Commercial Papers and Securities Overview

Study Notes

Commercial papers are short-term unsecured negotiable instruments used as a substitute for money in commercial transactions
Examples of commercial papers include bills of exchange, checks, and other instruments used in commerce
Typically, commercial papers have a maturity period of less than one year
Commercial papers can be transferred or "sold" at a discounted value and redeemed later by the last holder at its "par value"

Securities are tradeable and fungible financial instruments that can be traded on the open market
Examples of securities include stocks, bonds, sukuk, and depository receipts

Sukuk are a type of Islamic bond that confers rights as beneficiaries under a trust of the relevant assets backing the deal
Sukuk can be structured in a variety of ways, with the most common structures backed by ijara or musharaka
A typical sukuk would have the following features:
- The issuer is usually a special purpose vehicle (SPV) company
- The SPV purchases relevant assets from the existing owner for a price equal to the proceeds of the sukuk issue
- The SPV enters into an Islamic finance contract with the vendor in relation to the assets
- Payments due to the SPV from the vendor are reset periodically and match the periodic distributions due to investors
- Funds to pay the principal of the sukuk at maturity are generated by a sale of the assets back to the vendor

Depository receipts are tradeable securities issued by a bank or financial institution conferring on the holders beneficial ownership of assets held by the Depository on trust
There are two main types of depository receipts:
- Bearer Depository Receipts (BDRs) - used where a direct bond issue by the ultimate borrower is not possible or financially attractive
- Global Depository Receipts (GDRs) - used to facilitate international investment in shares of companies in emerging markets

Derivatives are financial instruments whose value is based on or derived from other assets or variables
The value of a derivative security depends on the value of another underlying asset
Derivatives are used by parties to "bet" on the underlying asset value changing in opposite ways
Examples of derivatives include futures, forwards, swaps, and options

Futures contracts are agreements to buy or sell a specific asset at a predetermined price on a future date
The underlying asset can be a commodity, financial asset, or event
Futures markets span the globe and have been used for hundreds of years

Options are contracts between two parties, where the buyer has the right, but not obligation, to purchase or sell the underlying asset at a predetermined price within a predetermined timeframe
Two types of options exist:
- Call option - right to buy an asset at an agreed price by or at a set time in the future
- Put option - right to sell an asset at the strike price by or at a set time in the future

Hybrid securities combine features of both debt securities and equity securities
Main types of hybrid securities include preference shares

Preference shares rank ahead of ordinary shares in terms of dividends and liquidation proceeds
They carry "quasi-debt" features, including:
- Fixed preferential dividend payable in priority to dividends on ordinary equity
- Preferential right to a return of capital on a liquidation of the issuer
- Limited voting rights

Under Omani Commercial Companies Law, all shares enjoy equal rights, including the right to receive dividends, subscribe for new shares, dispose of shares, and participate in the distribution of the company's assets upon liquidation.