(36) Market Organization and Structure Flashcards
LOS 45. a: Explain the main function of the financial system.
The three main functions of the financial system are to:
1) Allow entities to save, borrow, issue capital, manage risks, exchange assets, and utilize information.
2) Determine the return that equates aggregate savings and borrowing.
3) Allocate capital efficiently
LOS 45. b: Describe classifications of assets and markets.
Assets and markets can be classified as:
Financial assets (e.g., securities, currencies, derivatives) versus real assets (e.g., real estate, equipment)
Debt securities versus equity securities
Public securities that trade on exchanges or through dealers versus private securities.
Physical derivative contracts (e.g., on grains or metals) versus financial derivative contracts (e.g., on bonds or equity indexes).
Spot versus future delivery markets
Primary markets (issuance of new securities) versus secondary markets (trading of previously issued securities).
Money markets (short-term debt instruments) versus capital markets (longer-term debt instruments and equities)
Traditional investment markets (bonds, stocks) versus alternative investment markets (e.g., real estate, hedge funds, fine art).
LOS 45. c: Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes. What are the major types of assets?
The major types of assets are securities, currencies, contracts, commodities, and real assets.
LOS 45. c: Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes.
Securities include:
fixed income (e.g., bonds, notes, commercial paper),
equity (common stock,
preferred stock, warrants), and
pooled investment vehicles (mutual funds, exchange-traded funds, hedge funds, asset-backed securities).
LOS 45. c: Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes.
Contracts include futures, forwards, options, swaps, and insurance contracts.
LOS 45. c: Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes.
Commodities include agricultural products, industrial and precious metals, and energy products and are traded in spot, forward, and futures markets.
LOS 45. c: Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes.
Most national currencies are traded in spot markets and some are also traded in forward and futures markets.
LOS 45. d: Describe types of financial intermediaries and services that they provide.
Brokers, exchanges, and alternative trading systems
Brokers, exchanges, and alternative trading systems connect buyers and sellers of the same security at the same location and time. They provide a centralized location for trading.
LOS 45. d: Describe types of financial intermediaries and services that they provide.
Dealers
Dealers match buyers and sellers of the same security at different points in time.
LOS 45. d: Describe types of financial intermediaries and services that they provide.
Arbitrageurs
Arbitrageurs connect buyers and sellers of the same security at the same time but in different venues. They also connect buyers and sellers of non-identical securities of similar risk.
LOS 45. d: Describe types of financial intermediaries and services that they provide.
Securitizes and depository institutions
Securitizes and depository institutions package assets into a diversified pool and sell interest in it. Investors obtain greater liquidity and choose their desired risk level.
LOS 45. d: Describe types of financial intermediaries and services that they provide.
Insurance companies
Insurance companies create a diversified pool of risks and manage the risk inherent in providing insurance.
LOS 45. d: Describe types of financial intermediaries and services that they provide.
Clearinghouses
Clearinghouses reduce counterparty risk and promote market integrity
LOS 45. e: Compare positions an investor can take in an asset.
Long position
A long position is an asset represents current or future ownership. A long position benefits when the asset increases in value.
LOS 45. e: Compare positions an investor can take in an asset.
Short Position
A short position represents an agreement to sell or deliver an asset or results from borrowing an asset and selling it (i.e., a short sale). A short position benefits when the asset decreases in value.
