order to implement a real sale or purchase of these assets and the insurance provider or purchaser of the possible adverse price changes. It is true that contractors can not also take advantage of favorable conditions possible. Forward contract involves enforceable, but the parties are not immune from its failure in the event of bankruptcy or bad faith of one of the parties to the transaction. Secondary market of forward contracts on most of the assets is underdeveloped because of their characteristics forward contract - a contract individual. An exception is the forward exchange market. By entering into a forward contract, the parties agree on the price at which the transaction will be executed. This price is called the cost of delivery. There are two approaches to determining the forward price. According to the first forward price occurs as a consequence of expectations of the derivatives market on the future price of the swap. The second approach - Arbitration - based on the technical relationship between forward and current spot prices, which is determined by the current market rate without the risk. Moreover, it is assumed that the investor indifferent whether to acquire the asset in the spot market now or in a forward contract in the future. As part of the arbitration approach is also distinguished: 1) the forward leg price of the asset on which no income is paid and 2) the forward leg of the asset price at which the income is paid. For the first case of formula for determining the forward price can be represented as follows:
Forward leg price of an asset that pays income to determine a bit more complicated. If the per share dividend paid during the term of the forward contract, the price of the forward leg should be adjusted to its size, since purchasing the contract, the investor does not receive the dividend [14. 180-196 p.]. For the simplest case, when the dividend is paid just before the expiry of the contract, the formula is:
If the dividend is paid at some time during the term of the contract, the buyer will lose not only the dividend but also the interest of its reinvestment before the expiry of the contract. In this case, the previous formula becomes:
where: T - is the term of the contract; t - the date of payment of dividends; r - interest rate risk-free for the time period T; λ- rate without risk for the period Tt;
There are several varieties of short-term forward contracts, among them - the repo and reverse repo. Repo - is an agreement between counterparties, whereby one party sells securities with the obligation to redeem them from her after a while at a higher price. The operation resulted in the first party actually obtains a loan secured by securities. Income in the second part is formed by the difference between prices at which she first buys and then sells the paper. Reverse repurchase agreement - an agreement to purchase securities with the obligation of selling them later at a lower price. In this transaction the person purchasing the securities at a higher price actually gets them into a loan secured by the money. The second person who provides credit in the form of securities, receives the income (interest on a loan) in the amount of difference between selling price and the repurchase of securities [2. 171-185p.].
A futures contract is an agreement between the parties on the purchase or sale of a certain quantity of goods on the date fixed for an agreed price.Although such a contract is determined by purchase price, but an asset to the delivery date is not paid. Participants in the transaction are liable for compulsory execution of the contract. Futures contracts are concluded on assets such as agricultural products, raw materials, foreign currency, securities and fixed income market indices, bank deposits. Futures contracts are made only on the exchange. Consider more currency futures [6. 193-201p.].
The U.S. trade currency futures contracts carried in the international monetary market (IMM), Division of the Chicago Mercantile Exchange (CME). In Rossi's futures are trading at the moment only on the Stock Exchange "Saint Petersburg". Currency futures, like forward contracts fix the price of any currency up to the date of delivery in a certain period of time in the future. Unlike forward contracts, futures contracts are standardized, and trading operations shall be implemented on an organized exchange. The advantage of futures contracts to forwards is their market liquidity, ie, the possibility of selling or buying in the stock market. Futures contracts provide the necessary services to participants of the foreign exchange market.These services include: 1) determine the price, ie market participants are conducting hedging and speculators react to determine the future price of any currency, 2) liquidity, the ability of market participants to buy and sell at any time when the market opened for trading, and 3) the protection of the client, which is implemented by the introduction of compulsory exchangerules. To ensure a high level of customer protection on the CME uses the following measures: the margin requirements, protection from bankruptcy protection by default; clearing system.
The first level of protection to trade currency futures - is the initial margin (initial margin). Exchange sets margin requirements for each firm a member of the clearing. In turn, the company sets the standards for the client (buyer or seller of a futures contract). These requirements minimize the potential damage that can be applied to the client in the event of bankruptcy or insolvency of the member firms clearing system. In addition to the initial margin requirements, there are maintenance margin (maintenance margin).They are based on the daily increase or decrease in value of the futures contract.
