Investment banking

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A firm, acting as underwriter or agent, that serves as an intermediary between an issuer of securities
and investing institutions.

Normally an investment bank buys a new issue of securities for a negotiated price. The investment
bank then forms a syndicate and resells the securities to its customers and to the public.

Investment banks assist public and private corporations in raising funds in the Capital Markets (both
equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and
other types of financial transactions.

They stand at the heart of financial markets in that they help make both the primary market and,
through their trading desks and market makers, the secondary market too

STOCK
Stock is share in the ownership of a company. Stock represents the claim on the companys assets
and earnings as well as voting rights attached to the stock. Company issues the stock for raising the
fund (thro IPO). As a return, investor may get the dividend and value appreciation of the stock.

Issuing stock is advantageous for the company because it does not require the company to pay back
the money or make interest payments along the way.

When you buy a debt investment (bonds), you are guaranteed the return of your money (principal)
along with the promised interest payments. If you are buying a stock, as a small business owner, it is
not guaranteed a return. As an owner, your claim on assets is lesser than that of creditors. This
means that if a company goes bankrupt and liquidates, you, as a shareholder, dont get any money
until the banks and bondholders have been paid out.

Different Types of Stock

Common Stock Majority of the stock is in this form. Has voting rights for electing the board
members.
Preferred Stock Guaranteed Dividend. In the time of liquidation, the preferred stock holder will get
preference than common stock holder. No voting rights.
P/E Ratio This is calculated by dividing the current stock price by earnings per share from the last
four quarters.
EPS The portion of a companys profit allocated to each outstanding share of common stock. EPS
serves as an indicator of a companys profitability.
Calculated as:
 FUTURES
A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to
transact a set of financial instruments or physical commodities for future delivery at a particular price.
If you buy a futures contract, you are basically agreeing to buy something, for a set price, that a seller
has not yet produced. But participating in the futures market does not necessarily mean that you will
be responsible for receiving or delivering large inventories of physical commoditiesremember,
buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or
speculate rather than exchange physical goods (which is the primary activity of the cash/spot market).
That is why futures are used as financial instruments by not only producers and consumers but also
speculators.

A futures contract is an agreement between two parties: a short position, the party who agrees to
deliver a commodity, and a long position, the party who agrees to receive a commodity. In every
futures contract, everything is specified: the quantity and quality of the commodity, the specific price
per unit, and the date and method of delivery.

A Farmer and the bread maker may enter into a futures contract requiring the delivery of 5,000
bushels of grain to the buyer in June at a price of $4 per bushel. say the futures contracts for wheat
increases to $5 per bushel the day after the above farmer and bread maker enter into their futures
contract of $4 per bushel. The farmer, as the holder of the short position, has lost $1 per bushel
because the selling price just increased from the future price at which he is obliged to sell his wheat.
The bread maker, as the long position, has profited by $1 per bushel because the price he is obliged
to pay is less than what the rest of the market is obliged to pay in the future for wheat.

On the day the change occurs, the farmers account is debited $5,000 ($1 per bushel X 5,000
bushels) and the bread makers account is credited by $5,000 ($1 per bushel X 5,000 bushels). As
the market moves every day, these kinds of adjustments are made accordingly. Unlike the stock
market, futures positions are settled on a daily basis, which means that gains and losses from a days
trading are deducted or credited to a persons account each day. In the stock market, the capital gains
or losses from movements in price arent realized until the investor decides to sell the stock or cover
his or her short position.

As the accounts of the parties in futures contracts are adjusted every day, most transactions in the
futures market are settled in cash, and the actual physical commodity is bought or sold in the cash
market.

The players in the futures market fall into two categories: hedgers and speculators.

Hedgers Farmers, manufacturers, importers and exporters can all be hedgers. A hedger buys or
sells in the futures market to secure the future price of a commodity intended to be sold at a later date
in the cash market. This helps protect against price risks.
Speculators Other market participants, however, do not aim to minimize risk but rather to benefit
from the inherently risky nature of the futures market. These are the speculators, and they aim to
profit from the very price change that hedgers are protecting themselves against. Unlike the hedger,
the speculator does not actually seek to own the commodity in question. Rather, he or she will enter
the market seeking profits by offsetting rising and declining prices through the buying and selling of
contracts.
Going Long
When an investor goes longthat is, enters a contract by agreeing to buy and receive delivery of the
underlying at a set priceit means that he or she is trying to profit from an anticipated future price
increase.
Going Short
A speculator who goes shortthat is, enters into a futures contract by agreeing to sell and deliver the
underlying at a set priceis looking to make a profit from declining price levels. By selling high now,
the contract can be repurchased in the future at a lower price, thus generating a profit for the
speculator.
Spreads
Spreads involve taking advantage of the price difference between two different contracts of the same
commodity.

