Lecture One

Question 1

Real Assets

Answer 1

ownership of tangible things

Question 2

Investment is linked to

Answer 2

rationale to buy or sell, to exploit undervaluation

Question 3

Financial Assets

Answer 3

instruments that represent ownership of real assets and cash flows they produce

Question 4

Derivative Contracts

Answer 4

derive their value from other instrumental values

Question 5

Buy Side

Answer 5

people and institutions who use financial services

Question 6

Sell Side

Answer 6

those who provide financial services

Question 7

Orders

Answer 7

instructions to trade, given to brokers and/or exchanges

Question 8

Trade Decision

Answer 8

concerns how to execute the investment decision – in which markets, at what prices and at what time and through which agents

• Acquisition of information
• Routing of the order
• Execution of the trade
• Confirmation, clearance and settlement

Question 9

Limit Order

Answer 9

instructs broker to trade at the best available price but do not violate limit price condition

• Do not buy at a price above the limit price
• Do not sell at a price below the limit price

Question 10

Limit Orders may not execute

Answer 10

standing limit orders supply liquidity by allowing others to trade when they want

Question 11

Market Orders

Answer 11

buy/sell orders that are to be executed immediately at the market price

Question 12

Properties of a Market Order:

Answer 12

• Consumption of liquidity
• Have a market impact when brokers move prices to find liquidity
• Execution is near certain but execution price may be uncertain

Question 13

Stop Orders

Answer 13

price contingent orders

• Activate when price contingency is met
• Almost always market orders
• Typically used to close long positions

Question 14

Duration Orders:

Answer 14

• Day order
• Good til cancelled order
• Fill or kill order
• Immediate or cancel orders

Question 15

Bargaining

Answer 15

negotiation process over contract terms that occurs between a buyer and seller
- Useful with large orders

Question 16

Auction

Answer 16

competitive market process involving multiple buyers, multiple sellers or both
- Useful and effective method for pricing a security with an unknown value

Question 17

Walrasian Auction

Answer 17

simultaneous auction where each buyer submits to the auction his demand and each seller submits their supply for a given security at every possible price e.g. opening and closing auctions on the ASX

Question 18

Utalitarian Traders:

Answer 18

Investors
Borrowers
Asset Exchangers
Tax-Avoiders
Hedgers

Question 19

Dutch Auction

Answer 19

bids are sorted according to price and auctioneer works back from highest bid until all shares are sold

Question 20

First-Price Sealed-Bid Auctions

Answer 20

bidders simultaneously submit sealed bids – winner is the one who submits the highest bid. Does not allow for price discovery. Winners curse may arise if value is not known with certainty

Question 21

Continuous Double Auctions

Answer 21

buyers submit bids (max buys prices) and sellers submit offers (min sell price)

• Bids and offers are ranked according to price
• Transaction occurs when the highest bid and lowest offer matches

Question 22

Development in Markets

Answer 22

profit motives resulted in the need for growth and subsequently mergers took place

Question 23

Past Decade Development

Answer 23

numerous new entrants into the market giving rise to alternative trading systems

• Fragmented markets i.e. Chi-X
• New types of traders focused on speed and technology
• Trading via innovation

Question 24

Capital Market is necessary for

Answer 24

economic growth and development, the secondary market, companies need capital to fund projects

Question 25

Price Discovery

Answer 25

process of determining the price of an asset through the interaction of buyers and sellers

Question 26

Profit Motivated Traders:

Answer 26

Speculators Arbitrageurs Algorithmic traders Dealers