Global Markets

Question 1

What are global markets used for?

Answer 1

The purchase and sale of securities and other financial products with the intention of INVESTING and/or MANAGING RISK.

Question 2

What actors are present on global markets?

Answer 2

• hedgers
• speculators
• arbitrageurs

(most of these tend to be corporations)

Question 3

What do hedgers do?

Answer 3

protect themselves against the risk of changing prices

Question 4

What do speculators do?

Answer 4

bet on prices changing in their favor

Question 5

What do arbitrageurs do?

Answer 5

try to earn a riskless profit through the exploitation of security mispricing

Question 6

What are some hedging instruments?

Answer 6

• options (conditional derivative)
• futures/forwards (non-conditional derivative)
• swaps
• self-hedging (fuck it we ball)

Question 7

What is the difference between term loans and RCF (revolving credit facilities)?

Answer 7

RCF do not have a term

Question 8

What is the name of shares in the market called?

Answer 8

Float

Question 9

What is the purpose of doing an IPO?

Answer 9

• increase liquidity
• increase equity
• value the company (!!!)

Question 10

What are the possible corporate actions over your own stock?

Answer 10

• split
• reverse split
• buyback

Question 11

What is a split?

Answer 11

issuing additional shares to shareholders (e.g. in a 2:1 split, investors receive double the shares they already have, and the shares will be worth half of their original value)

Question 12

What is a reverse split?

Answer 12

each outstanding share of the company is converted into a fraction of a share. (e.g. in a 1:10 reverse stock split, every ten shares that you own will be converted into a single share)

Question 13

What is a buyback?

Answer 13

when a company buys its own stocks on the market

Question 14

What does it mean to roll a contract?

Answer 14

refers to extending the expiration or maturity of an option, futures contract, or forward by closing the initial contract and opening a new longer-term contract for the same underlying asset at the then-current market price

Question 15

What does it mean to straddle?

Answer 15

sell both put and call options

Question 16

Who sells options?

Answer 16

Speculators:
- banks
- funds (hedge, sovereign)

Question 17

How do sovereign funds speculate?

Answer 17

sell options and receive the premium, hope the option doesn’t get exercised

Question 18

What 3 divisions CIB usually divided into?

Answer 18

• global markets
• investment banking
• coverage

Question 19

What departments are in the Global markets division?

Answer 19

-FIC
- EQC
- COMMO

Question 20

What departments are in the investment banking division?

Answer 20

• mergers and acquisitions
• initial public offerings (IPOs)
• debt and equity issuances
  and other capital-raising activities.

Question 21

What does coverage do?

Answer 21

Relationship managers play a crucial role in the CIB department.

They act as the primary point of contact for key clients, understanding their financial needs, and coordinating various banking services and products to meet those requirements.

Question 22

What is the ECB’s primary objective?

Answer 22

maintain price stability

Question 23

What is the US FED’s primary objective?

Answer 23

support growth

Question 24

What are some central banks other than the FED/ECB?

Answer 24

• Bank of england
• Bank of japan
• People’s bank of china (PBOC)
• swiss national bank (SNB)

Question 25

What are the 4 main asset classes?

Answer 25

- commodities - equity - foreign exchange - interest rate and credit

Question 26

What is the Bretton Woods agreement?

Answer 26

a set of international agreements that were established during a conference held in Bretton Woods in 1944

Question 27

What did the Bretton Woods agreement result in?

Answer 27

The creation of a system of fixed exchange rates called the Gold Exchange Standard. Under this system, major currencies were pegged to the US dollar, which in turn was convertible to gold at a fixed rate of $35 per ounce. This arrangement aimed to provide stability and predictability in international trade and finance.

Question 28

What were the consequences of Bretton Woods?

Answer 28

the US currency the dominant international reserve currency due to its direct convertibility to gold. This solidified the economic and financial dominance of the United States in the post-war era.

Question 29

Why did Bretton Woods fall apart?

Answer 29

increasing trade imbalances, particularly the US trade deficit, which put pressure on the convertibility of the US dollar to gold. In 1971, Richard Nixon suspended the dollar's gold convertibility, effectively ending the fixed exchange rate system and leading to the adoption of flexible exchange rates.

Question 30

What rights can someone hold in the equity market?

Answer 30

Dividend Rights : shareholders are entitled to receive periodically in the form of cash or additional shares a portion of the company's profits in the form of dividends. Voting Rights: owning shares of a company gives the right to vote at the company's general meetings on matters such as approving major corporate decisions and making changes to the company’s guidelines. Information Rights: the shares gives its owner the right to receive information about the company's financial performance, operations, and strategic direction provided through annual reports and financial statements. Capital increase Rights: to protect shareholders from dilution, they have the right to purchase additional shares of the company before they are offered to external investors. Liquidation Rights: if the company goes bankrupt, shareholders usually have the right to receive a portion of the assets after the company's debts and obligations are paid off. Unfortunately, they are usually last in line and may not receive anything if there are insufficient assets to cover all liabilities.

Question 31

What are the characteristics of a term loan?

Answer 31

- OTC Contracts - Speed - Flexibility - Low issuance costs if any

Question 32

What are the characteristics of a bond?

Answer 32

- Securities - Typically issued through auctions - Typically traded OTC - May be listed

Question 33

What are the main types of commodities?

Answer 33

- Agricultural Commodities including Grains - Metals - Energy Commodities - Livestock and Meat - Soft Commodities - Precious and Industrial Minerals - Other Commodities

Question 34

What are the 4 differences between commodities futures price movements and other asset classes'?

Answer 34

There are significant storage costs associated with commodities, including costs for special care and insurance. In contrast, financial assets essentially have no storage costs. Commodities prices often depend on their location, given the potential high cost to transport them. In contrast, financial assets essentially have no transport cost. Shorting costs for commodities are expressed as a lease rate. Lease rates may be greater than the shorting fees for financial assets. Financial assets usually provide price and/or income returns based on risk. In contrast, commodities only provide price returns and even at that, the price tends to be mean-reverting, so timing and holding period become relevant investment concerns.