There are many different types of spreads, including:

Calendar spread This involves the simultaneous purchase and sale of two futures of the same
type, having the same price, but different delivery dates.
Inter-Market spread Here the investor, with contracts of the same month, goes long in one market
and short in another market. For example, the investor may take Short June Wheat and Long June
Pork Bellies.
Inter-Exchange spread This is any type of spread in which each position is created in different
futures exchanges. For example, the investor may create a position in the Chicago Board of Trade
(CBOT) and the London International Financial Futures and Options Exchange (LIFFE).

Margins
In the futures market, margin has a definition distinct from its definition in the stock market, where
margin is the use of borrowed money to purchase securities. In the futures market, margin refers to
the initial deposit of good faith made into an account in order to enter into a futures contract. This
margin is referred to as good faith because it is this money that is used to debit any day-to-day
losses.
When you open a futures contract, the futures exchange will state a minimum amount of money that
you must deposit into your account. This original deposit of money is called the initial margin. When
your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses
that occur over the span of the futures contract

The initial margin is the minimum amount required to enter into a new futures contract, but the
maintenance margin is the lowest amount an account can reach before needing to be replenished.
For example, if your margin account drops to a certain level because of a series of daily losses,
brokers are required to make a margin call and request that you make an additional deposit into your
account to bring the margin back up to the initial amount.

Leverage: The Double-Edged Sword

In the futures market, leverage refers to having control over large cash amounts of commodities with
comparatively small levels of capital. In other words, with a relatively small amount of cash, you can
enter into a futures contract that is worth much more than you initially have to pay (deposit into your
margin account). It is said that in the futures market, more than any other form of investment, price
changes are highly leveraged, meaning a small change in a futures price can translate into a huge
gain or loss.
Due to leverage, if the price of the futures contract moves up even slightly, the profit gain will be large
in comparison to the initial margin. However, if the price just inches downwards, that same high
leverage will yield huge losses in comparison to the initial margin deposit. For example, say that in
anticipation of a rise in stock prices across the board, you buy a futures contract with a margin deposit
of $10,000, for an index currently standing at 1300. The value of the contract is worth $250 times the
index (e.g. $250 x 1300 = $325,000), meaning that for every point gain or loss, $250 will be gained or
lost.

If after a couple of months, the index realized a gain of 5%, this would mean the index gained 65
points to stand at 1365. In terms of money, this would mean that you as an investor earned a profit of
$16,250 (65 points x $250); a profit of 162%!

On the other hand, if the index declined 5%, it would result in a monetary loss of $16,250a huge
amount compared to the initial margin deposit made to obtain the contract. This means you still have
to pay $6,250 out of your pocket to cover your losses.

Pricing and Limits

Prices on futures contracts, however, have a minimum amount that they can move. These minimums
are established by the futures exchanges and are known as ticks.
Say that the price change limit on silver per ounce is $0.25. Yesterday, the price per ounce closed at
$5. Todays upper price boundary for silver would be $5.25 and the lower boundary would be $4.75. If
at any moment during the day the price of futures contracts for silver reaches either boundary, the
exchange shuts down all trading of silver futures for the day. The next day, the new boundaries are
again calculated by adding and subtracting $0.25 to the previous days close. Each day the silver
ounce could increase or decrease by $0.25 until an equilibrium price is found. Because trading shuts
down if prices reach their daily limits, there may be occasions when it is NOT possible to liquidate an
existing futures position at will.

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

First, when you buy an option, you have a right but not the obligation to do something. You can
always let the expiration date go by, at which point the option is worthless. If this happens, you lose
100% of your investment, which is the money you used to pay for the option (as token).Second, an
option is merely a contract that deals with an underlying asset. For this reason, options are called
derivatives, which mean an option derives its value from something else.

Calls and Puts

The two types of options are calls and puts:

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

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

There are four types of participants in options markets depending on the position they take:

1. Buyers of calls

2. Sellers of calls

3. Buyers of puts

4. Sellers of puts

People who buy options are called holders and those who sell options are called writers;
furthermore, buyers are said to have long positions, and sellers are said to have short positions.

-Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to
exercise their rights if they choose.

-Call writers and put writers (sellers) however are obligated to buy or sell. Selling options is more
complicated and can thus be even riskier.

The price at which an underlying stock can be purchased or sold is called the strike price. This is the
price a stock price must go above (for calls) or go below (for puts) before a position can be exercised
for a profit. All of this must occur before the expiration date.

For call options, the option is said to be in-the-money if the share price is above the strike price. A
put option is in-the-money when the share price is below the strike price. The amount by which an
option is in-the-money is referred to as intrinsic value.

The total cost (the price) of an option is called the premium. This price is determined by factors
including the stock price, strike price, time remaining until expiration (time value), and volatility.

Why use Options?

There are two main reasons why an investor would use options: to speculate and to hedge.

Speculation
When you buy an option, you have to be correct in determining not only the direction of the stocks
movement, but also the magnitude and the timing of this movement. To succeed, you must correctly
predict whether a stock will go up or down, and you have to be right about how much the price will
change as well as the time frame it will take for all this to happen.