Clearing system exchanges only work with its member firms and not to individual market participants. Exchange performs calculations directly with members of the clearing system. Clearing house acts as a guarantor of the implementation of futures and options contracts. Standardized futures contracts have a number of features, which are set by the exchange. These standardized elements of the currency futures include: 1) the unit or the amount of the contract and 2) the method of price quotations, and 3) the minimum price change, and 4) limits the price, 5) deadlines, 6) a predetermined end date of trade; 7) The estimated date, 8 ) provision or margin requirements [6. 193-201p.].
All foreign exchange contracts that are sold or bought in the IMM, are estimated in U.S. dollars. IMM contracts have a standard period of performance. Currency futures contracts are paid on the third Wednesday of the month expiry of the contract. Trade contracts IMM ends two business days prior to the medium in which the term expires on them. This is usually the Monday before the environment.
Purchase of foreign currency futures provide the buyer "a long position (futures position when the game does not rise) and can be used to hedge against the future payment obligation in the same currency. Sales of foreign currency futures provides the seller "short position (short position) in this currency.
One of the most popular futures transactions are transactions in the indices.They constitute a contract for the sale of imaginary securities package assembled from the largest shares of companies whose market value in the summation determines the value of market indexes such as the RTS in Russia, «Nikkey» in Japan, «Dow-Jones»
in the U.S. [http://www.forextimes.ru/stock/index.php3?q=NASDAQ] (See Table 2.).
Table 2: Index futures positions on October 18, 2006
P500, is 170.000 USD.>Assume that the current price of a typical package, consisting of 500 shares of major U.S. companies, according to which the index is calculated S If an hour later the index goes down, that is, the total market value contained in it is reduced to 167.000 dollars, the player who sold the index portfolio, re-buys it, and thus completes the transaction with a profit of $ 3000.
2.2. Swaps and forward rate agreement
Swap - an agreement between two counterparties to exchange future payments in accordance with certain conditions in the contract. There are several types of swaps [1. 596-624 p..].
Interest rate swaps - is to share a bond with a fixed interest rate on floating-rate obligation. Involved in the swap face exchange only interest payments but not denominations. Payments are made in a single currency, and the parties under the terms of the swap, undertake to exchange payments over several years (from two to fifteen). One party pays the amount that is calculated on the basis of a solid interest rate of nominal, fixed in the contract, and the other side - the amount in accordance with floating interest rate on this value. As floating-rate swaps are often used rate LIBOR (London Interbank Offer Rate). A person who carries out the fixed payments on swaps, commonly referred to as the swap buyer. The person performing the floating payments - seller of the swap. With the swap, the parties involved are able to trade their firm commitment to interest-bearing liabilities with floating interest rates and vice versa. The need for such an exchange could occur, for example, if a party, released tverdoprotsentnoe commitment expected fall in future interest rates. Then, through the exchange of fixed interest on a floating, it can absolve themselves of the financial burden of debt servicing. The company just released the obligations under the floating rate and expected future interest rates, will be able to avoid increasing its debt service due to exchange floating for fixed interest.
Currency swap - an exchange of par value and fixed interest in one currency at face value and a fixed percentage of other currencies. Sometimes, the real exchange denomination can not happen. The swap of assets - is the exchange of assets to create a synthetic asset that would produce a higher return.
There are many types of swaps, the most common of which is a product swap, which is discussed below in the paragraph on OTC derivatives.Agreement on the forward rate (FRA) came in the early 80's as a development of the interbank interest rate contracts. The main objective conclusion of FRA is to hedge interest rate. But, like other derivatives, it can be used for speculation [2. 171-185p.].
Forward Rate Agreement - an agreement between two counterparties, whereby they commit themselves to exchange a certain date in future payments based on short-term interest rates, one of which is solid, that is known in advance, as fixed in the agreement, and second - floating, as it is the spot rate that will exist at the beginning of the forward period, and therefore at the conclusion of FRA is not yet known. Payments are calculated relative to contract value. Terms of the contract include a forward period, from a certain date in the future. In practice, under a contract made only one payment, which is based on the difference between the forward rate fixed in the FRA, and the spot interest rate which is fixed on the day of the beginning of the forward period. If the spot rate is higher than the forward, the seller pays this difference to the buyer. If the spot rate is below the forward, then the difference shall pay to the buyer to the seller. The buyer is insured against raising interest rates and secures stake fixed in the contract, the seller covered against lowering interest rates and also secures the rate established in the contract [3.224-236 p.].
