NEWSLETTER. Stock Options FEBRUARY 2018 MESSAGE FROM THE CEO INTRODUCTION TO THE INSTITUTE IFMP ACTIVITIES TERMS OF THE MONTH

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1 Institute of Financial Markets of Pakistan NEWSLETTER FEBRUARY 2018 MESSAGE FROM THE CEO INTRODUCTION TO THE INSTITUTE ARTICLE ON Stock Options IFMP ACTIVITIES TERMS OF THE MONTH BUSINESS AND ECONOMIC NEWSFLASH URDU GLOSSARY TERMS OF THE MONTH QUOTES AND JOKES BUSINESS AND ECONOMIC NEWSFLASH MARKETS IN REVIEW URDU GLOSSARY VOLUNTARY PENSION SCHEMES IN PAKISTAN The name of the institute has been changed QUOTES AND JOKES from Institute of Capital Markets to Institute of Financial Markets of Pakistan MARKETS IN REVIEW Contact Us Address: Park Avenue Building, Suite No. 1009, 10th Floor, P.E.C.H.S Block No. 6, Shahrah-e-Faisal, Karachi. Tel: +92 (21)

2 00 CONTENT 01 Message from the CEO 02 Introduction to the Institute 03 IFMP Activities Page: 3 Page: 4 Page: 5 04 Essentials of Investing in Stock Options 07 Terms of the Month 08 Business and Economic Newsflash Page: 6 Page: 9 Page: Urdu Glossary Quotes and Jokes Markets in Review Page: 11 Page: 12 Page: (21) info@ifmp.org.pk

3 01 Message from the Chief Executive Officer T he last few years have seen a rapid growth in size, quality and sophistication of financial markets, because of changes in the policy and regulatory environment, the entrepreneurial initiatives of individuals and institutions, and the availability of trained manpower. The continuing growth of financial markets is further adding to the demand for well-trained professionals. Mr. Muhammad Ali Khan Institute of Financial Markets of Pakistan is dedicated to the professional development of financial markets and research on financial markets as well as the well being of financial markets by educating the professionals about the norms and ethics being practiced in the markets. IFMP has had a pioneering role in meeting the demand for educated manpower. It is Pakistan's first specialized institution devoted to the education and updating of knowledge of manpower for financial markets. It will provide highquality educational standards for all types of financial market participants; investors, brokers, mutual funds, investment banks and policy makers. The Institute's main activities are (1) Licensing the professionals working in the financial markets by certifications. The institute s key responsibility is to educate the professionals working in different financial markets of Pakistan through examining their knowledge in their relevant field of work; (2) Studying the latest developments in the financial markets in order to discover whether there is such a thing as an ideal market economy; and (3) Contributing to the development of financial markets in Pakistan. By means of these three activities the Institute seeks to communicate its ideas to the audience both at home and overseas. The Institute's research is intended, first and foremost, to be neutral, professional and practical. Rooted in practice, it aims to contribute to the healthy development of Pakistani financial markets as well as to related policies by conducting neutral and professional studies of how these markets and the financial system are regulated and organized and how they perform. The economy is changing all the time. The Institute hopes that, by responding to these changes positively, it can contribute to the dynamic development of the country's financial markets as well as of the economy itself. January 2018 IFMP Newsletter Page 3

4 02 Introduction to the Institute The Institute of Financial Markets of Pakistan (IFMP), Pakistan s first securities market institute, has been established as a permanent platform to develop quality human capital, meet the emerging professional knowledge needs of financial markets and create standards among market professionals. The Institute has been envisioned to conduct various licensing examinations leading to certifications for different segments of the financial markets. IFMP develops a pool of trained and certified professionals, skilled not only to deal in conventional instruments but also to trade in new and complex financial market products. FEE STRUCTURE EXAMINATION SCHEDULE Candidate Registration Fee Examination Registration Fee Membership Fee (Annual) Study Guide (Hard Copy) Rs.10,000 Rs.7,000 Rs.5,000 Rs.800 Sun, March 25, 2018 Sun, May 27, 2018 Sun, July 29, 2018 Sun, September 30, 2018 Sun, November 25, 2018 PROGRAMMES LICENSING CERTIFICATIONS INSURANCE CERTIFICATIONS OTHER CERTIFICATIONS Fundamentals of Capital Markets Pakistan s Market Regulations Stock Brokers Certification Mutual Funds Distributors Commodity Brokers Certification Financial Analysts Certification Mutual Funds Basic Certification Securities and Futures Advisors Certification Programme (Basic and Core Modules) General Takaful Training Family Takaful Training Life Insurance Agent Non-Life Insurance Agent Bancassurance Certification Bancatakaful Certification Financial Derivative Traders Certification Compliance Officers Certification Clearing and Settlement Operations Certification Risk Management Certification Capital Budgeting and Corporate Finance Certification Investment Banking and Analysis Certification Islamic Finance Certification Fixed Income Certification January 2018 IFMP Newsletter Page 4