Hedging
Imagine you wanted to take advantage of technology stocks and their upside, but say you also
wanted to limit any losses. By using options, you would cost-effectively be able to restrict your
downside while enjoying the full upside.

A Word on Stock Options

Many companies use stock options as a way to attract and to keep talented employees, especially
management. They are similar to regular stock options in that the holder has the right but not the
obligation to purchase company stock. The contract, however, is between the holder and the
company, whereas a normal option is a contract between two parties that are completely unrelated to
the company.

An Example of how Options Work

Lets say that on May 1st, the stock price of Corys Tequila Co. is $67 and the premium (cost) is $3.15
for a July 70 Call, which indicates that the expiration is the 3rd Friday of July and the strike price is
$70. The total price of the contract is $3.15 x 100 = $315. In reality, youd also have to take
commissions into account, but well ignore them for this example.

Remember, a stock option contract is the option to buy 100 shares; thats why you must multiply the
contract by 100 to get the total price. The strike price of $70 means that the stock price must rise
above $70 before the call option is worth anything; furthermore, because the contract is $3.15 per
share, the break-even price would be $73.15.

When the stock price is $67, its less than the $70 strike price, so the option is worthless. But dont
forget that youve paid $315 for the option, so you are currently down by this amount. Three weeks
later the stock price is $78. The options contract has increased along with the stock price and is now
worth $8.25 x 100 = $825. Subtract what you paid for the contract, and your profit is ($8.25 $3.15) x
100 = $510.

BONDS
Bonds are debt. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or
government). The primary advantage of being a creditor is that you have a higher claim on assets
than shareholders do: that is, in the case of bankruptcy, a bondholder will get paid before a
shareholder. However, the bondholder does not share in the profits if a company does well he or
she is entitled only to the principal plus interest.

Why Bother With Bonds?

Take two situations where this may be true:

1) Retirement The easiest example to think of is an individual living off a fixed income. A retiree
simply cannot afford to lose his/her principal as income for it is required to pay the bills.

2) Shorter time horizons

 Characteristics
Face Value/Par Value
The face value (also known as the par value or principal) is the amount of money a holder will get
back once a bond matures. A newly issued bond usually sells at the par value. Corporate bonds
normally have a par value of $1,000, but this amount can be much greater for government bonds.
What confuses many people is that the par value is not the price of the bond. A bonds price
fluctuates throughout its life in response to a number of variables (more on this later). When a bond
trades at a price above the face value, it is said to be selling at a premium. When a bond sells below
face value, it is said to be selling at a discount.

Coupon (The Interest Rate)

The coupon is the amount the bondholder will receive as interest payments. Its called a "coupon"
because sometimes there are physical coupons on the bond that you tear off and redeem for interest.
However, this was more common in the past. Nowadays, records are more likely to be kept
electronically. Most bonds pay interest every six months, but its possible for them to pay monthly,
quarterly or annually.

The coupon is expressed as a percentage of the par value. If a bond pays a coupon of 10% and its
par value is $1,000, then itll pay $100 of interest a year. A rate that stays as a fixed percentage of the
par value like this is a fixed-rate bond. Another possibility is an adjustable interest payment, known as
a floating-rate bond. In this case the interest rate is tied to market rates through an index, such as the
rate on Treasury bills. A lower coupon means that the price of the bond will fluctuate more.

Maturity
The maturity date is the date in the future on which the investors principal will be repaid. Maturities
can range from as little as one day to as long as 30 years (though terms of 100 years have been
issued). A bond that matures in one year is much more predictable and thus less risky than a bond
that matures in 20 years. Therefore, in general, the longer the time to maturity, the higher the interest
rate. Also, all things being equal, a longer term bond will fluctuate more than a shorter term bond.

Issuer
The issuer of a bond is a crucial factor to consider, as the issuers stability is your main assurance of
getting paid back. For example, the U.S. government is far more secure than any corporation. Its
default risk (the chance of the debt not being paid back) is extremely small so small that U.S.
government securities are known as risk-free assets. The reason behind this is that a government will
always be able to bring in future revenue through taxation. A company, on the other hand, must
continue to make profits, which is far from guaranteed. This added risk means corporate bonds must
offer a higher yield in order to entice investors this is the risk/return tradeoff in action.

The bond rating system helps investors determine a companys credit risk. Think of a bond rating as
the report card for a companys credit rating. Blue-chip firms, which are safer investments, have a
high rating, while risky companies have a low rating.

Notice that if the company falls below a certain credit rating, its grade changes quality to junk status.
Junk bonds are aptly named: they are the debt of financial difficulty. Because they are so risky, they
have to offer much other debt. This brings up an important point: not all bonds are inherently certain
types of bonds can be just as risky, if not riskier, than stocks.

Yield, Price and Other Confusion

A bonds price changes on a daily basis. At any time, a bond can be sold in the open market, where
the price can fluctuate.

