Wealth management : private banking, investment decisions and structured financial products

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Title:

Personal Author:

Chorafas, Dimitris N.

Publication Information:

Oxford, UK : Butterworth-Heinemann, 2006

ISBN:

9780750668552

Subject Term:

Structured notes (Securities)

Private banks

Financial engineering

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Library	Item Barcode	Call Number	Material Type	Item Category 1	Status
Searching... PSZ JB	30000010104216	HG4651.5 C46 2006	Open Access Book	Book	Searching... Unknown

Wealth Management has two themes: Private Banking and investment decisions regarding Structural Financial Products. Dr. Dimitris Chorafas examines in a rigorous way whether structured financial products are advisable investments for retail and institutional investors and, if yes, which risks they entail. As our society becomes increasingly affluent, and state-supported pension schemes find it difficult to survive, a growing number of high net-worth individuals, and families, have become retail investors - looking for ways and means to optimize wealth management, and Private Banking deals with these sorts of clients. Private banking also deals with clients that are institutional investors, such as pension funds, mutual funds, and insurance companies, as well as not-for-profits, foundations and companies explicitly set up for wealth management. Both institutional and retail investors are being offered by the banks they work with structured products. Typically, these are securities that provide them with a redemption amount, with may be either with full or partial capital protection, and some type of return. The book examines structured financial products, their polyvalent nature, and the results which could be expected from them.

Return on structural instruments, which are essentially derivatives, is paid in function of a specific investment strategy on selected underlying asset(s). This essentially means on the performance of the underlyings, obtained by asset managers, which may be banks or hedge funds, through purchase or sale of embedded options. But there are risks. Both risk and return from structured products are related to three main issues: the volatility of future value of an underlying, the uncertainty of future events, and the exposure of the product. Every type of investment is subject to market forces, and the more leveraged a portfolio is, the greater will probably be both the assumed risk and the expected reward. The fact that structured financial products appeal, or at least are being marketed, to both retail investors and institutional investors makes the dual approach deliberately chosen in this book most advisable. This book addresses all these issues in a practical manner with numerous case studies and real-world examples drawn from the author's intensive research.

Author Notes

Since 1961, Dr Dimitris N. Chorafas has advised financial institutions and industrial corporations in strategic planning, risk management, computers and communications systems, and internal controls. A graduate of the University of California, Los Angeles, the University of Paris, and the Technical University of Athens, Dr Chorafas has been a Fulbright scholar. Financial institutions which have sought his assistance include the Union Bank of Switzerland, Bank Vontobel, CEDEL, the Bank of Scotland, Credit Agricole, #65533;sterreichische L#65533;nderbank (Bank Austria), First Austrian Bank, Commerzbank, Dresdner Bank, Mid-Med Bank, Demir Bank, Banca Nazionale dell'Agricoltura, Istituto Bancario Italiano, Credito Commerciale and Banca Provinciale Lombarda. Among multinational corporations Dr Chorafas has worked as consultant to top management, are: General Electric-Bull, Univac, Honeywell, Digital Equipment Corp, Olivetti, Nestl#65533;, Omega, Italcementi, Italmobiliare, AEG-Telefunken, Olympia, Osram, Antar, Pechiney, the American Management Association and host of other client firms in Europe and the United States. Dr Chorafas has served on the faculty of the Catholic University of America and as visiting professor at Washington State University, George Washington University, University of Vermont, University of Florida, and Georgia Institute of Technology. Also, the University of Alberta, Ecole d'Etudes Industrielles de l'Universit#65533; de Gen#65533;ve, and Technical University of Karlsruhe. More than 6,000 banking, industrial and government executives have participated in his seminars in the United States, England, Germany, other European countries, Asia and Latin America.

