Flashcards
IFM
Cards in this deck (27)
- 1Real AssetUsed to produce income, such as factory or machine
- 2Financial AssetClaim on income produced by real asset, Bonds, stocks, derivative security
- 3Derivative SecurityFinancial Asset that has its value determined by something else, such as stock, bond, interest rate. A contract between 2 parties, bet, and sum from payoff for both sides equal to zero.
- 4Fixed Income SecurityProvides a form of fixed, periodic pays and return of the principal at maturity
- 5Purpose of DerivativeReduce risk, induce risk, one side sees risk reduced while other takes on risk.
- 6Financial MarketsWhere financial assets are traded. Can be one-on-one private transactions, organized around a dealer, structured and organized exchanges (NYSE, CME).
- 7Clearning housesIntermediary between buyer and seller of asset that ensures execution of trade, collection of monies, delivery of asset, collection of data.
- 8NovationSubstitution of one counterparty for another. Derivatives clearinghouses usually become buyers to all sellers and sellers to all buyers.
- 9Market Measures of Activitytrading volume (number of trades), market value, notional value (potential exposure in derivatives), open interest (total number of contracts outstanding)
- 10Use of derivativesRisk management: reducing risk with derivatives (hedging)
Speculation
Reduced Transaction Costs: lower transaction cost than individual securities
Regulatory Arbitrage: circumventing regulation - 11End UserParty that buys derivatives
- 12Market MakersCreate derivatives
- 13Economic Observersincludes regulators
- 14Market OrderPurchase at current price
- 15Limit orderinstruction to trade a security at a specified or better price
- 16Stop Loss Ordersell once price reaches a specified level
- 17Lease RatePayment made on a borrowed asset
- 18Short Selling Reasonsspeculation, means of borrowing money, hedging
- 19Haircutthe extra amount of money the owner of the asset asks the short seller to provide.
- 20Repo RateInterest paid on the short sale proceeds and the haircut if it is a bond
- 21Short RebateInterest paid on the short sale proceeds and the haircut if it is a stock
- 22Forward ContractSale transaction consummated in the future of which all details are laid out today
- 23Forward (Long Position)=Spot price @ expiration - Price Named in Forward Contract
- 24Forward (short position)=Price named in forward contract - Spot price @ expiration
- 25Value of Long ForwardPrice of Underlying - present value of forward contract price
- 26Forward PricePV(Forward Price)=Price of Underlying
The price named in the forward contract that does not require any cash payment up front - 27Forward Spot ParityFe^-rt = S
F=Se^rt