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Brokers Awareness program


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Title: Brokers Awareness program

Brokers Awareness program
  • Dr. Mounther Barakat
  • Securities and Commodities Authority

?????? ????? ???????
  • ?. ???? ????? ??????
  • ???? ??????? ??????? ??????

  • It has been noticed that traders and entry level
    brokers may be
  • 1- from backgrounds other than finance, or
  • 2- little finance background, or
  • 3- of finance background that needs to be
  • If you are none of the above, this is not for you

What is this program about????? ???? ??????
????? ????????
  • Introduction to the field of finance
  • Financial risk and return
  • Demand on financial assets
  • Structure of interest rates
  • Financial markets efficiency
  • Economic policies and the role of the central
  • Capital, money, commodity, derivatives, mortgage,
    foreign exchange markets
  • Organization of markets and its operations
  • Introduction to financial analysis
  • Conflict of interest and financial crises
  • Financial institutions Investment companies,
    securities firms, banks, insurance companies,
    finance companies, pensions, ...

What is Finance?????? ????? ???? ???????
  • Finance deals with efficient allocation of
    resources by using pricing systems that are based
    on the riskness of assets.
  • Three areas of finance
  • Financial markets and Institutions
  • Corporate finance
  • Investments

Definitions from Finance perspective??????? ????
  • Asset
  • Real asset Vs. Financial asset
  • Primary asset Vs. Secondary asset
  • Intermediary Vs. broker Vs. dealer
  • Market
  • Financial market
  • Balance sheet
  • Income statement
  • Statement of cash flow
  • Cash Vs. profit
  • Surplus Vs. Deficit Units

The financial System?????? ??????
  • Types of financial Systems
  • Religious
  • Socialism
  • Capitalism
  • Mixed
  • The financial system in the UAE is the free
    market system with considerations specific to the
    UAE (e.g. Islamic and Arab culture, )

The financial system?????? ?????? ??????
  • Participants
  • Governments
  • Businesses
  • Individuals
  • Foreigners
  • The financial sector
  • Financial markets
  • Financial institutions
  • Money and Interest rates

The Financial System?????? ??????
Financial System
Fin. Sec.
- Interest rates - Money Supply
- Government. - Businesses - Individuals -
- Financial Markets - Financial Institutions
The Financial Sector?????? ??????
Financial Sector
Financial Markets
Financial Institutions
Long Term Equity Debt
Short Term Money FOREX
Non-depositories Investment Companies Securities
firms Contractual financing
Depositories Banks Credits Unions
Interest Rates and Money Supply????? ???????
??????? ???????
  • Interest is the rent of money
  • Equal to the real growth rate of GDP plus the
    expected inflation rate plus a premium to
    compensate for the riskness of the company being
  • Money supply is the amount of liquidity that is
    being allowed by the UAE central bank. The
    company being analyzed benefits if the amount of
    liquidity is near the healthy level.
  • Both interest rates and money supply have a great
    effect on the performance and value of the
    company and need to be taken into consideration
    in any financial analysis.

Function of Financial Markets and
Institutions????? ??????? ????????? ???????
  • Allows transfers of funds from person or business
    without investment opportunities (i.e.,
    Lender-Savers) to one who has them (i.e.,
  • ????? ??????? ??? ???????? ??? ?? ?????????
  • Improves economic efficiency
  • ????? ???????? ??????????

Segments of Financial Markets
  • Direct Finance
  • Borrowers borrow directly from lenders in
    financial markets by selling financial
    instruments which are claims on the borrowers
    future income or assets
  • ??????? ???????
  • Indirect Finance
  • Borrowers borrow indirectly from lenders via
    financial intermediaries (established to source
    both loanable funds and loan opportunities) by
    issuing financial instruments which are claims on
    the borrowers future income or assets
  • ??????? ??? ???????

Importance of Financial Markets ?????
??????? ???????
  • Financial markets are critical for producing an
    efficient allocation of capital, which
    contributes to higher production and efficiency
    for the overall economy, as well as economic
    security for the citizenry as a whole
  • ????? ??????? ??????? ???????? ????? ?????
  • Financial markets also improve the lot of
    individual participants by providing investment
    returns to lender-savers and profit and/or use
    opportunities to borrower-spenders
  • ????? ???? ?????? ???????? ??????