Preface	p. xi
Part 1 Private banking	p. 1
1 Private banking defined	p. 3
1.1 Introduction	p. 3
1.2 Private banking clients	p. 4
1.3 Organizational challenges in private banking	p. 7
1.4 Security and secrecy requirements	p. 10
1.5 A private banking roadmap	p. 12
1.6 Household debt and private banking	p. 15
1.7 The ownership society's recycling pattern	p. 18
1.8 Synergy of private banking and institutional investments	p. 20
2 Know your customer and his or her profile	p. 24
2.1 Introduction	p. 24
2.2 The sense of 'know your customer'	p. 25
2.3 A system approach to wealth management	p. 28
2.4 Wealth management according to client profile	p. 32
2.5 Why knowledge engineering can assist the investor	p. 34
2.6 A financial advisory expert system for currency exchange	p. 37
2.7 Caveat emptor and reputational risk	p. 40
2.8 Who is accountable for failures in fund management?	p. 43
3 Business opportunity: fees and commissions from private banking	p. 46
3.1 Introduction	p. 46
3.2 Trades, investments and private banking customers	p. 48
3.3 Establishing a strategy for fees and commissions	p. 51
3.4 Unbundling the management fee	p. 54
3.5 Different companies have different private banking aims	p. 57
3.6 Performance and remuneration of investment managers	p. 59
3.7 Simulation of portfolio performance	p. 62
3.8 The impact of business risk	p. 65
4 Risk and return with investments	p. 68
4.1 Introduction	p. 68
4.2 Basic notions of risk assessment	p. 69
4.3 Mitigating the risk of losses	p. 72
4.4 Prerequisites for rigorous risk control	p. 75
4.5 Fine-tuning the philosophy of investments	p. 78
4.6 Risk and return with implied volatility	p. 81
4.7 Risk-adjusted pricing: an example with credit risk	p. 84
4.8 An introduction to stress testing	p. 86
Part 2 Asset management	p. 91
5 Asset management defined	p. 93
5.1 Introduction	p. 93
5.2 Asset management and capital mobility	p. 95
5.3 Asset allocation strategies	p. 97
5.4 Asset allocation and the shift in economic activity	p. 101
5.5 Real estate property derivatives: a case study	p. 103
5.6 Passive and active investment strategies	p. 106
5.7 A critical view of alternative solutions	p. 110
5.8 The portfolio's intrinsic value	p. 112
6 Business models for asset management	p. 116
6.1 Introduction	p. 116
6.2 Choosing the investment manager	p. 118
6.3 Don't kill the goose that lays the golden egg	p. 120
6.4 The contribution to asset management by contrarians	p. 123
6.5 Asset management as an enterprise	p. 126
6.6 Hedging strategies followed by portfolio managers	p. 129
6.7 Deliverables and performance in administration of assets	p. 132
6.8 Past performance is no prognosticator of future results	p. 134
7 Outsourcing and insourcing wealth management	p. 138
7.1 Introduction	p. 138
7.2 Risk and return with outsourcing	p. 140
7.3 Internal control and security are not negotiable	p. 142
7.4 Custody only, mid-way solutions and discretionary powers	p. 144
7.5 Building up the investor's portfolio	p. 148
7.6 The option model of investing	p. 152
7.7 Efficiency in private banking and asset management	p. 154
7.8 The private banking profit centre	p. 158
8 Trust duties and legal risk	p. 163
8.1 Introduction	p. 163
8.2 Trusts and trustee responsibilities	p. 164
8.3 Legal risk and the case of tort	p. 167
8.4 Reasons behind legal risk and cost of litigation	p. 170
8.5 Legal risk and management risk correlate	p. 172
8.6 Mishandling the client: small cases that can lead to legal risk	p. 176
8.7 Big cases of legal risk: high-tech crime and identity theft	p. 178
8.8 Merck and Co.: legal risk with Vioxx	p. 180
Part 3 Derivative financial instruments, structured products and risk control	p. 183
9 Derivative financial instruments defined	p. 185
9.1 Introduction	p. 185
9.2 Derivatives and hedging	p. 186
9.3 Underlying and notional principal amount	p. 189