The amount to be paid by one counterparty to another at the end of the forward period is defined as:
S = N (rs - rf)* t/360;
Where: S - Total sum payment; N - nominal FRA; rs - spot rate; rf - forward rate; t - the forward period.
2.3. OTC derivatives
Because of their relatively wide distribution in the monetary and currency markets want to mention briefly the OTC derivatives market. OTC market offers a risk management over a wide range of resources than traditional commodity derivatives. There are some pros OTC instruments: can be designed any tools that meet customer needs; duration (expiry date) portfolio, consisting of OTC instruments, can be much longer, with a depth of up to several years (in the commodity markets the tools found with duration of up to three years) and there is no daily requirement for Margin, no position limits and restrictions on market share [6. 193-201p.].
True, there are disadvantages, the main of which is the difficulties that arise often when you close the position, as tools designed specifically for the requirements of a particular client. OTC derivatives can be designed in various ways. At the same time there are a few standard products that are used most frequently. In particular, commodity swaps. The primary purpose of commodity swap - the distribution of the price risk between the client and the financial intermediary. The swap is an exchange of payment flows, where one party agrees to buy or sell the goods at a fixed price on certain dates, and the other side is ready to sell, respectively, or to purchase this product at current market price of the same date. Actually arise in this case payment flows offset each other, and as a result of the stipulated date of one party pays another difference between the current and fixed price. The purpose of this operation is to provide a fixed price for a party.
Use this tool can, for example, a consumer who wants to pay for the goods set price, made in his annual budget. Fixed price to eventually pay the client, will emerge from the current market price of goods and payments on swap.Any increase in the price of the asset will be offset by budget payments received by the client from the contractor, paying the current price.
Producer, by contrast, should be interested in being able to fix the selling price of manufactured goods, it also can make through swaps. Any fall in commodity prices will be offset by the payment of the counterparty for swap.However, using only swaps to reduce price risk is very dangerous. For example, a producer of wheat, registering with the swap price of selling it in a bad year can yield significant losses experienced difficulties with the performance of its obligations under the swap if the price of wheat will increase greatly. In this situation, the manufacturer is better to use an option to swap (or swap option) [3. 224-236 p.].
Swap option (swaptions) - gives the buyer the right but not the obligation to conclude a swap. There are several varieties of OTC derivatives. Here are some of them: Swope optsi ones on the average Asian or swap options (average rate swaptions or asian swaptions) - they are based on the price of goods, averaged in a certain way for a certain period of time. This product enhances the degree of protection from sharp customer day price surges caused by short-term market conditions.
Basket swap optsiny (basket swaptions) - based on the price of the combined portfolio, consisting of a set of goods. Each item included in the basket, has in her own weight to suit the customer, allowing them to manage the risks arising from changes in prices of several products with a single tool.
Options on stock options (compound options) - gives the buyer the right but not the obligation, to purchase the underlying common (base) option at a later date.
OTC derivatives offered by brokers, has become one of the most convenient way to manage price risks. Appearing on the foreign exchange and money markets, these tools have proliferated recently in the commodity sector. We can assume that as soon as the share of OTC instruments, and the total turnover of the stock market may increase substantially [7. 317-322p.].
Chapter 3. Investment resources of international financial market
Currently, the international financial market, there are three poles of world economic relations: the European, North American and Asia Pacific.
European pole combines the industrialized countries of the European Union and the countries of Eastern Europe, the Middle East have traditionally gravitated to the financial market of Switzerland. This market is characterized by annual volume of capital of 9 trillion dollars, the presence of the most inexpensive and long-term resources available to foreign investors at the rate of 2-4% per annum.
North American Pole covers mainly the markets of USA and Canada with an annual volume of capital of 18 trillion U.S. financial center is the United States. Market offers a significant share of imports of financial resources, a large volume of securities transactions with foreign investors. For distribution of securities of foreign issuers are various schemes of deposit of securities in foreign banks with subsequent release in the U.S. depository receipts [3, s.224-236].