Function of Financial Markets ??? ?????? ?????
?????? ???????
Flow of Funds Through the Financial System
Classifications of Financial Markets?????
??????? ??? ???????
  • Primary Market ????? ???????
  • New security issues sold to initial buyers
  • Secondary Market ????? ????????
  • Securities previously issued are bought and sold

Classifications of Financial Markets?????
??????? ??? ???????
  • Exchanges ??????? ??????? (????????)
  • Trades conducted in central locations (e.g.,
    ADSM, DFM, .)
  • Over-the-Counter Markets ??????? ????? ?????
  • Dealers at different locations buy and sell

Classifications of Financial Markets?????
??????? ??? ?????????
  • Long term (Capital Markets)
  • Debt
  • Equity
  • Short term (Money Markets)
  • Foreign Exchange
  • Money markets

Classifications of Financial Markets ?????
??????? ??????? ??? ????? ??????
  • Debt Markets ????? ?????
  • Short-Term (maturity lt 1 year) Money Market
  • Long-Term (maturity gt 1 year) Capital Market
  • Equity Markets ????? ???????
  • Common Stock

Characteristics of Debt Markets Instruments?????
  • Debt instruments ???? ????? ?????
  • Buyers of debt instruments are suppliers (of
    capital) to the firm, not owners of the firm
  • Debt instruments have a finite life or maturity
  • Advantage is that the debt instrument is a
    contractual promise to pay with legal rights to
    enforce repayment
  • Disadvantage is that return/profit is fixed or

Characteristics of Equity Markets
Instruments????? ???????
  • Equity instruments (common stock is most
    prevalent equity instrument) ???? ????? ???????
  • Buyers of common stock are owners of the firm
  • Common stock has no finite life or maturity date
  • Advantage of common stock is potential high
    income since return is not fixed or limited
  • Disadvantage is that debt payments must be made
    before equity payments can be made

Characteristics of Financial Markets????? ?????
  • Debt Markets ???? ????? ?????
  • Although less well-known by the average person,
    debt markets are much larger in total dollars
    than equity markets, due to greater number of
    participant classes (households, businesses,
    government, and foreigners) and size of
    individual participants (businesses, and
  • This is not the case in the UAE debt market is
    mostly bank loans and informal or off balance
    sheet lending.

Characteristics of Financial Markets????? ???????
  • Equity Markets ???? ????? ???????
  • Although newly founded and lacks the needed
    environment to function properly, it proved to
    have played its role in establishing the elements
    of the sovereignty of the country and in
    promoting economic development.
  • To the contrary of most economies including that
    of the US the equity market in UAE is larger than
    the debt market, due to the fact that the bond
    markets are small and illiquid.

Function of Financial Intermediaries??? ???????
  • Financial Intermediaries ??????? ????????
  • Engage in process of indirect finance
  • More important source of finance than securities
  • Needed because of transactions costs and
    asymmetric information

Function of Financial Intermediaries??? ???????
  • Transactions Costs ?????? ?????????
  • Financial intermediaries make profits by reducing
    transactions costs
  • Reduce transactions costs by developing expertise
    and taking advantage of economies of scale and

Function of Financial Intermediaries??? ???????
  • A financial intermediarys low transaction costs
    mean that it can provide its customers with
    liquidity services, services that make it easier
    for customers to conduct transactions ?????
    ??????? ??? ?????? ??? ????? ??????? ????????
  • Banks provide depositors with checking accounts
    that enable them to pay their bills easily
  • Depositors can earn interest on checking and
    savings accounts and yet still convert them into
    goods and services whenever necessary without
    having to discontinue and liquidate investments

Function of Financial Intermediaries??? ???????
  • Another benefit made possible by the FIs low
    transaction costs is that they can help reduce
    the exposure of investors to risk, through a
    process known as risk sharing
  • ????? ???????
  • FIs create and sell assets with lesser risk to
    one party in order to buy assets with greater
    risk from another party (e.g. banks)
  • This process is referred to as asset
    transformation, because in a sense risky assets
    are turned into safer assets for investors

Function of Financial Intermediaries??? ???????
  • Adverse Selection ???????? ?? ?????????
  • Before transaction occurs
  • Potential borrowers most likely to produce
    adverse outcome are ones most likely to seek loan
    and be selected brokers and financial analysts
    can prevent that by studying the credit
    worthiness of the borrowers

Function of Financial Intermediaries??? ???????
  • Moral Hazard ???????? ?????? ?????
  • After transaction occurs
  • Hazard that borrower has incentives to engage in
    undesirable (immoral) activities making it more
    likely that won't pay loan back

Function of Financial Intermediaries??? ???????
  • Financial intermediaries reduce adverse selection
    and moral hazard problems, enabling them to make
    profits. How they do this is covered in many of
    the topics to come.
  • ???????? ??????? ???? ?? ??? ???????

