Funds Investing

Shortly after Charles was decided by the High Court of Australia, another fixed investment trust was the subject of taxation proceedings. This time, it was before the Supreme Court of Canada in MNR v. TransCanada Investment Corporation Ltd. The trust was a typical fixed investment trust. Under the trust deed, an administrator (i.e. the manager) was to purchase a fixed number of predetermined shares of common stock of companies to constitute a trust unit. Upon all the shares of underlying companies of a unit being vested in the trustee, the trustee would issue shares of a trust unit. Each share of a trust unit represented an undivided equal interest in the unit. Read the rest of this entry »

B. Rights in a Unit: A Preliminary Analysis and Three Propositions

A modern trust deed invariably provides that the trustee will hold the unit trust assets for the unitholders ‘on and subject to the terms and conditions of the trust deed‘ and in the case of an authorized unit trust, the regulations made under section 81 of the Financial Services Act 1986.It is always possible for the trust deed or the relevant regulations to contain hundreds of covenants or terms that may alter or add to the rights in the beneficial interests of the trust assets. With the varieties of unit trusts and the varieties of units in the market today, the significance of the qualifying statement ‘on and subject to the terms and conditions of the trust deed‘ may easily be overlooked. Read the rest of this entry »

A. The Trust Corpus and the Cash Fund Concept

The trust is by nature a relationship fastened upon the properties of the trust. Considerable debate has been focused upon the rights of a beneficiary in the trust properties.⁵ In a private trust, the trust is a means of disposition of properties by way of gift. The trust corpus in the private trust, even when the settlor is one of the beneficiaries, is the subject matter of a gift. In this sense, the trust has a distributive character that makes use of equity’s recognition of a multiplicity of interests within a trust. A beneficiary’s interest is an interest in a gift. His interest is a matter of degree of ownership. If he is a beneficiary under a discretionary trust, he has nothing more than a right to be considered as a beneficiary. Read the rest of this entry »

UNDERLYING IS A CREDIT SPREAD ON A REFERENCE OBLIGATION

When the underlying for a credit spread option is the credit spread for a reference obligation over a referenced benchmark, then the payoff of a call and a put option are as follows:

Credit spread call option:

payoff =

(credit spread at exercise — strike credit spread) x notional amount x risk factor

Credit spread put option:

payoff =

(strike credit spread — credit spread at exercise) x notional amount x risk factor

The strike credit spread (in decimal form) is fixed at the outset of the option. The credit spread at exercise (in decimal form) is the credit spread over a referenced benchmark at the exercise date.

The risk factor is equal to

risk factor = 10,000 x percentage price change for 1-basis-point change in rates for the reference obligation Read the rest of this entry »

A credit spread option is an option whose value/payoff depends on the change in credit spread for a reference obligation. It is critical in discussing credit spread options to define what the underlying is. The underlining can be either

1. a reference obligation, which is a credit-risky bond with a fixed credit spread, or
2. the level of the credit spread for a reference obligation

UNDERLYING IS A REFERENCE OBLIGATION WITH A FIXED CREDIT SPREAD

When the underlying is a reference obligation with a fixed credit spread, then a credit spread option is defined as follows:

Credit spread put option: An option that grants the option buyer the right, but not the obligation, to sell a reference obligation at a price that is determined by a strike credit spread over a referenced benchmark. Read the rest of this entry »