Asia-Pacific pole (ATP) world economic relations before the countries of Southeast Asia and Oceania. The financial resources of the ATP focused on the Japanese market, the annual capital exceed 6 trillion dollars, this market is based largely on their own resources and compared to the U.S. market is characterized by a low-leveraged. The biggest importers of resources the Japanese market are China, Oceania and Southeast Asia, and in recent years - the countries of Latin America and Western Europe.Currently, there is increased gravity ATP to the European market, more and more of the financial and economic ties between Japan and focuses Switzerland.
World experience shows that investments in productive form directed mainly at those countries which are characterized by rapidly and effectively developing market relations. Global Triad - the United States, European Union and Japan is focusing the bulk of total exports and imports of investment. As part of the triad is the most intensive movement of capital, active members of which are TNCs, which owns 90% of direct foreign investment.
Distribution of equity between different groups of countries as follows: about 65% falls on the industrialized countries, more than 30% - on developing countries and less than 5% - for the countries of Central and Eastern Europe (including Russia).
Currently, there is a gradual change in the basic conditions of international economic activity. The essence of these changes in the most general form is as follows:
- There are conditions for easier access to foreign markets, factors of production abroad, a wide choice of ways to penetrate foreign markets: trade, direct investment, contracting agreements such as franchising;
- The expansion of markets creates opportunities for growth companies, but at the same time increases competition in the regional and global levels, prompting the company to maintain a constant competitive;
- TNCs are able to maneuver them belonging to the tangible and intangible assets in different countries, seeking to maximize the benefit of the whole structure;
- Changing relative importance of different factors affecting foreign direct investment (since, with the general lowering of tariff and nontariff barriers, the role of this factor in terms of its impact on the direction of investment decreases at the same time increases the importance of such factors as the condition of infrastructure, differences in overall costs, administrative and tax environment for foreign capital) [3.224-236 p.].
Attracting foreign investment is largely dependent on what the conditions for foreign investors created in the host country, as far as its favorable investment climate.
Investment climate - a complex and multidimensional concept. As a rule, under the investment climate to understand which generalizes the characteristic set of social, economic, organizational, legal, political and other conditions that determine the attractiveness and desirability of investing in the economy of the country (region).
Investment Climate Assessment involved taking into account:
- Economic conditions (state of the macroeconomic environment, the dynamics of GDP, national income, industrial production, inflation, development of high-tech industries, the labor market, the situation in the monetary, financial, budgetary, fiscal, monetary systems, etc.) ;
- Public Investment Policy (the degree of state support for foreign investment, the possibility of nationalization of foreign property, participation in international treaties, agreements, compliance, continuity of political power, the stability of state institutions and their performance, etc.);
- Legal and regulatory framework in investing activities (status of regulations and procedures for their adjustment, the parameters of input and output of investment from the country's tax, currency and customs regime, the order of creation, registration, activities, accounting, merger and liquidation of companies, regulatory and control measures over their activities, settlement of disputes);
- Informative, factual, statistical data on the status of the various factors determining the investment climate.
Assessment of the various components of the investment climate to determine the level of investment risk, feasibility and attractiveness of investments. Methodology for assessing the investment climate are very diverse. For example, in Japan, used the descriptive characteristics of the investment climate without quantitative estimates. In the U.S. method of assessing the investment climate requires the definition of the four aggregate indicators of economic activity, development potential and economic systems, economic efficiency of investments and the main components of tax policy. Results of evaluations are published in the annual statistical map. Is best known now received comprehensive rating of investment attractiveness, published by the leading economic journals: "Euromoneu", "Fortune," "The Esonomist. In particular, the rating of the journal Euromoneu "is based on the calculation of the nine groups of indicators: economic efficiency, the level of political risk, the state debt, the ability to service debt, credit, access to bank lending, the availability of long-term loan capital, the probability of occurrence of force majeure. Important guides for the foreign investors are assessing the World Bank experts, special financing or credit ratings (IVSA, Moodu's, Standard & Roor's, etc.) [3.224-236 p.].
Chapter 4. New Financial Instruments.