Financial Institutions????? ???????? ???????
  • Depository Institutions (Banks) ????????
  • Commercial banks
  • Savings Loan Associations (SLs)
  • Mutual Savings Banks
  • Credit Unions
  • Contractual Savings Institutions ????????
  • Life insurance companies
  • Property casualty insurance companies
  • Pension funds

Financial Institutions ????? ???????? ???????
  • Investment Intermediaries ???????? ???????????
  • Finance companies
  • Mutual funds
  • Money market mutual funds

Financial Institutions ????? ???????? ???????
  • Commercial banks ?????? ????????
  • Raise funds primarily by issuing checkable,
    savings, and time deposits which are used to make
    commercial, consumer and mortgage loans
  • Collectively, these banks comprise the largest
    financial intermediary and have the most
    diversified asset portfolios
  • Around 1 trillion DHS in total assets in the UAE

Financial Institutions ????? ???????? ???????
  • SLs, Mutual Savings Banks and Credit Unions
  • ???????? ????????? ??????? ??????? ????? ?????
  • Raise funds primarily by issuing savings, time,
    and checkable deposits which are most often used
    to make mortgage and consumer loans, with
    commercial loans also becoming more prevalent at
    SLs and Mutual Savings Banks
  • Mutual savings banks and credit unions issue
    deposits as shares and are owned collectively by
    their depositors, most of which at credit unions
    belong to a particular group, e.g., a companys

Financial Institutions ????? ???????? ???????
  • All CSIs acquire funds from clients at periodic
    intervals on a contractual basis and have fairly
    predictable future payout requirements.
  • Life Insurance Companies ????? ????? ??????
  • receive funds from policy premiums, can invest
    in less liquid corporate securities and
    mortgages, since actual benefit pay outs are
    close to those predicted by actuarial analysis
  • Fire and Casualty Insurance Companies ????? ?????
    ??????? receive funds from policy premiums, must
    invest most in liquid government and corporate
    securities, since loss events are harder to

Financial Institutions ????? ???????? ???????
  • All CSIs acquire funds from clients at periodic
    intervals on a contractual basis and have fairly
    predictable future payout requirements.
  • Pension and Government Retirement Funds
  • ?????? ???????
  • hosted by corporations and state and local
    governments acquire funds through employee and
    employer payroll contributions, invest in
    corporate securities, and provide retirement
    income via annuities

Financial Institutions ????? ???????? ???????
  • Finance Companies ????? ???????
  • sell commercial paper (a short-term debt
    instrument) and issue bonds and stocks to raise
    funds to lend to consumers to buy durable goods,
    and to small businesses for operations
  • Mutual Funds ?????? ?????????
  • acquire funds by selling shares to individual
    investors and use the proceeds to purchase large,
    diversified portfolios of stocks and bonds we
    will have a training course on these some time
    this summer

Financial Institutions ????? ???????? ???????
  • Money Market Mutual Funds
  • ?????? ????????? ???????? ????? ?????
  • acquire funds by selling checkable deposit-like
    shares to individual investors and use the
    proceeds to purchase highly liquid and safe
    short-term money market instruments
  • Hedge Funds, ETFs and others

Regulation of Financial Markets
  • Reasons for Regulation ????? ??????? ??????
  • Increase Information to Investors
  • Protect investors and their investments
  • Ensure the Soundness of Financial Intermediaries
  • Improve Monetary Control

Regulation Reason Increase Investor
Information????? ???? ?????????
  • Asymmetric information in financial markets means
    that investors may be subject to adverse
    selection and moral hazard problems that may
    hinder the efficient operation of financial
    markets and may also keep investors away from
    financial markets
  • The Securities and Commodities Authority (SCA)
    requires corporations issuing securities to
    disclose certain information about their sales,
    assets, and earnings to the public and restricts
    trading by the largest stockholders (known as
    insiders) in the corporation.

Regulation Reason Increase Investor
Information????? ???? ?????????
  • Such government regulation can reduce adverse
    selection and moral hazard problems in financial
    markets and increase their efficiency by
    increasing the amount of information available to

Regulation Reason Ensure Soundness of Financial
Intermediaries ????? ???????
  • Because providers of funds to financial
    intermediaries may not be able to assess whether
    the institutions holding their funds are sound or
    not, if they have doubts about the overall health
    of financial intermediaries, they may want to
    pull their funds out of both sound and unsound
    institutions, with the possible outcome of a
    financial panic that produces large losses for
    the public and causes serious damage to the

Regulation Reason Ensure Soundness of Financial
Intermediaries ????? ???????
  • To protect the public and the economy from
    financial panics, six types of regulations are
  • Restrictions on Entry - soundness
  • Disclosure transparency
  • Restrictions on Assets and Activities no
  • Deposit Insurance peace of mind
  • Limits on Competition no price wars
  • Restrictions on Interest Rates no usury

Regulation Restriction on Entry ????? ??????
  • Restrictions on Entry
  • Very tight regulations as to who is allowed to
    set up a financial intermediary
  • Individuals or groups that want to establish a
    financial intermediary, such as a bank or an
    insurance company, must obtain a charter from the
  • Only if they are upstanding citizens with
    impeccable credentials and a large amount of
    initial funds will they be given a charter.

