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Emerging Markets Intro

Emerging Markets Intro. November 20, 2005 Marcelo Miranda Finance Club Ross School of Business University of Michigan. Agenda. What is EM? Why EM? Main Emerging Markets today Desks within EM Typical day in EM CDX.EM: Example of EM Structured Product Where to get information.

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Emerging Markets Intro

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  1. Emerging Markets Intro November 20, 2005 Marcelo Miranda Finance Club Ross School of Business University of Michigan

  2. Agenda • What is EM? • Why EM? • Main Emerging Markets today • Desks within EM • Typical day in EM • CDX.EM: Example of EM Structured Product • Where to get information

  3. What is an Emerging Market? • Markets of developing countries • Mass inflow of investments during the 90’s • Privatization, liberalization and opening • EM still represent small fraction of the world markets (e.g. less 10% of world market cap) • Yet they get a lot of attention. Why???

  4. Return: Fixed Income – Yield Curves

  5. Return: Equity Indices Source: MSCI

  6. Diversification: International Equity Markets Risk of the portfolio (%) Single Country Portfolio International Portfolio Number of stocks in the portfolio

  7. Main Emerging Markets (F.I.)

  8. Functions: Sales, Trading, Structuring, Research Asset Classes: Equity, Fixed Income, FX, Commodities Fixed Income: Sovereign, Corporate Degree of sophistication: Cash, Derivatives (Flow), Derivatives (Structured) The EM Ecosystem

  9. Typical Day (Cash – Sovereign – Trading) • Get in the office at 7am, check news • Take a look at the book and double check previous days orders with middle office • 8am – Morning call with all desks • Talk to brokers, sometimes with clients • Check broker screens • Quotes for clients through sales • Hedge and rebalance book • Close book a check trades with middle office • Done at 5:30pm, go home at 6pm.

  10. CDX.EM Diversified IndexBasics • Synthetic CDO • Basket of 40 single name CDS’s • Sovereign (majority) and Corporate • Equally weighted (2.5% each) • Index trading or single tranche trading

  11. CDX.EM Diversified IndexPortfolio Composition

  12. Tranche Structure 30-100% Coupons flow down the capital structure WATERFALL Losses work up the capital structure 25-30% 20-25% 15-20% Mezzanine 10-15% 0-10% Equity Exhaustion Point (10% of 40 = 4 defaults)

  13. CDX.EM Diversified IndexS&P Credit Ratings • Remember FIN513: Calculation of E(R) given possible outcomes. • From the market prices for each tranche we can infer the probability of default and determine a proxy for credit rating. • Investors can choose a level of risk and stay diversified. 1Based on ratings as of April 4, 2005. 2Assumes 19% recovery rate for sovereigns and 9.75% recovery rate for corporates.

  14. Sources of information • ISI Emerging Markets (Kresge) • International Finance Stats (Kresge) • Global Market Information Database (Kresge) • PIMCO (pimco.com) • MSCI (msci.com) • Sell side research (Tozzi, web)

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