Measuring Return with Yield

Yield is a figure that shows the return you get on a bond. When you buy a bond at par, yield is equal
to the interest rate. When the price changes, so does the yield. If you buy a bond with a 10% coupon
at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down
to $800, then the yield goes up to 12.5%. This happens because you are getting the same
guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price
to $1,200, the yield shrinks to 8.33% ($100/$1,200).

Yield to Maturity
When bond investors refer to yield, they are usually referring to yield to maturity (YTM).

Maturity. It equals all the interest payments you will receive (and assumes that you will reinvest the
interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at
a discount) or loss (if you purchased at a premium).

Price in the Market

The factor that influences a bond more than any other is the level of prevailing interest rates in the
economy. When interest rates rise, the prices of bonds in the market fall, thereby raising the yield of
the older bonds and bringing them into line with newer bonds being issued with higher coupons.
When interest rates fall, the prices of bonds in the market rise, thereby lowering the yield of the older
bonds and bringing them into line with newer bonds being issued with lower coupons.

Different Types of Bonds

Government Bonds
Treasury bonds (More than 10 years maturity)

Treasury notes (1 to 10 years)

Treasury bills (less than one year).

Treasury bills arent bonds because of their short maturity. All debt issued by Uncle Sam is regarded
as extremely safe, as is the debt of any stable country. The debt of many developing countries,
however, does carry substantial risk. Like companies, countries can default on payments.

Municipal Bonds
Municipal bonds, known as "munis", are the next progression in terms of risk. Cities dont go bankrupt
that often, but it can happen. The major advantage to munis is that the returns are free from federal
tax. Because of these tax savings, the yield on a muni is usually lower than that of a taxable bond.
Corporate Bonds
Corporate bonds are characterized by higher yields because there is a higher risk of a company
defaulting than a government. The upside is that they can also be the most rewarding fixed-income
investments because of the risk the investor must take on. The companys credit quality is very
important: the higher the quality, the lower the interest rate the investor receives.

Other variations on corporate bonds include convertible bonds, which the holder can convert into
stock, and callable bonds, which allow the company to redeem an issue prior to maturity.

Zero-Coupon Bonds
This is a type of bond that makes no coupon payments but instead is issued at a considerable
discount to par value. For example, lets say a zero-coupon bond with a $1,000 par value and 10
years to maturity is trading at $600; youd be paying $600 today for a bond that will be worth $1,000 in
10 years.

How Do I Buy Bonds?

Most bond transactions can be completed through a full also open an account with a bond broker, but
be warned minimum initial deposit of $5,000. If you cannot afford mutual fund that specializes in
bonds (a bond fund).

Credit Derivatives- a primer

What is a credit derivative?
A credit asset is the extension of credit in some form: normally a loan, installment credit or financial
lease contract.

Every credit asset is a bundle of risks and returns: every credit asset is acquired to make certain
returns on the asset, and the probability of not making the expected return is the risk inherent in a
credit asset.

There are several reasons due to which a credit asset may not end up giving the expected return to
the holder: delinquency, default, losses, foreclosure, prepayment, interest rate movements, exchange
rate movements, etc.

A credit derivative contract intends to transfer the risk of the total return in a credit transaction falling
below a stipulated rate, without transferring the underlying asset. For example, if bank A enters into a
credit derivative with bank B relating to the formers portfolio, bank B bears the risk, of course for a
fee, inherent in the portfolio held by bank A, while bank A continues to hold the portfolio.

The motivation to enter into credit derivatives transactions is well appreciable. In part, it is a design by
a credit institution; say a bank, to diversify its portfolio risks without diversifying the inherent portfolio
itself. In part, the trend towards credit derivatives has been motivated by bankers need to meet their
capital adequacy requirements.

Let us visualize a bank, say Bank A which has specialized itself in lending to the office equipment
segment. Out of experience of years, this bank has acquired a specialized knowledge of the
equipment industry. There is another bank, Bank B, which is, say, specialized in the cotton textiles
industry. Both these banks are specialized in their own segments, but both suffer from risks of
portfolio concentration. Bank A is concentrated in the office equipment segment and bank B is
focused on the textiles segment. Understandably, both the banks should diversify their portfolios to be
safer.

One obvious option for both of them is: Bank A should invest in an unrelated portfolio, say textiles.
And Bank B should invest in a portfolio in which it has not invested still, say, office equipment. Doing
so would involve inefficiency for both the banks: as Bank A does not know enough of the textiles
segment as bank A does not know anything of the office equipment segment.

Here, credit derivatives offer an easy solution: both the banks, without transferring their portfolio or
reducing their portfolio concentration, could buy into the risks of each other. So bank B buys a part of
the risks of the portfolio that is held by Bank A, and vice versa, for a fee. Both continue to hold their
portfolios, but both are now diversified. Both have diversified their risks. And both have also
diversified their returns, as the fees being earned by the derivative contract is a return from the
portfolio held by the other bank.

