Equity strategies are closely guarded secrets and as such, there is very little written about how investors and corporate can utilise equity vehicles as part of their growth strategies. In this much-needed book, industry expert Juan Ramiraz guides readers through the whole range of equity derivative instruments, showing how they can be applied to a range of equity capital market situations, including hedging, yield enhancement and disposal of strategic stakes, mergers and acquisitions, stock options plan hedging, equity financings, share buybacks and other transactions on treasury shares, bank regulatory capital arbitrage and tax driven situations. The book includes case studies to highlight how equity derivative strategies have been used in real-life situations.
Preface xvii About the Author xix 1 Main Strategic Equity Derivative Instruments 1 1.1 Equity Forwards 1 1.1.1 Equity Forwards 1 1.1.2 Example of a Cash-settled Equity Forward on a Stock 2 1.1.3 Example of a Physically Settled Equity Forward on a Stock 3 1.1.4 Calculating the Forward Price of a Stock 4 1.2 Equity Swaps 6 1.2.1 Total Return Equity Swaps 6 1.2.2 Price Return Equity Swaps 7 1.2.3 Case Study: Physically Settled Total Return Equity Swap on Deutsche Telekom 7 1.2.4 Case Study: Cash-settled Total Return Equity Swap on Deutsche Telekom 12 1.2.5 Determination of the Initial Price 15 1.2.6 Determination of the Settlement Price 16 1.2.7 Equity Notional Resets 17 1.2.8 Case Study: Total Return Equity Swap on EuroStoxx 50 17 1.2.9 Compo Equity Swaps 21 1.2.10 Quanto Equity Swaps 23 1.2.11 Uses of Equity Swaps 25 1.3 Stock Lending and Borrowing 26 1.3.1 Stock Lending and Borrowing 26 1.3.2 Stock Lending/Borrowing Transaction Flows 27 1.3.3 Counterparty Credit Risk 28 1.3.4 Advantages of Stock Lending and Borrowing 29 1.3.5 Drawbacks of Stock Lending and Borrowing 29 1.4 Call and Put Options 30 1.4.1 Call Options 30 1.4.2 Put Options 33 1.4.3 European vs. American Style 36 1.4.4 Time Value vs. Intrinsic Value 36 1.4.5 In, At or Out-of-the-money 37 1.4.6 Variables that Influence an Option Price 38 1.4.7 Historical Volatility vs. Implied Volatility 40 1.4.8 Put-Call Parity 41 1.4.9 Options' Sensitivities, the "Greeks" 42 1.4.10 Delta Hedging 44 1.4.11 Offsetting Dividend Risk 45 1.4.12 Adjustments to Option Terms Due to Other Corporate Actions 46 1.4.13 Volatility Smile 47 1.4.14 Implied Volatility Term Structure 48 1.4.15 Composite and Quanto Options 49 1.5 Dividend Swaps 50 1.5.1 Dividend Swaps 50 1.5.2 Applications of Dividend Swaps 50 1.5.3 Risks 52 1.5.4 Main Dates in a Dividend Distribution 52 1.5.5 Case Study: Single-stock Dividend Swap 52 1.5.6 Case Study: Index Dividend Swap 56 1.5.7 Pricing Implied Dividends 58 1.6 Variance Swaps and Volatility Swaps 58 1.6.1 Variance Swaps Product Description 59 1.6.2 Calculation of the Realized Volatility and the Realized Variance 61 1.6.3 Volatility Swaps Product Description 62 1.6.4 Volatility Swaps vs. Variance Swaps 63 1.6.5 Applications of Variance and Volatility Swaps 63 2 Equity Capital Markets Products 65 2.1 Main Equity Capital Markets Products 65 2.1.1 Capital Increase Products 65 2.1.2 Secondary Placement Products 66 2.1.3 Equity-linked Products 66 2.2 Initial Public Offerings 66 2.2.1 Product Description 66 2.2.2 Benefits of Going Public 67 2.2.3 Drawbacks of Going Public 67 2.2.4 The IPO Process 68 2.2.5 Phase 1: Preparation of the Company 68 2.2.6 Phase 2: Preparation of the Offering 69 2.2.7 Phase 3: Marketing of the Offering 75 2.2.8 Phase 4: Placement of the Offering 77 2.2.9 Key Success Factors Affecting an IPO 80 2.2.10 Key Risk Factors Affecting an IPO 81 2.2.11 Case Study: Visa's IPO 82 2.3 Case Study: Google's Dutch Auction IPO 85 2.4 Rights Issues (or Rights Offerings) 87 2.4.1 Product Description 87 2.4.2 Main Definitions of a Rights Issue 88 2.4.3 Advantages and Weaknesses of a Rights Issue 89 2.4.4 Rights Offerings Success Factors 90 2.4.5 Calculation of the TERP 90 2.4.6 Case Study: ING's EUR 7.5 billion Rights Issue 91 2.5 Rights Issues of Convertible Bonds 95 2.5.1 Case Study: Banco Popolare Rights Issue of a Convertible Bond 95 2.6 Accelerated Book-Buildings 98 2.6.1 Product Description 98 2.6.2 Advantages and Weaknesses of an ABB 99 2.6.3 Estimating the Discount 99 2.6.4 Case Study: IPIC's Disposal of 11.8% of Barclays 100 2.7 At the Market Offerings 100 2.7.1 Product Description 100 2.7.2 Case Study: US Treasury Placement of Citigroup Shares 101 3 Convertible Bonds and Mandatory Convertible Bonds 103 3.1 Introduction to Convertible Bonds 103 3.1.1 What are Convertible Bonds? 103 3.1.2 Convertible vs. Exchangeable Bonds - Exchange Property 104 3.2 Who Buys Convertible Bonds? 105 3.3 Convertible Bonds: The Issuer Perspective 106 3.4 Case Study: Infineo