9.4 From notional principal to financial toxic waste	p. 193
9.5 Derivatives that became institutionalized	p. 197
9.6 Private banking derivatives and the paper money trauma	p. 199
9.7 Dr Alan Greenspan on derivatives and the case of hedge funds	p. 202
9.8 George Soros on derivatives	p. 206
10 Structured financial products	p. 209
10.1 Introduction	p. 209
10.2 Structured products and capital protection	p. 210
10.3 Structured versus synthetic products	p. 213
10.4 The role of strategists, traders and modelling controllers	p. 216
10.5 Aftermath of design factors on risk profile	p. 219
10.6 Structured investments are not liquid	p. 222
10.7 A secondary market for structured instruments	p. 225
10.8 Dynamic threshold mechanism	p. 227
11 Controlling the risk taken with structured products	p. 229
11.1 Introduction	p. 229
11.2 Credit risk and exposure at default	p. 231
11.3 Credit risk transfer and hazard rate models	p. 234
11.4 Credit risk volatility and bond spreads	p. 237
11.5 A case study on General Motors	p. 241
11.6 Liquidity risk in an ownership society	p. 243
11.7 General and specific market risk	p. 245
11.8 Stockmarket bubbles and damage control	p. 248
11.9 Risk management and the 'Greeks'	p. 250
Part 4 Case studies with the three main classes of structured products	p. 253
12 Fixed income structured products	p. 255
12.1 Introduction	p. 255
12.2 Fixed interest structured products defined	p. 258
12.3 Constant proportion portfolio insurance	p. 261
12.4 FISP versus CPPI: a comparative study	p. 264
12.5 Borrowing through issuance of derivatives	p. 266
12.6 Capital protection notes and bondholders' risk	p. 270
12.7 Structured instruments with underlying credit risk	p. 273
12.8 Embedded derivatives for the ownership society	p. 276
13 Practical examples with fixed income derivatives	p. 279
13.1 Introduction	p. 279
13.2 Money rates, money markets and financial instruments	p. 281
13.3 Inflation-linked notes	p. 284
13.4 Stairway notes (step-ups)	p. 288
13.5 Callable reverse floaters	p. 290
13.6 Accrual notes	p. 293
13.7 Fixed and variable rate notes	p. 296
13.8 Bull notes	p. 297
14 Equity-type structured products	p. 300
14.1 Introduction	p. 300
14.2 Headline risk and the nifty-fifty	p. 303
14.3 Equity derivatives defined	p. 306
14.4 Players in equity derivatives	p. 309
14.5 Risks taken with analytics	p. 311
14.6 Criteria used for dynamic rotation	p. 315
14.7 Equity derivatives swaps	p. 316
14.8 The use of embedded barrier options	p. 318
15 Practical examples with equity-type derivatives	p. 322
15.1 Introduction	p. 322
15.2 Equity index and basket structured notes	p. 324
15.3 Absorber certificates	p. 326
15.4 Early repayment certificates	p. 328
15.5 Enhanced yield certificates	p. 330
15.6 Reverse exchangeable certificates	p. 331
15.7 Potential share acquisition certificates	p. 332
15.8 EUR complete participation securities	p. 334
15.9 US dollar non-interest-bearing note linked to equity	p. 336
15.10 The strategy of pruning the basket and reallocating securities	p. 336
16 Currency exchange structured products	p. 338
16.1 Introduction	p. 338
16.2 Currency transactions and economic exposure	p. 340
16.3 Exchange rate volatility and risk control	p. 343
16.4 Mismatch risk and carry trades	p. 346
16.5 Forex rates and structured instruments	p. 349
16.6 Dual currency structured products	p. 352
16.7 A US dollar/Asian currency basket and a forex benchmark fund	p. 354
16.8 Conclusion	p. 357
Appendix Derivatives as a tax haven	p. 359
A.1 Introduction	p. 359
A.2 Wealth tax	p. 359
A.3 Derivatives, offshores and private individuals	p. 361
A.4 Companies have been masters in using derivatives and offshores	p. 362
A.5 Shifting the risk with no return to the household sector	p. 364
A.6 Cynics look at the private banking client as a cash cow	p. 366
Index	p. 369

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Table of Contents