5 03 IFMP Activities IFMP Conducted Open Training Session for Mutual Funds Distributors Certification Examination The IFMP Mutual Fund Distributors Certification Programme covers the concepts of financial system and securities markets, the mutual fund industry and its governing regulatory framework, operational aspects of mutual funds and ethical practices. This Certification Exam is specifically designed to meet the minimum qualification needs of the mutual fund distributors certification programme working either directly with a fund management company or through a distribution agent. It intends to ensure that they are competent to provide buying & selling services to the mutual fund investors. Several candidates from the industry (Asset Management Companies and Banks) participated in the training session which was specially designed to make candidates prepare for the upcoming Mutual Funds Distributors Examination. IFMP Conducted Training workshop on Fixed Income Securities Certification in collaboration with USAID FMD for ABL Asset Management Lahore Center. The IFMP Fixed Income Securities Certification Exam covers the basic concepts of fixed income securities, financial intermediaries and their mechanisms, available instruments of fixed income securities and trading avenues, risks and returns. Employees who are involved in fixed income securities investments and trading participated in the workshop and were awarded certificates after successfully completing the training session. January 2018 IFMP Newsletter Page 5

6 04 Article Essentials of Investing in Stock Options What are Stock Options? Stock options are derivative instruments that derive their value from the underlying share. This means that any price fluctuation in the underlying security will bring a change in the value of the derivative contract. Stock or share is a security offered by a company to the investors. Investors can buy the shares of a company. When investors subscribe to these shares, they are offered share certificates by the company, indicating that the investors are now shareholders of the company and hold shares to the extent of their investment in the company. The company uses the collected funds for investment purposes in their new projects. The profits earned from these projects are then distributed among the shareholders as dividends or are kept in the company reserves, Equities or shares are one of the most favored financial instruments among the investor communities across the world. Benefits like high returns, corporate benefits like voting rights, etc. attract investors to invest in these assets; you can invest in shares through the following channels. Through the primary market: By subscribing to the shares during the Initial Public Offering (IPO) period, you can directly access the securities market. When you subscribe to the issue, shares are allotted depending upon your request for subscription and regulatory criteria for allotment of shares. Through the secondary market: By trading on exchange platforms, you can buy and sell shares of various listed companies. You can buy and sell as per your discretion. Through an investment vehicle: By investing in investment vehicles like mutual funds, collective investment funds, you can gain indirect access to the equity markets. You can benefit from high returns of the share markets. However, you will not be entitled to corporate benefits like voting rights. Performance of the Stock Options You can analyze the performance of the stock options by looking at the following indicators. Number of Contracts/ Volume Turnover/ Notional Value Outstanding Open Interest Total Traded Quantity January 2018 IFMP Newsletter Page 6

7 05 Article Stock options are option contracts on a given share or a security. It is important that you should first understand the need to invest in the product before you enter a trade. You may need to take necessary precautions before investing. Stock options can be purchased by paying a small amount of the entire contract value, which is termed as the premium. If the underlying share moves by a small value, the stock option contract will change by a huge value. So, you should remember that though you enter the contract by making a small investment, the contract may fluctuate with huge percentage gains or losses due to fluctuations in the underlying stock. You should be careful while choosing the stock option as for a given stock there are different stock option contracts available in the market, which differ in their strike prices, expiry date, premium rates, etc. You should choose a contract that suits your investment requirements. You should remember that historical performance of the stock or stock option does not dictate the future performance. How are Stock Options Designed? Stock options are derivative instruments that help traders hedge risk resulting from price fluctuations in the underlying stock. Derivative instruments have revolutionized the risk management process for traders across the world. The variety of instruments and their benefits have helped investors meet their requirements. Stock option contracts differ from the conventional forward and futures contracts due to their structure and payoff profile. Traders who trade in huge volumes in equity markets have found these instruments beneficial to manage their price risk. Also, portfolio managers who manage huge volumes of securities for their investors use these contracts to manage any price fluctuation in a given stock. For instance, a trader who has bulk of shares of company ABC can invest in these instruments to manage price risk in the underlying shares. For derivatives trading, shares are selected as per the following criteria: The stocks are selected as per their daily average market capitalization and daily average traded value over the last six months on a rolling basis. There should have been sufficient orders in the said stock to bring a change in the stock price over the last six months. This is defined by the term median quarter sigma order size, which is defined as the order size that is required to bring a change in the price of the share equivalent to one quarter of standard deviation. This factor is analyzed over the last six months for the given stock. This should be not less than Rs.5 lakh over the last six months. The market-wide position limit in the given share should not be less than Rs.100 crore. This limit is valued taking the closing prices of stocks in the underlying cash market on expiry day of the contract. The market-wide position limit on open position (number of shares of underlying stock) on the futures and options on a given stock should be 20 percent of shares held by non-promoters in the given security, i.e., free float holding. January 2018 IFMP Newsletter Page 6