The above example has depicted credit derivatives being a bilateral transaction as a sort of a
bartering of risks. As a matter of fact, credit derivatives can be completely marketable contracts: the
credit risk inherent in a portfolio can be securitized and sold in the capital market just like any other
capital market security. So, any one who buys such a security is inherently buying a fragment of the
risk inherent in the portfolio, and the buyers of such securities are buying a fraction of the risks and
returns of a portfolio held by the originating bank.

Thus, the concept of derivatives and securitization have joined together to make risk a tradable
commodity.

A definition of credit derivatives:

Credit derivatives can be defined as arrangements that allow one party (protection buyer or originator)
to transfer credit risk of a reference asset, which it may or may not own, to one or more other parties
(the protection sellers).

Types of credit derivatives:

The easiest and the most traditional form of a credit derivative is a guarantee. Financial guarantees
have existed for thousands of years. However, the present day concept of credit derivatives has
traveled much farther than a simple bank guarantee. The credit derivatives being currently used in the
market can be broadly classified into the following:

Total return swap:

As the name implies, a total return swap is a swap of the total return out of a credit asset against a
contracted prefixed return. The total return out of a credit asset can be affected by various factors,
some of which may be quite extraneous to the asset in question, such as interest rate movements,
exchange rate fluctuations etc. Nevertheless, the protection seller here guarantees a prefixed return
to the originator, who in turn, agrees to pass on the entire collections from the credit asset to the
protection seller. That is to say, the protection buyer swaps the total return from a credit asset for a
predetermined, prefixed return.
Credit default swap:
Credit default swap is a refined form of a traditional financial guarantee, with the difference that a
credit swap need not be limited to compensation upon an actual default but might even cover events
such as downgrading, apprehended default etc. In a credit default swap, the protection seller agrees,
for an upfront or continuing premium or fee, to compensate the protection buyer upon the happening
of a specified event, such as a default, downgrading of the obligor, apprehended default etc. Credit
default swap covers only the credit risk inherent in the asset, while risks on account of other factors
such as interest rate movements remain with the originator.

Credit linked notes:

Credit linked notes are a securitized form of credit derivatives. The technology of securitization here
has been borrowed from the catastrophe bonds or risk securitization instruments click here to get
more details. Here, the protection buyer issues notes. The investor who buys the notes has to suffer
either a delay in repayment or has to forego interest, if a specified credit event, say, default or
bankruptcy, takes place. This device also transfers merely the credit risk and not other risks involved
with the credit asset.

ISDA Credit Event definitions

The 6 Credit Events under ISDA Definitions are:

1. Bankruptcy

2. Obligation Acceleration

3. Obligation Default

4. Failure to Pay

5. Repudiation/Moratorium

6. Restructuring

A. CREDIT EVENTS
1. Bankruptcy
Bankruptcy in the 1999 Definitions mirrors the wording of Section 5(a)(vii) of the ISDA Master
Agreement. It is widely drafted so as to be triggered by a variety of events associated with bankruptcy
or insolvency proceedings under English law and New York law, as well as analogous events under
other insolvency laws.

ISDA is aware that the scope of the definition of Bankruptcy may be wider than insolvency-related
events falling within the credit assessment criteria used by rating agencies. Certain actions taken by
the reference entity, for instance, a board meeting or a meeting of shareholders to consider the filing
of a liquidation petition, could be argued as being in furtherance of an act of bankruptcy and thus
triggering a Credit Event, even though such act would not generally be considered a bankruptcy event
in the context of credit assessment by a rating agency. Therefore, the inclusion of this Credit Event
could provide credit protection ahead of such circumstances.
By contrast, a guarantee would not typically provide any protection against insolvency-related events
ahead of an actual failure to pay.

2. Obligation Acceleration
Obligation Acceleration covers the situation, other than a Failure to Pay, where the relevant obligation
becomes due and payable as a result of a default by the reference entity before the time when such
obligation would otherwise have been due and payable. The Default Requirement builds in a
minimum threshold which the relevant sum being accelerated must exceed before the Credit Event
occurs.

The scope of this Credit Event forms a subset of that of Obligation Default. Thus if Obligation Default
is specified as a Credit Event in the relevant credit derivatives transaction, this Credit Event will only
be of relevance if the Default Requirement is lower than that in respect of the Obligation Default.

The credit considerations are discussed under Obligation Default below.

3. Obligation Default
Obligation Default covers the situation, other than a Failure to Pay, where the relevant obligation
becomes capable of being declared due and payable as a result of a default by the reference entity
before the time when such obligation would otherwise have been capable of being so declared. The
Default Requirement builds in a minimum threshold which the relevant sum being defaulted or
capable of being accelerated must exceed before the Credit Event occurs.

It may be important to note that the concept of "default" used in the present context refers to a default
under the relevant provisions of the relevant contract or agreement.

4. Failure to Pay
Failure to Pay is defined to be a failure of the reference entity to make, when and where due, any
payments under one or more obligations. Grace periods for payment are taken into account.

