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1
Q

Real assets

A

Assets used to produce goods and services

2
Q

Financial assets

A

Are claims to the income generated by real assets
Determine how the national pie is split among the investors
Contribute to the productive capacity if the economy indirectly
Allow for separation of ownership and control of the firm
And facilitate the transfer of funds to enterprises with attractive investment opportunities

3
Q

Sectors of the financial environment

A

Households are net savers
Businesses are net borrowers
Governments can be both

4
Q

Derivative securities

A

The diverse risk and tax preferences of households
Businesses offer uniform types of securities
-> industry that creates complex securities out of primitive ones

5
Q

Active and passive management

A

Active: finding undervalued securities, timing the market
Passive: holding an efficient portfolio

6
Q

Proprietorships and partnerships

A
\+:
Ease of formation
Subject to few regulations
No corporate income taxes
-:
Difficult to raise capital
Unlimited liability
Limited life
7
Q

Corporations

A
\+:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
-:
Double taxation
Cost of set-up and report filing
8
Q

Conflict between managers and stockholders

A
Managers act in their interest
BUT:
Managerial compensation packages
Direct intervention by stockholders
Threat of firing
Threat of takeover
9
Q

Conflict between stockholders and bondholders

A

Stockholders prefer riskier projects (upside), while bondholders prefer limited risk as they receive only fixed payment
Bondholders are concerned about additional debt -> covenants

10
Q

Maximum margin

A

50%

You can borrow up to 50% of the stock value, set by the Fed

11
Q

Maintenance margin

A

Minimum amount of equityin trading before additional funds must be put into account

12
Q

Margin call

A

Notification from broker you must put up additional funds

13
Q

A derivative

A
Is an instrument whose value depends on the values of other underlying variables
Futures
Forwards
Swaps
Options
14
Q

Futures contract

A

An agreement to buy or sell an asset at a certain time in the future for a certain price

Traditionally traded in open outcry system, now electronic trading

15
Q

Spot contract

A

An agreement to buy or sell immediately or within a very short period of time at a specified price

16
Q

Exchanges trading futures

A
Chicago board of trade
Chicago mercantile exchange
Euronext
Eurex
BM&F brasil
17
Q

Futures price

A

Is the price at which you agree to buy or sell

It is determined by supply and demand (as in spot contract)

18
Q

Exchanges trading options

A

Chicago board options exchange
Philadelphia stock exchange
International securities exchange
Eurex

19
Q

Hedgers

A

Use the market to reduce their risk exposure to market variables such as exchange rate, a commodity price or an interest rate

20
Q

Speculators

A

Use the market to take a position on the future direction of a market variable

21
Q

Arbitrageurs

A

Attempt to lock in riskless profit by entering into transactions in two or more markets

22
Q

Stock split n-for-m

A

Suppose you own G options with a strike of K
Then
The strike is reduced to mK/n
Number of options is increased to nG/m

23
Q

American vs European option

A

American is worth at least as much as European
Usually some chance of early exercise
Exception: american call on a non-dividend paying stock - should never be exercised early

24
Q

Protective put portfolio

A

Stock+put

Payoff is St or X

25
Q

Put-call parity

A

Protective put: S0+P= call+t-bill: C+X/(1+r)

26
Q

Costs of trading

A

commission: fee paid to the broker for the transaction
spread: cost of trading with dealer (ask - bid)

27
Q

short-selling bans

A

reaction to 07-09 by imposing bans
Beber & Pagano (2013):
detrimental to liquidity
slowed price discovery, especially in bear markets
failed to support prices, except possibly for US financial stocks

28
Q

short sales

A

illegal to sell the stock you do not own

you can borrow share certificates from sb who owns the stock