1. Security Markets Flashcards

1
Q

How are financial markets organized?

A
  1. Dealer markets (intermediary so fixed income, charge a spread)
  2. Agency or auction markets / Limit order book (most stock market and some derivate markets)
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2
Q

Why do we care how markets are organized?

A
  • Type of market determines way of trading
  • Trading is important consideration in portfolio management and asset pricing
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3
Q

How do trading costs and market liquidity relate?

A
  • Trading involves costs
  • Since trading is costly, investors are concerned about market liquidity
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4
Q

What characteristics does market liquidty involve?
(5 kenmerken)

A
  • Ease of sale
  • Necesarry price concesions to effect a quick transaction
  • Price predictability
  • Transaction costs (fixed, variable)
  • Depth (how many interested people)
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5
Q

What is a dealer market?

A

In dealer markets, buyers and sellers do not trade with each other, but with “dealers” (usually banks) who act as intermediary and stabilize the market by supplying immediacy

intermediary = mediater. Advantage is that the bank always gives a price

  • if I want to sell my bonds, i dont have to wait for a seller
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6
Q

What is a bid-ask spread?

A

The bid-ask spread is the difference between the highest price a buyer will offer (the bid price) and the lowest price a seller will accept (the ask price).

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7
Q

What is an Agency market?

A

In agency markets, order flow meets at central place (e.g., the stock exchange)

So buyers and sellers directly trade with each other

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8
Q

In most agency or auction markets there is one market maker or specialist for each stock, what do they do?

A

“Specialists handle much of the order flow for stocks assigned to them by the exchange and have the affirmative obligation to make fair and orderly markets for their stocks.”
A market where all traders in an asset meet (either physically or electronically) at one place to buy and sell.

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9
Q

6 roles of financial markets

A
  • Allocation of capital
  • Consumption timing / smoothing: early on in your life you need to borrow money, while later on in your life you have spare cash that you want to invest.
  • Separation of ownership and control
  • Provision of liquidity: because of markets, you’re able to buy/sell whenever you want.
  • Allocation of risk: markets allow people to invest according to their risk profile. If you’re risky you invest in equity, otherwise you invest in debt.
  • Information aggregation through prices: markets allow to gather information through stock prices.
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10
Q

Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.

If the maintenance margin is 25%, how low can Xtel’s price fall before you get a
margin call?

margin trade when call?

A

1000P-5 000/ 1000P = 0.25
amount shares * price - amount borrowed / amount shares * price

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11
Q

Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.

b. If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin
call?

A

(total amount borrowed own stake) - sharesp / sharesp

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