Regulation Disclosure ???????
  • Disclosure Requirements
  • There are stringent reporting requirements for
    financial intermediaries
  • Their bookkeeping must follow certain strict
  • Their books are subject to periodic inspection,
  • They must make certain information available to
    the public.

Regulation Restriction on Assets and Activities
????? ????????
  • There are restrictions on what financial
    intermediaries are allowed to do and what assets
    they can hold
  • Before you put your funds into a bank or some
    other such institution, you would want to know
    that your funds are safe and that the bank or
    other financial intermediary will be able to meet
    its obligations to you

Regulation Restriction on Assets and Activities
????? ????????
  • One way of doing this is to restrict the
    financial intermediary from engaging in certain
    risky activities
  • Another way is to restrict financial
    intermediaries from holding certain risky assets,
    or at least from holding a greater quantity of
    these risky assets than is prudent

Regulation Deposit Insurance???????
  • The government can insure people providing funds
    to a financial intermediary from any financial
    loss if the financial intermediary should fail

Regulation Past Limits on Competition ????
  • Although the evidence that unbridled competition
    among financial intermediaries promotes failures
    that will harm the public is extremely weak, the
    government needs to impose many restrictive
  • The purpose is to prevent financial
    intermediaries from competing to the point where
    the integrity of the financial system is

Regulation Past Restrictions on Interest Rates
???? ?????? ???????
  • Competition must also be inhibited by regulations
    that impose restrictions on interest rates that
    can be paid on deposits
  • These regulations need to be instituted because
    of the widespread belief that unrestricted
    interest-rate competition help encourage bank

Regulation Reason Improve Monetary Control
?????? ??????? ???????
  • Because banks play a very important role in
    determining the supply of money (which in turn
    affects many aspects of the economy), much
    regulation of these financial intermediaries is
    intended to improve control over the money supply
  • One such regulation is reserve requirements,
    which make it obligatory for all depository
    institutions to keep a certain fraction of their
    deposits in accounts with the central bank
  • Reserve requirements help the central bank
    exercise more precise control over the money
    supply well, much can be detailed about the UAE
    monetary policy.

The cost of money????? ??? ?????
  • The price, or cost, of debt capital is the
    interest rate.
  • The price, or cost, of equity capital is the
    required return. The required return investors
    expect is composed of compensation in the form of
    dividends and capital gains.

What four factors affect the cost of
money???????? ???? ???? ?? ????? ??? ?????
  • Time preferences for consumption (sacrifice)
  • Expected inflation (loss in purchasing power)
  • Risk (worry)

Nominal vs. Real rates?????? ?????? ????????
  • k represents any nominal rate
  • k represents the real risk-free rate of
    interest, if there was no inflation. Typically
    ranges from 1 to 4 per year.
  • kRF represents the rate of interest on Treasury

Determinants of interest rates?????? ??? ???????
  • k k IP DRP LP MRP
  • k required return on a debt security
  • k real risk-free rate of interest
  • IP inflation premium
  • DRP default risk premium
  • LP liquidity premium
  • MRP maturity risk premium

Premiums added to k for different types of
debt?????? ?????? ??????? ????????
S-T Treasury ?
L-T Treasury ? ?
S-T Corporate ? ? ?
L-T Corporate ? ? ? ?
Yield curve and the term structure of interest
rates????? ?????? ?????? ??????? ??????????
  • Term structure relationship between interest
    rates (or yields) and maturities.
  • The yield curve is a graph of the term structure.

Hypothetical yield curve????? ???? ???????
  • An upward sloping yield curve.
  • Upward slope due to an increase in expected
    inflation and increasing maturity risk premium.

The Yield Curve????? ??????
  • Corporate yield curves are higher than that of
    Treasury securities, though not necessarily
    parallel to the Treasury curve.
  • The spread between corporate and Treasury yield
    curves widens as the corporate bond rating

The Yield Curve????? ??????
Interest Rate ()
Treasury Yield Curve
Years to Maturity