Conditions for introduction of new types of securities to the capital market have been established in the RFCA. Circulation of new types of securities will help diversify risks at the organized securities market and will promote to the increase in the market liquidity and active attraction of retail investors.
Within the frames of the Strategic Plan for 2009-2011 the Agency is committed to introduction of new financial instruments. For this purpose, the Agency has worked out the new listing requirements taking effect in June of this year. In compliance with the new listing requirements, the range of listed non-state securities is divided into two main groups such as shares and debt securities. Besides, the line of offered financial instruments (units of mutual funds, index funds, derivative securities, debt securities including securitized bonds, depositary receipts) has been extended. Greater investments opportunities have been provided to domestic and foreign investors.
Circulation of new types of securities will also help investors to hedge the risks connected with transactions in the securities market. For example, in order to attract foreign investors to the Central Asia Region and establishment of index funds, derivative market, the new index Renaissance Capital Central Asia Equity Index has been introduced. This index includes shares of the companies of the Central Asia Region.
It is worth mentioning that the Russian market of derivatives is recognized as one of the most fast-growing markets in the world. The growth in volume of RTS index futures trading was 20.6 mln. contracts in the first quarter. It exceeds the analogous indicator of the last year by 511%.
Besides, in the result of the measures for introduction of new financial instruments at the domestic stock market taken by the Agency, for the first time, the Real Estate Investment Trust (REIT) was introduced. JSC REIT Great Wall placed 12.266 ordinary shares to the amount of KZT 1.472 bln.
At the same time, in order to create conditions for introduction of Islamic financing, the Agency made the proposal on amendments to the current banking laws (in the part of operating and regulation of Islamic banks), tax laws (with the purpose of reduction of the tax burden and establishment of the fair competitive environment for Islamic banks) as well as general provisions of the Civil Code of the Republic of Kazakhstan.
In addition, with the purpose of intensification of the commodities trading (grain, cotton, meat, etc.), the commodities exchange on the basis of the RFCA is being organized. The Agency works on establishment of the commodities exchange to trade grain futures and to promote the market of precious metals.
Now it is planned to work out and launch new financial instruments such as securitized assets (SPV), futures, options which will be available to a wide range of investors (both institutional investors and natural persons). [ 8.]
4.1. Islamic financing
Kazakhstan financial services market is being expanded introducing Islamic financial principles. In February 2009 a Law of the Republic of Kazakhstan on issues of organization and activity of Islamic banks and organization of Islamic financing (the Law) was adopted. The Law avails opening of Islamic banks, Islamic investment funds, and issuance of Islamic securities in Kazakhstan.
These days an Islamic financial services market is actively developing in secular economies, such as the USA, the United Kingdom, France, etc. Leading international banks and investment companies provide Islamic financial services, and open subsidiary companies that comply with Islamic financial principles. Popularity of Islamic financing is growing due to the world’s interest in attraction of Middle East countries’ investment capital. Also Islamic financial organizations showed resistance to the world liquidity crunch owing to characteristics of Islamic financing.
Basic principles of Islamic finance are prohibition of interest, risk sharing, asset backing of money flows, and prohibition of financing of certain activities (gambling, trading with arms, tobacco, alcoholic production, etc.).
According to the Law an Islamic bank is a second-tier bank operating under a special license. Each Islamic bank should create a Shariah Board, an advisory body that supervises compliance of Islamic bank’s operations with Shariah principles. Kazakhstan legislation specifies following Islamic banking products: accepting investment deposits and interest-free deposits; providing interest-free cash loans repayable within specified periods; investment activities on leasing / renting conditions; supporting entrepreneurial activities by financing trading activities as a commercial agent by providing a commercial loan; financing manufacturing and trading activities through acquiring an interest in corporate equities and/or on partnership conditions; agency for the Islamic Bank ’ s banking transactions.
It is necessary to mention that due to the fact that Shariah principles prohibit guaranteeing of income and not sharing of risks, Islamic banks do not participate in a fund of guaranteeing of deposits.
