Socially responsible investment has become an important role of financial services in the world. One of the latest investments that are available in the market is called “green bonds”, its popularity has taken off the recent years. A green bond is a bond specifically earmarked to be used for environmental and climate activities, meaning green bonds are used to fund projects with clear environmental benefits. To elaborate, green bonds are intended to encourage climate-friendly projects that aimed at pollution control, sustainable agriculture and wastewater management system, clean transportation, climate change adaptation, etc. Green bond market is open to different types of issuers such as government bodies, corporates, and financial institutions.… Read the rest
Global Investment Management
Socially Responsible Investment (SRI)
Socially responsible investment (SRI) can be defined broadly as an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. SRI funds aim to integrate personal, social and environmental concerns with financial considerations, their objective is to increase investors’ wealth while ensuring that the selected companies have a positive impact on people and the Planet. Often called ethical investments or sustainable investments, this type of investment has become increasingly popular in recent years.
The early stages of the SRI movement can be traced back to the nineteenth century, especially amongst religious movements such as the Quakers and Methodists.… Read the rest
Comparison Between Merit Based Regulation and Disclosure Based Regulation
There are two basic models of regulatory system which is the supervision framework for securities market which is a merit based regulation and disclosure based regulation. These regulation systems are important to provide adequate investor protection and regulate business practices or codes of conduct that reduce systemic risks.
Merit Based Regulation (MBR)A securities regulator is needed, which control all matters relating to securities and to take all reasonable measures to preserve the confidence of investors in the securities market by ensuring sufficient security for such investors. The securities regulator has the discretion to approve the proposals with such revisions and subject to such terms and conditions as it deems fit.… Read the rest
Fama and French Three Factor Model
Capital Asset Pricing Model (CAPM) is the backbone of modern portfolio theory. According to CAPM, the expected return on stock is a function of its relationship with the market portfolio defined by its beta. However, Eugene Fama and Kenneth French (1992) brought together two more factors and found that stock return is based on a combination of not just market beta but also firm size and value. They came up with a new model known as Three Factor Model as an alternative to CAPM.
What is Fama and French Three Factor Model?Fama and French three factor model expands on the Capital Asset Pricing Model (CAPM) by adding size and value factors in addition to the market risk factor in CAPM.… Read the rest
Total Return Swaps (TRS)
Total Return Swaps (TRS), sometimes known as a total rate of return swaps or TR swaps, are an on off-balance sheet transaction for the party who pays total returns composed of capital gains or losses plus the ordinary coupon or dividend, and receives LIBOR plus spread related to the counterparty’s credit riskiness on a given notional principal. The bank paying total returns is effectively warehousing, renting out its balance sheet while transferring economic value and risk to preferably an uncorrelated counterparty to the referenced assets. A TRS is similar to a plain vanilla swap except the deal is structured such that the total return (cash flows plus capital appreciation/depreciation) is exchanged, rather than just the cash flows. … Read the rest
Future Flow Securitization
Securitization of the future flow-backed receivables is a new phenomenon in developing economies. Future Flow Securitization has grown in emerging markets in response to finding lower cost funding instrument by investment grade firms in the emerging market economies where their abilities were hampered by sovereign rate ceiling. While many of these companies historically relied on bank loans, or straight debts syndicated by major foreign banks in the past, rising volatility of interest rates and foreign exchange rates as well as reduced risk tolerance of major lenders have pushed these institutions (sovereign and private companies) toward an alternative vehicle such as future flow securitization.… Read the rest