8 06 Article For a1 stock on which derivative trading is permitted, the market-wide limit should not be less than Rs.60 crore. No fresh contracts are issued on a security that fails to meet the eligibility criteria for three months in a row. Existing contracts may be allowed to trade till expiry. Any stock that has been banned from issuing new contracts consistently for three months will be removed from trading. A stock that is soon going to get listed or a stock that lost eligibility for trading in the derivative segment may be introduced in the derivative segment if it fulfills the criteria as mentioned above. Benefits You can enjoy the following benefits by investing in derivatives: Risk management through hedging: Hedging is a technique that helps you minimize any risk resulting from fluctuations in the value of the underlying asset. By trading in stock options contracts, you can hedge your price risk in the underlying portfolio of securities. The hedgers can transfer their risk to other market players and minimize their risk arising out of any price fluctuations. Price discovery: Derivatives help in price discovery for assets as buyers and sellers in this market quote prices depending upon the information they have about the supply and demand position for a given asset. This gives direction to the derivative and spot markets. This also brings in transparency into the markets. Integration of markets: Derivatives help in integration of markets by unifying markets across the world. Deregulation of trade norms and globalization of economies have created new investment avenues for investors and derivatives have helped investors cater risk management needs and enabled them to explore new investment avenues. Achieving market efficiency: Market players of derivative markets help in achieving price equilibrium by making transactions to benefit from price differences. Arbitragers reduce the price differences and help the market reach equilibrium in market price for a given asset. Lower transaction costs: Stock options help in reducing the transaction costs for the investors as investors need not purchase any additional insurance product to manage their investment risk. Also, investors can purchase derivatives with smaller amount of capital, offering leverage and enabling transactions at lower costs. Defined risk limit: Stock options limit your risk as the risk is known. Hence, if you do not wish to exercise the option, you may not do so and your loss will be limited to the option premium that you paid to the seller of the option. January 2018 IFMP Newsletter Page 6

9 Terms of the Month 07 "Exercise price" means the price payable by an employ- "Encumbrance" in relation to any property, movable or ee for exercising an option granted to him in pursuance immovable, means any mortgage, charge (fixed or of a Scheme; [Public Companies (Employees Stock Option floating), hypothecation, pledge, assignment or transfer Scheme) Rules, 2001] by way of security, or any other form of security or own- Exposure includes Facility and subscription to or in- ership interest less than absolute legal and beneficial vestment in equity securities, debt instruments or securi- ownership; [Insurance Ordinance, 2000] ties, units or certificates or shares of a Collective Investment Scheme, money-market placements, deposits, Certificate of Deposits, Continuous Funding System, forward contracts, derivatives and credit cards, but does not in- "Eligible pledgee" means any person who in accordance with the regulations, is recognized by a central depository as eligible for the purpose of receiving any pledge of book-entry securities ; [Central Depository Act, 1997] clude: (a) obligations under letters of credit and letters of "Electronic media" includes the internet, radio, televi- guarantee to the extent of cash margin held by an Non sion, tapes, cassettes, all forms of electronic recording -Banking and Finance Companies ; media including computer diskettes and CD-ROMs; (b) a Facility provided to financial institutions [Insurance Ordinance, 2000] through REPO transactions with underlying statu- Expert" includes banker, securities advisor, engineer, tory liquidity requirement eligible securities; valuer, accountant, lawyer and any other person whose (c) letters of credit established for the import of plant profession gives authority to a statement made by him and machinery; and [Securities Act, 2015] (d) deposits of less than ninety days. Get Yourself Registered!! 4th May, 2018 Last Date for Registration for 27th May 2018 Examination January 2018 IFMP Newsletter Page 9