Under a commercial loan agreement an Islamic bank purchases to its ownership a good and sells it to a client with a price markup allowing payments to be delayed or made in installments. The commercial loan agreement shall include good’s name, quantity, and price, at which the purchaser acquires the good from the Islamic Bank, specifying a markup on the good and commercial loan conditions. Thereby, Shariah principles are followed: absence of uncertainty and prohibition of using money as a good. The price markup makes Islamic bank’s income.
An Islamic bank may finance manufacturing and trading activities under a partnership agreement to derive revenues. According to the agreement an Islamic bank and a client enter into an agreement with money or with an asset. Revenues and losses of the project are distributed between the bank and the client proportionally to their parts in common assets or as agreed in advance. Thus, risk sharing Shariah principle is followed. Income of the Islamic bank is its part in the revenue made from the project realization.
According to the Law an Islamic investment fund is a joint stock investment fund or closed unit investment fund that invests in accordance with Shariah principles. Investment declaration of the Islamic investment fund is reconciled with a Shariah Board. For this purpose a management company may outsource Shariah Board services, thus, it is not obliged to create its own Shariah Board.
It is worth to mention that Shariah Board experts should meet high requirements to their work experience, knowledge of Shariah and principles of Islamic financing. Globally there is a short list of acknowledged experts that are represented in several Shariah Boards at the same time. Thereby, apart from assessment of project’s profitability investors consider the Shariah experts that gave a Shariah approval of the project.
The Law specifies following types of Islamic securities: shares and common stock of Islamic investment funds, Islamic lease certificates, and Islamic participation certificates. Islamic lease certificates are issued to finance purchase of real estate, ground areas, etc. An Islamic special purpose vehicle (SPV) is created by the originator. The SPV buys an asset from the originator or the third party for funds obtained through the certificate issuance. The asset is leased, and the lease payments are distributed between the certificate holders as dividends.
Islamic participation certificates are issued by the SPV for financing of new investment project, the existing investment project, or an entrepreneurial activity. Originator participates in the project by brining in asset or trust management of the SPV. The revenue obtained from the project realization is distributed between the originator and the certificate holders.
The global practice shows that Islamic securities are issued by legal entities and governments for construction of infrastructural objects, multifunctional centers, manufacturing, etc. Often a combination of Islamic lease and Islamic participation certificates is used. As for now in Kazakhstan according to the Law the originator of an SPV is an Islamic bank, “KazAgro” National Holding” JSC, “Samruk-Kazyna” National Welfare Fund” JSC and its 100 % subsidiary organizations.
Development of a legal base for Islamic finance in Kazakhstan is accompanied with coming of new market players. A first Islamic brokerage company and an Islamic consulting firm started their operations. As well Government of Kazakhstan and United Arab Emirates signed an agreement on opening of the first Islamic bank in Kazakhstan by the end of this year.
Above all introduction of Islamic financial principles expands a range of financial services in Kazakhstan. Besides, this is an instrument for attraction of investment capital and leading Islamic financial industry players to Kazakhstan.
4.2. Investors and issuers
Investors :
The favorable investment climate of the last years promoted to establishment of the wide investor base in Kazakhstan such as commercial banks, retirement saving plans, insurance companies and mutual finds.
As of January 1, 2008 total assets of commercial banks were KZT 11.6 trillion (USD 97.12 bln), retirement savings plans — KZT 1.2 trillion (USD 10.17 bln), insurance companies — KZT 0.2 trillion (USD 1.86 bln) and mutual funds — KZT 0.19 trillion (USD 1.66 bln).
The increase in the population prosperity and implementation of the Improvement of the Investment and Financial Literacy of the Population Program by the Agency promoted to attraction of savings of the population to the stock market. Thus, in 2007 the share of retail investors in transactions of sale and purchase of shares was 31.7% and that of corporate bonds was 13.5%.
Moreover, foreign investors achieved a dominant position at the Kazakhstan Stock Exchange. In 2007 the share of non-resident foreign investors was 11.9% in the total trade of corporate securities.
The Agency strives to make the stock market more transparent and clear for the population by promoting the improvement of the investment activities of citizens of the Republic of Kazakhstan at the stock market.
In this connection, the Agency conducts seminars for students, public servants of central and local executive authorities, journalists of regional and republican mass media.
