1. Essentials of Investment

3. Ahmed Alhassan  Graduate of KPUPM – Finance & Economics (2 nd Honor)  Worked in Saudi Fransi Bank – Senior Fund Manager  Worked in Bank AlJazira – Head of Asset Management  Worked in other Investment Companies  Licensed Financial Consultant – By Ministry of Commerce  Licensed Management Consultant – By Ministry of Commerce

4. Policies  Training Hours  From 8 – 4 PM  No Smoking in Training Rooms  Mobile is Off During The Session  Attendance Is Importance  Test At The End Of The Training

5. Daily Schedule Period Activity From To 08:00 am-09:15 amSession I 09:15 am-09:30 am Break 09:30 am-10:45 amSession II 10:45 am-11:00 am Break 11:00 am-12:15 pmSession III 12:15 pm-01:15 pm Prayer and Lunch Break 01:15 pm-02:30 pmSession IV 02:30 pm 02:45 pmBreak 02:45 pm 04:00 pmSession V

6. Training Topics - 1 1) Brokers and Brokerage Activities  Type of Brokers  Margin Trading / Examples and Exercises  Importance of Margin Trading 2) Investment Main Asset Classes  Cash – Money Market  Equity  Bond – Fixed Income

7. Brokerage Activities 1) Brokers and Brokerage Activities  Type of Brokers  Discount VS Full Service Brokers  Geographical Coverage  Type Of Orders in Saudi Exchange (TADAWUL)  Limit, Market, Hidden, Fill or Kill, Day Order and Good till Date  Examples  Type Of Orders (International)  Sell/Buy Stop, Sell/Buy Stop limit and Immediate or Cancel (IOC)  Examples  In Saudi Market : No Short Selling

8. Margin Trading  Margin Trading - What is it?  Examples and Exercises  Importance of Margin Trading

9. Margin Trading  Buying Stock Using Margin  Buying on margin is borrowing money from a broker to purchase stock  Key Terms :  Minimum Margin (SAR) : Minimum account balance to get loan “margin”  Initial Margin (SAR): Amount borrowed from broker  Maintenance Margin (SAR): Minimum account balance before broker call you to deposit more cash … or force sell  Margin Call: Once the account touch maintenance margin limit, you will receive a phone call “margin call”  Purchasing Power: Cash Deposit + Loan  Different Margin for Different Stocks (Classification)

10.  Your margin account requires:  an initial margin of 50%, and  a maintenance margin of 30%  Al Rajhi Share is selling for SAR 50.  You have SAR20,000, and you want to buy as much of Al Rajhi Shares as you can.  You may buy up to SAR20,000 / 0.5 = SAR40,000 worth of AlRajhi. AssetsLiabilities and Account Equity 800 Shares of Al Rajhi@ SAR50/share SAR 40,000 Margin Loan20,000 Account Equity20,000 TotalSAR 40,000 Total40,000 Margin Trading Example

11.  After your purchase, shares of Al Rajhi fall to SAR 35. (Woe!)  New margin = SAR8,000 / SAR28,000 = 28.6% < 30%  Therefore, you are subject to a margin call. Assets Liabilities and Account Equity 800 Shares of Al Rajhi@ 35/share 28,000 Margin Loan20,000 Account Equity8,000 Total28,000 Total28,000 Margin Trading Example

12. Advantage / Disadvantage Margin Trading  Advantages:  Increase the Profit  Disadvantages  Increase the Degree of Volatility (Loss and Profits)  50% loss in portfolio = total loss of your investment  You are Not Allowed to Wait  Cash account only: you can wait for possible correction / rebound  Losses happen when you sell  You will be forced to Sell

13. Training Topics - 2 3) Market / Exchange Structure  Type of Exchanges / Example  Listed VS non-listed Financial Instruments  Cash VS Future Contracts  Exchange VS Over-The-Counter (OTC) 4) Stock Market  Shares / Single Financial Instrument  Depository Receipt / Examples and Why?  Exchange Traded Funds - Examples  Index / Indices – Examples  Mutual Funds – live Examples (Performance – Prospectus )

14. Training Topics - 3 5) Portfolio Construction - Basics  Top Down Approach - Examples  Bottom Up Approach - Examples 6) Fundamental Analysis VS Technical Analysis 7) Portfolio Performance  Global Investment Performance Standard (GIPS) 8) Mutual Funds  Type of Funds (Growth – Income – Liquidity – Sharia Compliance)  Mutual Funds Operations

15. Training Topics - 4 9) Financial Derivatives  What is Financial Derivatives  Why Do We Need Financial Derivatives  Case - Subprime  Hedge Funds – What are Hedge Funds 10) How to Measure Return and Risk and Statistical Measures  Volatility  Max Draw Down  Correlation – Correlation Matrix  Beta

16. What are Financial Derivatives A derivative can be define as:  a financial instrument whose value depends on (or derives from) the values of other, more basic, underlying variables. Very often the variables underlying derivatives are the prices of traded assets. However, derivatives can be dependent on almost any variable.