10 08 Business and Economic Newsflash Pakistan may find itself on FATF blacklist after June Pakistan may find itself on the blacklist of a global financial watchdog if it does not prepare a comprehensive action plan to eradicate terrorist financing by June, official sources told Dawn. The 37-nation Financial Action Task Force (FATF) held its plenary meeting in Paris last week where it placed Pakistan on a watchlist of the countries where terrorist outfits are still allowed to raise funds. On Friday, the group issued an updated grey list, along with a statement announcing the decisions taken at the plenary session, and Pakistan was not on the list. Officials in Islamabad interpreted this as a breather, although it s more of a technical detail. The grey list identifies the jurisdictions with strategic anti-money laundering/countering the financing of terrorism deficiencies for which they have developed an action plan with the FATF. Pakistan has not yet worked out the proposed plan with the FATF and that s why it s not on the list. The FATF carries out an in-depth study of the financial system of a country known as mutual evaluation as part of the process to avoid blacklisting. The next evaluation starts in April, which may take 18 months, and will be followed by another 12 months of analysis. A mutually agreed action plan for overcoming strategic deficiencies would become operative at the end of evaluation. Between now and June, Pakistan will have to work out the details of the evaluation process with the FATF and a failure to do so could trigger another process, which may push Pakistan on the blacklist of wilful violators. Next 10 years crucial for Pakistan s economy: WB Next 10 years are crucial for Pakistan to set a higher growth trajectory, with challenges arising on the economic front, due to lack of political consensus, said the Country Director, World Bank, Patchamuthu Illangovan. Addressing participants of an economic conference, Illangovan pointed out that Pakistan s economy is facing short-term issues in the wake of rising external account deficit. The government had held back exchange rate for long, but recently allowed around five per cent adjustments in rupee-dollar parity. However, more flexibility is needed to move in the desired direction, he said. He added that the WB would issue revised growth rate targets in its upcoming report in April. The country director stressed that improved coordination was needed among the provinces on fiscal reforms. Meanwhile, Saqib Sheerani, a former adviser to the Ministry of Finance, highlighted that Pakistan s ease of doing business was currently at 147, which was 128 in January 2018 IFMP Newsletter Page 10

11 مزید اشیاء منتظم مشورہ درخواست تاوان نامہ مرا سلہ تقرر کاروبار چال ے ن ےک اخراجات 09 Urdu Glossary Accessories Administrator Advice Application Indemnity Bond Appointment Letter Operating Expenses ی ی Economic Sanctions معاش پا بندیاں Regulatory Regime انضبا ت نظام Specialized Financial Services خصویص مالیات خدمات خزانہ بانڈ آمدت ے غ ری ظاہر کردہ مخصوص مفاد بازار اجناس Treasury Bond Undisclosed Income Vested Interest Commodities Market January 2018 IFMP Newsletter Page 11

12 10 Quotes and Jokes A college degree is the key to realizing the American dream, well worth the financial sacrifice because it is supposed to open the door to a world of opportunity. Dan Rather Your greatest and most powerful business survival strategy is going to be the speed at which you handle the speed of change. That speed of change is trend. Ajaero Tony Martins Blockchain technology represents a generational opportunity to mutualize database infrastructure across entities within financial services. What that translates into is an enormous cost-saving, risk-reducing, and capital-enhancing opportunity. - Blythe Masters This is an anxiety driven world - the whole world is driven by anxiety. It is anxiety about the aftermath of the global financial crisis; it's anxiety about inequality and about computers replacing jobs. - Robert J. Shiller January 2018 IFMP Newsletter Page 12

13 11 Markets in Review Monthly Review Crude Oil (WTI)$ Beginning Ending Change KIBOR (6 Months) Bid % Offer % Beginning Ending Change 0.03 Pakistan Stock Exchange 100 Index Beginning 44, Ending 43, Change Gold Silver 10 Grams 10 Grams Beginning Rs. 47,839 Ending Rs. 48,171 Change Rs Beginning Rs. 611 Ending Rs. 677 Change Rs Foreign Exchange Rates Interbank Market GBP ( ) EURO ( ) USD ($) Beginning Rs Rs Rs Ending Rs Rs Rs Change Rs Rs Rs Source: Dawn e-paper Contact Us 92 (21) info@ifmp.org.pk January 2018 IFMP Newsletter Page 13