The failure of payment is critical to the credit risk borne by a protection buyer under a credit derivative
product. A failure to pay by an underlying reference entity also encompasses the situations in which
guarantee payments are generally triggered.

5. Repudiation/Moratorium
Repudiation/Moratorium deals with the situation where the reference entity or a governmental
authority disaffirms, disclaims or otherwise challenges the validity of the relevant obligation. A default
requirement threshold is specified.

6. Restructuring
Restructuring covers events as a result of which the terms, as agreed by the reference entity or
governmental authority and the holders of the relevant obligation, governing the relevant obligation
have become less favorable to the holders that they would otherwise have been. These events
include a reduction in the principal amount or interest payable under the obligation, a postponement
of payment, a change in ranking in priority of payment or any other composition of payment. A default
threshold amount can be specified.
This approach purports to adopt an objective approach by identifying specific events that are typical
elements of a restructuring of indebtedness. As restructuring events could be those undertaken by a
reference entity that would result in the credit quality being improved or remaining the same, the
Credit Event under the 1999 Definitions is specified not to occur in circumstances where the relevant
event does not result from deterioration in the creditworthiness or financial condition of the reference
entity.

Lets start with Investment Basics:

Investment is nothing but saving money in a way that will get you returns for it in the
future (short-term or long-term). Saving money in accounts will not generate any
benefits. Instead, one should invest the money in options like Mutual Funds, Bonds etc.,
which yield returns in the future.

Learn more about IB domain here.

Why should one Invest?
One needs to invest money in order to earn returns and generate returns to meet their
monetary goals in life. In other words, we can say that one should invest to meet the
cost of inflation (Inflation means the rate at which the cost of living increases in future).

When to start Investing?

The important rule for all investors is to invest early, regularly and for the long term, not
short term.

What are the available Investment options?

One can either invest in Physical Assets such as real estate, gold/jewelry, commodities
(seeds, crude oil, natural gas, metals etc.,) or in Financial Assets such as fixed deposits
with banks, provident/pension fund etc., or in securities market such as shares, bonds,
debentures etc.

Financial Options for Investments:

Few Short-term investment options are,

Savings Bank Account: This is nothing but saving our funds in regular bank
accounts. For such savings, the interest rate will be very low, approximately the
interest rate varies between 4% 5% p.a.
Money Market or Liquid Funds: This is another option for short-term
investment which gives better returns than the above-mentioned savings
account. However, the interest rate for Money Market Funds will be lesser than
the fixed deposits.
Fixed Deposits with Banks: This is a better investment option with a bit higher
interest rates when compared with the above two options. Fixed deposits are also
named as term deposits. The investment period for this option starts with a
minimum period of 30 days.
Apart from the above short-term investment options these are a few of the Long-term
investment options,

Post Office Savings: This is saving our money in the Post Office under various
types of schemes. The risk involved in this is low. The interest rate for this option
 is 8% per annum. The interest amount for this option is paid monthly and the
maturity term is 6 years.
Public Provident Fund: Another main long-term savings investment option is
Public Provident Fund. The interest rate for this option is about 8% p.a and the
maturity period is 15 years.
Company Fixed Deposits: This is a different kind of investment option in which
we can invest for short-term (6 Months) to medium-term (3 5 years) with a
company. The interest rate will vary from 6% 9% p.a. The interest amount will
be paid monthly, quarterly or annually.
What You Will Learn: [show]
Introduction to Investment Banking Domain:
Investment Bank is a financial entity that suggests an individual, company, government
sectored firm, etc. on how to raise their financial capital by participating in the market
activities.

The main role of the Investment Bank is to act as a mediator between the companies
(who are interested in selling their securities / shares) and the individuals (who are
willing to purchase the same).

Investment bank operates in two ways buy side and sell side.
Buy side includes services such as buying shares for investors whereas Sell side
includes underwriting the stock and selling the shares to the investors from companies.

Buy side operation of Investment Bank with an example:

Suppose an investor wants to buy 50 shares of ABCD Company. Then he will consult an
Investment bank where the stock broker places an order for the same and delivers the
shares to the Investor.

Sell side operation of Investment Bank with an example:

Suppose a Company PQR plans to issue new shares of stock in IPO then the Investment
Bank verifies the shares and sells the same to their Clients. This way PQR Company
raises funds by issuing their stock.