17. Characteristics of Derivatives Underlyings - the rates or prices that relate to the asset or liability underlying the derivative instrument Notional amount - the number of units or quantity that are specified in the derivative instrument Minimal initial investment - a derivative requires little or no initial investment because it is an investment in a change in value rather than an investment in the actual asset or liability No required delivery- generally the parties to the contract, the counterparties, are not required to actually deliver an asset that is associated with the underlying

18. Uses of Financial Derivatives  Risk transfer  Hedging  Investment  Exposure to different markets  Speculation

19. Common Types OF Derivatives  Options  Futures  Forwards  Warrants  Swaps  Other

20. Forward Contract A contract to buy or sell a specified amount of an asset at a specified fixed price with delivery at a specified future point in time. The value of the contract at inception is zero and typically does not require an initial cash outlay. The total change in the value of the forward contract is measured as the difference between the forward rate and the asset’s spot rate at the forward date.

21. Forward Contract  One of the parties to a forward contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price.  The other party assumes a short position and agrees to sell the asset on the same date for the same price.

22. Example – Forward Contract  SAR100,000,000 Million in one year to be converted to USD

23. Future Contracts  Futures contract obligates a person to buy or sell a commodity, security (equity) or financial instrument, or a basket of them (S&P 500 index), at a set price, on a set date (or dates) in the future  Standardized contracts only (i.e., exchange traded)  only trade specific contracts supported by the exchange  contracts are usually cash settled  Futures have only market risk due to daily re-margining through the exchange

24. Exchange Traded vs. OTC Derivatives  Exchange Traded  exchange central clearing house (CCH) acts as counterparty on both sides of the transaction  credit risk exposure to CCH  margin as required by CCH rules  limited number of standardized products  Transparent end-of-day valuation  simple liquidation  OTC  private transaction between two parties  creates counterparty credit risk to be managed  collateral negotiated between the parties  negotiated liquidation and early termination thus more complex outside of bankruptcy; sometimes skewed in bankruptcy

25. Where Futures are Traded?  The largest exchanges on which futures contracts traded are the CBOT and CME.  CBOT: (Chicago Board of Trade)  CME : Chicago Mercantile Exchange

26. Options  Represent a right rather than an obligation to either buy or sell some quantity of a particular underlying.  The buy or sell price is referred to as the strike price or exercise price

27. Options  Options are traded both on exchanges and in the over-the-counter market.  There are two types of option: Call option gives the holder the right to buy the underlying asset by a certain date for a certain price. Put option gives the holder the right to sell the underlying asset by a certain date for a certain price.

28. PARAMETERS OF OPTIONS  Exercise price = strike price = price at which the holder of the option can exercise the option (and thus buy or sell the underlying asset)  Expiration date  Premium = amount paid for the option  American option: can exercise any time up to and including expiration date  European option: can exercise only on expiration date

29. Option - Example

30. SWAPS  Agreement between two parties  “Counterparties”  Exchange sets of future cash flows  Two major types  Interest rate swaps  Currency swaps

31. SWAPS A Swap is a simultaneous buying and selling of the same security or obligation. Perhaps the best-known Swap occurs when two parties exchange interest payments based on an identical principal amount, called the "notional principal amount."

32. Interest Rate SWAP Each party will issue the less advantageous form of debt.

33. Currency SWAP

34. Asset Classes  Cash  Money Market Instruments  Maturity  Yield  Risk (What is the Risk of Money Market Instruments)  Examples (T-Bills – CDs – Commercial Paper – Repurchase Agreement – Money Market Funds) T-Bills Vs T-Notes Vs T-Bonds

35. Asset Classes  Cash / Money Market  Source of Return  Interest Paid on The Amount Invested  Increases or Decreases in Value of the Underlying Securities Due to Changing Interest Rates  Source of Risk  Changes of Interest Rate  Changes of Counter Party Risk

37. Asset Classes  Equity  Preferred Stocks Vs Common Stocks  Yield / Profit  Risk (Volatility, Max Draw Down)  Example – Saudi Stocks Financial Indicators

38. Asset Classes  Equity  Source of Return  Increase / Decrease of the Value of Shares (Growth, Income, or Defensive – “Beta”)  Dividends – Example of local market  Source of Risk  High Volatility – Standard Deviation, Max Draw Down  Lots of Factors Affect the Value of the Share (Systematic, non-systematic)  Losses Can be Significant (No Limit)

39. Asset Classes  Bonds  Type of Bonds (Government, Corporate, Asset Backed)  Floating Rate Note (FRN)  Maturity  Rating  Yield and Yield To Maturity (YTM)  Convexity (Sensitivity Analysis)

40. Asset Classes  Bonds  Source of Return  Interest Paid on The Loan  Increase / Decrease of the Value of Underlying Security  Source of Risk  Inflation / Interest Rate  On the Run Vs Off the Run  Issuer Financial Health  Country Risk