JSC RFCA educates the general public on the basis of the transfer and agency network of JSC Kazpochta by establishing information and education centers. The key goals of these centers are:
- establishment of the system of education and enhancement of the population financial knowledge in order to attract natural persons to the operations in the securities market as private investors;
- clarification of issues on regional companies’ entrance to the stock market to attract potential issuers to the special trading floor;
- explanation of the issues on the activities of the Regional Financial Center, as a whole, and Special Trading Floor, in particular. Other channels of the information distribution are used as well;
- the hot telephone line of the RFCA was opened to provide professional consultations on the issues of operations in the securities market;
- The Stock Market Guidebook was published and distributed;
- Internet portal of the financial center () was created.
Intensive work of the RFCA and mass media provoked much interest of the population and promoted to broadcasting of a number of TV programs on financial sector issues.
Key trends of further activities of the Agency in the field of improvement of the population financial literacy will be:
- Work on appropriate amendments to the Law of the Republic of Kazakhstan “On Public Service”. Implementation of the Improvement of the Investment and Financial Literacy of the Population Program for 2007-2009 approved by Republic of Kazakhstan Government Decree No.536, dated June 27, 2007.
- National game The Stock Exchange together with the Ministry of Finances, Samruk State Holding and the companies Deloitte and Renaissance Capital.
- Printed publications about the stock market of Kazakhstan for the current period including the dynamics of changes of stock indices for the companies listed at the Kazakhstan Stock Exchange. These materials will be of information and educational nature and will be aimed at attraction of the population to operations in the stock market as well as at promotion of the Regional Financial Center.
Production and broadcasting of public service announcements in the Kazakh and Russian languages will concentrate at explanation of the information on opportunities of investments of available funds of the population in financial instruments.
Issuers
Optimal conditions for stock market launch of various companies were created at the RFCA. In its turn, the Agency attracts new issuers by conducting marketing campaigns. In particular, special attention is paid to companies from regions of the Republic of Kazakhstan and foreign countries.
Thus, the Agency holds seminars for issuers in the regions at which the information on advantages of the stock market is given and the new Listing Rules and principles of the securities market operation are discussed in details.
The qualitative and quantitative composition of issuers increased in the result of effective actions taken by the Agency. Thus, for example, in 2005 the number of issuers was 94 and in 2007 – 126. The share of A class companies increased in the total structure of issuers (60%). Following the results of the first six months of 2008 135 issuers were listed at the KASE.
In 2007 such large domestic companies as JSC Kazakhstan Distribution Company, JSC Abdi (trade), JSC CAC (construction), JSC Al-Dos (health care), JSC Logicom (IT sector), JSC Iliysky Carton and Paper Plant (paper production) and JSC Airport Sary-Arka (transportation) entered the stock market.
It is necessary to note that new issuers on the part of public companies JSC Kazakhtelecom and JSC Small Business Development Fund appeared in 2007. At present, there are 17 enterprises with public participation which securities are sold at the stock market. Moreover, the Government of the Republic of Kazakhstan approved the list of 24 enterprises with public participation to be listed in 2008.
In addition to the actions on attraction of domestic issuers, the RFCA interacts intensively with foreign companies to introduce them to the stock exchange. Thus, in the nearest future the RFCA should become the main financial center in the region representing interests of the corporate sector of the CIS and other foreign countries.
The List of Enterprises with Public Participation which Securities are Traded at the Stock Market:
1. JSC Astana Finance
2. JSC Kazakhstani Mortgage Company
3. JSC Kazakhtelecom
4. JSC Almatyenergosbyt
5. JSC Agency Khabar
6. Eurasian Natural Resources Corporation PLC
7. JSC Mangistau Distribution Electricity Network Company
8. JSC Exploration and Production KazMunaiGaz
9. JSC Agricultural Credit Corporation
10. JSC National Company Commodity Contract Corporation
11. JSC Ulbinsky Metallurgical Plant
12. JSC Kazakhstan Development Bank
13. JSC Doszhan Temir Zholy (DTZ)
14. JSC KazAgroFinans
15. JSC Kedentransservis
16. JSC Almatinsky Distillery
17. JSC Kazakhstan Petrochemical Industries
The List of Enterprises with Public Participation to be Listed in 2008 as Approved by Republic of Kazakhstan Government Decree No.1219 dated December 11, 2007:
1. JSC Specialized Security Service Kuzet (Almaty)
2. JSC Medical Transportation Service (Almaty)
3. JSC Ablay Khan Kazakh University of International Relations and World Languages (Almaty)
4. JSC Kazakh University of Humanities and Law (Astana)
5. JSC Kazakhvzryvprom (Almaty)
6. JSC National Center Kurylysconsulting (Astana)
7. JSC KazAvtoTrans (Astana)
8. JSC Kazakh Academy of Sports and Tourism (Almaty)
9. JSC NC Social and Business Company Sary-Arka (Astana)
10. JSC Zhezkazgan University named after Baikonurov (Zhezkazgan)
11. JSC Kazakh Transportation and Communications Academy named after Tynyshpayev (Almaty)
12. JSC Kazakh Leading Academy of Architecture and Civil Engineering (Almaty)
13. JSC Zhenis (Almaty).
14. JSC Forest Nursery (Tugusken village, Karaganda Region)
15. JSC Almaty Institute of Power Engineering and Communications (Almaty Region)
16. JSC Karaganda Printing Production (Karaganda)
17. JSC Sanatorium Arman (Kokterek village, South-Kazakhstan Region)
18. JSC Civil Aviation Academy (Almaty).
19. JSC Sanatorium Arka (Astana)
20. JSC Air Company Zhezkazgan Air (Zhezkazgan)
21. JSC Kazakh Auenderi (Astana)
22. JSC Administration for Services to the Diplomatic Corps (Almaty).
23. JSC Baspalar Uyi (Almaty).
24. JSC Kazakhstan Mortgage Guarantee Fund (Almaty).
Conclusion.
Investment process acts as a combined movement of investments in various shapes and levels. In a market economy it is carried out by the investment market. The main characteristics of the investment market include: investment demand, investment proposal, competition, price. Combination of factors that determine the prevailing ratio of demand, supply, price levels, competition and sales volumes in the investment market, said market conditions investment market. The investment market can be seen on the one hand, as the market of investment capital, hosted by investors, and on the other hand, as the market of investment products of investment objects of investors. Actual investment activity is the content of the first stage of "investment funds - investment". The second stage "investment - investment performance" describes the relationship of costs and the effect is achieved. Reproduction approach to investment analysis involves consideration of investments in a move that bears repeating, since income arising from investments of investment resources, divided into consumption and accumulation, and accumulation is the basis for the next investment cycle. From the standpoint of the structural approach investments act as a unity of subjects, objects, and economic relations, traffic-related investments. The role of investment in the economy is manifested in their impact on economic growth, output and employment, structural changes, the development of industries and agriculture. Change in net investment in accordance with the multiplier effect leads to a change in the rising incomes in the economy.
In recent years the range of opportunities for investors is strongly increased due to easier access to securities of foreign companies. At the same time, foreign companies have become an important factor in the American market, as they invest heavily in U.S. stocks and bonds. In short, investors are experiencing a real globalization of financial markets, as they have greater access to financial markets in other countries. Development of communication facilities and the elimination of barriers created by government regulation of markets, eventually led to the globalization of the market environment in the areas of finance: in America, for example, as well as outside investors can easily make transactions with securities of leading companies.
The list of financial products offered by commercial banks today is characterized by a significant number and variety. Not without reason, it can be argued that it is commercial banks are the main driving force behind the creation of new financial products, including new financial instruments, which is explained by the fact that the supply of financial services, ie financial intermediation - the main objective of their activities.
New (innovative) a combination of financial market instruments, allowing design various innovative financial products to increase profitability, attract investment funds, insurance and possible financial risks of innovation, financial-credit support innovation actors, etc. As an example of such a combination are the innovative leasing, venture financing, forfeiting, franchising, production of specialized securities and others.
Thus, the global financial crisis was the impetus for the design and development of new financial products, instruments, thus allowing many organizations will not only return customers, but also attract new ones. That will boost profits and competitiveness of the banking system, which is a fundamental part of the whole economy of our country.
References
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4. Marshal John F., and Vipul K. Bansal A comprehensive guide of financial innovations: Per.s angl.-M.: INFRA-M, 2001
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