Below are the few important terms of Investment Banking

Domain:
1) Stock Exchange: An entity that controls the business of buying and selling of
securities. Stock Exchange can be regional or national exchanges.
Example: NASDAQ USA, NSE India etc.
2) Stock/Share/Equity: Total capital of a company is divided into equal units; each
unit is termed as share/equity/stock. Stock also represents a part of ownership of a
company.
3) Face value of a Share: The amount or value (used during buying or selling) allotted
to a share by the company.
4) Issue Price: The price of a companys shares at which they are available in the
market. When these shares are traded in the market the price may be below or above
the issue price.
5) Initial Public Offering (IPO): This is nothing but selling the securities or shares of
a company to the public for the first time in the market.
6) Market Capitalization: The financial value of a company is calculated by multiplying
the share price with number of shares which is termed as Market Capitalization.
Example: Suppose a Company X has 100 shares. The current market price of each
share is $50. Then the market capitalization of the Company X is $5000.
7) Security Market: Security market is a place where buyers and sellers of securities
(bonds, debentures, stocks etc.,) do their transactions of buying and selling the
securities.
8) SEBI (Security and Exchange Board of India): An authority that makes sure
whether the buyers and sellers behave in a proper way in the market. So that they get
their desired profits. There are different security and exchange boards/commissions as
per the country.
9) Dividend on share: Dividend is a percentage of the value of a share, which a
company returns to its share holders from its annual profits.
10) Bid Price: Bid Price is the rate at which the buyer is ready to buy the stock.
11) Ask Price: This is the price at which the seller wants to sell his stock.
12) Futures: A future contract is an agreement between the buyer and the seller in
which the stock of future delivery is transacted at a particular price.
For example, if you want to purchase a March future contract of XYZ Company then
you have to do that at the current price available in the market. Lets say that the March
futures are trading at $100 per share. By the time the contract expires (last day of the
contract in March month) the price of the stock may not be the same. It may be $95 or
$110. Based on these price differences investors makes profits in the markets.
13) Options: It is a financial contract between the buyer and seller in which the buyer
has the right to buy or sell a security at a particular price on or before a particular date.
Options are of two types: Calls, and Puts.
Call means the right to buy an asset at a price within a period of time.
Put means the right to sell an asset at a price within a period of time.
14) Portfolio: A Portfolio is a combination of various investment assets mixed and
matched for gaining profits as per an investors goal. Items that are included in the
portfolio can be shares, debentures, mutual funds etc.
15) Depository: An entity that holds the securities and funds of depositors in an
account. The two depositories in India are National Securities Depository Limited (NSDL)
and Central Depository Services Limited (CDSL).
16) Mutual Funds: An entity that collects money from investors and invests the same
in various financial instruments like shares, bonds, debentures etc.
17) Net Asset Value (NAV): NAV of the fund is the cumulative market value of the
asset. NAV per unit is the net value of the assets divided by the number of units. Buying
and selling of shares in the market are done on the basis of NAV related prices.
18) Nifty Index: It is a scientifically developed, 50 stock index, which shows the
movement of the Indian markets. It behaves as a barometer for the Indian markets.
19) Watch List: A list of selected securities. It is mainly used to monitor their
movement in the market regularly, closely or frequently.
Investment Banking Organizational Structure:

Investment banking comprises of Front Office, Middle Office, and Back Office.
1) Front Office: This plays a major role in generating funds. The main areas of front
office are Investment banking, Sales & trading, and Research.
Investment Banking helps customers in raising funds in capital markets and also
suggests the companies in raising their capital.
Sales & Trading deals with buying and selling of stock (shares, bonds etc.,)
 Research involves reviewing the company reports about their buy/sell ratings,
companys prospects etc. This will help in providing advice to their clients in the
right way.
2) Middle Office: This deals with Risk Management, Corporate Treasury and
Financial Control.
Risk Management involves analyzing the market situations and informing the
clients of the risks involved in their trades.
Corporate Treasury is responsible for the funds of Investment Banks.
Financial Control tracks the capital flow of the firm and its success.
3) Back Office: This includes Operations and Technology.
Operations checks whether the trades have been executed properly and funds
transferred successfully.
Technology supports the software, data, and systems of Investment Banks.
Trade Life Cycle:
The main goal of every trade order is to get executed at a suitable price with a minimum
risk spread.

The various stages of a trade order are as follows,

Decision of the investor to trade

Placing the trade order
Execution of the trade
Clearing of the trades (Trade validation and confirmation)
Settlement of trades
Funds / Securities settlement
How to Test Investment Banking Application:
Before moving to the testing part of Investment Banking applications here are the
sample screenshots of how an IB application looks like.

#1) From the below screen you can view the terms options (sell and buy of IBM shares),
bid price, ask price etc.,
(Note: Click on any image for enlarged view)
#2) From the below screen you can view the positions, quantity and price of a particular
symbol.

#3) Below is the sample screenshot of How a Watch List of an IB application looks like.

#4) This screen shows the graphical view of a symbol.

#5) Below screen displays how a position or order is closed.

#6) This shows the profile details of a client.

#7) Below screen displays the view of mobile IB application.
[screenshot source1 and source2]
Test Scenarios:
Different Investment Banking applications have different software testing and QA
requirements. Below are few general test scenarios or test cases useful for testing such
applications.
Positive Scenarios:
1) The Investment banking applications have different logins for different users like
brokers, dealers, individuals or investors etc. Verify the logins of appropriate users with
their login IDs as the permissions for accessing the application for all the users may not
be the same.
For example, a broker has the permission to view the trading limits of the individuals
based on the amount/funds in the individuals account. However, this facility may not be
available for the individual.
2) The function of the Watch-list can be verified by adding, removing the
securities/symbols to it. Ensure that the removed symbols should get deleted from the
Watch-list and vice versa.
3) Buy Order To test this functionality, place a trade buy order for any symbol with
some quantity like 10 or 20 etc and submit the same. Then go the orders section and
verify the details whether the order has been placed successfully or not.
4) Sell Order Place a trade sell order as above (buy order) and verify the details.
5) Change Order Go to the orders section and open any previous order or existing
order and make few changes like editing the quantity or symbol etc and verify whether
the modifications get updated or not.
6) Cancel Order Open an existing order and try to cancel it. The order should be
canceled successfully.
7) Different types of orders have to be tested.
Market order Try to place a trade order for the market price and check
whether the trade gets executed for that price at the same point of time.
Limit order Try to place an order for a particular price and check whether the
trade has been executed when the market price meets the price set by the user.
8) Check and verify whether the proper notifications or warning messages are getting
displayed for the corresponding actions.
For example, after placing a trade buy order and submitting it, a message should be
displayed that the order has been placed successfully.
9) Try to update the user information like email, mobile no. etc, save it and log out from
the application. Login to the application and verify whether the updated information has
been saved or not.
10) If the AUT (application under test) supports various territories or geo-locations,
check few functionalities for various locations.
11) Test the calculations part of the application very thoroughly and also, test its
localization.
12) Test the connections of the applications whether they work out of the staging
environments.
13) The security of the application should also be tested as it contains the personal data
of the users.
14) Multi-tasking of the applications should also be tested when other apps are open on
the device.
15) Applications quality, look and feel, user friendliness etc are also to be tested as it
gains the users trust.
Negative Scenarios:
1) Try to place a trade order for more than the value of funds available in the account
and the order should not get placed and it should pop-up a warning message stating that
the funds are insufficient.
2) Test the quantity of shares feature in the application. Place a trade order for the
number of shares greater than the available quantity of shares. Trade should not be
placed as the quantity of shares requested is more than the available quantity.
3) Try to place a trade order for a stock for which the expiry date has been reached. The
order should not get placed.
Also read => How to Classify Positive and Negative Test Scenarios
Testing the Database of an Investment Banking application:
1. Login to the IB application and create a profile for a Client with all required
mandatory details and save the details. Now login to the database of the same IB
application and verify the details of the client through SQL queries. All the details
entered through the front-end application needs to be saved in the database.
2. Open an existing record of a Client and modify few details like email, address or
phone number and save the data. The updated details should get saved in the
database.
3. While creating a profile for a Client, enter only a few details and without saving
the data close the application or sign out from the application. Now check in the
database that the earlier entered details should not get saved.
4. Try to create a duplicate record for an already existing client, the record should
not get created.
 5. On behalf of a Client place 2 or 3 trade orders and submit. Now verify the
database whether the same trade orders got updated in the database or not.
6. Login to a Clients account and cancel an existing order, now check the same in
the database that the particular record should get canceled.
Testing the Security of an Investment Banking application:

1. Create a Clients profile, enter the username or login id and enter the password
too. The data in the password field should be encrypted so that the hackers
cannot find the password.
2. Try to login to the application with invalid credentials. The system should not
allow the login.
3. While navigating through the pages in the IB application or website the back
button functionality of the browser should not work. (Mainly for financial websites
this functionality should be blocked.)
4. Login to the application and try to perform any transaction and leave the system
idle for some time. Then try to proceed with the transaction the system should
get logged off. This indicates the session time-out of the application.
5. Try to login to the application with for a particular user Id with an invalid
password and repeat the same for 3 attempts. Then the particular login id should
be blocked. This feature restricts hackers from entering into the system with bulk
data.
6. Login to the application and perform any transaction. And now verify the cookies
of the browser, they should be in an encrypted form to avoid hacking of the data.
Testing the Performance of an Investment Banking application:
1. While navigating through the IB web-site check whether the system responds
quickly to an action performed or not. This determines the speed of the
application.
2. Try to login to the IB application with various user Ids simultaneously from
various systems (no. of users that the application can handle). The application
should handle multiple user logins the way it is intended to.
3. Login to IB site with a user Id and place the huge number of trades included with
some complex funds transactions. This reveals the ability of the application to
handle large volume.
4. Login to IB site with various user Ids from various systems parallelly and perform
huge transactions from all the used Ids at the same time. This shows how much
stress the application can handle.
Tips for testing an Investment Banking Application:
The tester cannot test the Investment Banking or trading application until
he/she gains a grip on the domain.
An Investment banking application is not just tested for knowledge but should be
tested for the logic behind it.
While testing the functionality related to trades, concentrate on the expiry dates
of the stock.
While placing any trades through an IB application you should be careful and
concentrate on the Symbols, as there may be an alphabet difference in
them. For example, while placing a trade order for Silver, just make sure for
which type of Silver you are placing the order. (Silver = 30kg lot, SilverM = 5
kg).