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equity investments > Market Organization and structure > Flashcards

Market Organization and structure Flashcards

1
Q

What is a financial system?

A

It consists of markets and financial intermediaries that facilitate the transfer of financial assets, real assets, and financial risks in various forms from one entity to another.

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2
Q

What are the 3 main functions of financial systems?

A
  • To help people achieve their purposes by using the financial system.
  • To facilitate the discovery of the rate of return where aggregate savings equal aggregate borrowings.
  • Allocating capital to its most efficient uses.
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3
Q

How does the financial system help people achieve their purposes in using the financial system?

A
  • It helps in the saving process by creating investment vehicles.
  • It facilitates borrowing by aggregating funds from savers.
  • It helps companies in raising equity capital.
  • It helps to manage various risks by offering contracts to hedge those risks.
  • It facilitates the exchange of assets by creating liquidity in spot markets.
  • The financial system facilitates information-based trading by creating liquid markets with low transaction costs.
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4
Q

When is allocative efficiency reached?

A

When the scarce capital in an economy is allocated to the most productive uses.

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5
Q

How are assets classified?

A

They are financial (securities, currencies, and contracts) or they are physical (commodities and real estates).

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6
Q

How are markets classified?

A

They are classified on the basis of:
- Timing of delivery.
- Who the seller is
- The maturity of instruments that are traded.
- The types of securities.

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7
Q

What are fixed income instruments?

A

They are instruments that are promises to repay borrowed money.

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8
Q

What are the types of fixed-income instruments? Describe them.

A
  • Notes: fixed-income securities with <10y maturity.
  • Bonds: >10y maturity.
  • Bills: issued by gov., <1y maturity.
  • Certificate of deposit: issued by banks <1y maturity.
  • Repurchase agreements: short-term lending instruments.
  • Money market instruments traded in the money market and have maturities of one year or less.
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9
Q

What are the types of equity securities?

A
  • Common shares: holders can participate in the company’s decision-making process.
  • Preferred shares: holders can receive fixed dividends regularly.
  • Warrants: holders have the right to purchase an entity’s common stock at a prespecified price at or before the warrants’ expiration date.
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10
Q

What are pooled investments?

A

They are securities that represent shared ownership in the assets held by them (ABS, RMBS, CMBS, etc.)

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11
Q

What are currencies?

A

They are monies issued by national monetary authorities and primarily trade in the foreign currency market.

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12
Q

On what can a contract may be classified?

A

It may be classified on the basis of:
- The nature of the underlying asset.
- The timing of delivery

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13
Q

What are forward contracts?

A

It is a contract between 2 parties where one has the obligation to buy, and the other has an obligation to sell an underlying asset at a fixed price at a future date.

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14
Q

What are future contracts?

A

Similar to forward contracts with 2 big differences:
- Futures contracts are standardized and trade on organized exchanges.
- A clearinghouse is the counterparty to all futures contracts.

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15
Q

What is a swap contract?

A

It is an agreement between 2 parties to exchange a series of CF at periodic settlement dates over a certain period of time.

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16
Q

What is an option contract?

A

It gives the holders the right to buy or sell a security at a predetermined price some time in the future.

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17
Q

What are European options vs. American options?

A
  • European options can only be exercised at their expiration dates.
  • American options can be exercised anytime until or at their expiration dates.
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18
Q

What are credit default swaps?

A

It promises to pay its holders the amount of principal in case a company defaults on its bonds.

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19
Q

What are commodities?

A

It include precious metals, energy products, industrial metals, agricultural products and carbon credits.

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20
Q

What are brokers? What are the types?

A

They are agents who fulfill orders for their clients. They reduce the costs of trading for their clients by finding counterparties for their trades. The types are:
- Block brokers: provide brokerage services to large traders.
- Investment banks: provide a variety of services to companies.

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21
Q

What are exchanges?

A

They provide a platform where traders can carry out their trades.

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22
Q

What are alternative trading systems (ATS)?

A

They differ from exchanges because they do not exercise regulatory authority over their members except concerning the conduct of their trading in their trading networks.

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23
Q

Why are many ATSs called “dark pools”?

A

Because they do not display orders sent to them.

24
Q

What are dealers?

A
  • They fulfill orders for their clients by actually taking positions as counterparties for their trades.
  • They create liquidity in the market.
  • They can also be brokers and vice-versa so practitioners call them “broker-dealer”.
25
Q

What are securitizers?

A

They are entities that undertake the process of securitization.

26
Q

What are depository institutions?

A

They pay interest to depositors and provide transaction services to them (commercial banks, savings and loan banks, credit unions, etc.)

27
Q

What is the law of one price?

A

It states that 2 securities that generate identical CF in the future, regardless of future events, should have the same price today.

28
Q

What are arbitrageurs?

A

They are looking for a violation of the law of one price.

29
Q

What are clearinghouses?

A

They arrange for the final settlement of trades. They serve as guarantors of performance in futures markets and as escrow agents in other markets.

30
Q

What are custodial services?

A

It helps prevent the loss of securities through fraud or oversight.

31
Q

What is the long position in a forward or futures contract?

A

It is the side that is obligated to take physical delivery of the asset or its cash equivalent at contract expiration.

32
Q

What is the short position in a forward or futures contract?

A

It is the side that is obligated to make physical delivery of the asset or its cash equivalent at contract expiration.

33
Q

How would a long position on a call option benefit?

A

When the underlying rises in value.

34
Q

How would a short position on a call option benefit?

A

When the underlying falls in value.

35
Q

How would a long position on a put option benefit?

A

When the underlying falls in value.

36
Q

How would a short position on a put option benefit?

A

When the underlying rises in value.

37
Q

What is the bid and the ask?

A
  • The bid price is the price that traders are willing to buy a security.
  • The ask price is the price traders are willing to sell a security.
38
Q

What are execution instructions?

A

They indicate how an order should be filled.

39
Q

What are the types of execution instructions? Describe them.

A
  • Market orders: it instructs brokers or the exchange to fill an order immediately at the best available price.
  • Limit orders: they instruct the broker or the exchange to fill an order at a specified price or better.
40
Q

What are exposure instructions?

A

They specify whether, how, and to whom orders may be exposed.

41
Q

What are hidden orders?

A

They are exposed only to the brokers or exchanges that receive them.

42
Q

What are validity instructions?

A

They indicate when an order may be filled.

43
Q

What do validity instructions inlude? Describe them.

A
  • Day orders: only valid for the day on which they are submitted.
  • Good-till-canceled orders: valid until canceled by the broker.
  • Immediately and are otherwise canceled: they are filled or killed.
  • Good-on-close orders: only execute at the close of trading and are also called market-on-close orders.
  • Stop orders: placed by investors to protect themselves from adverse price movements.
44
Q

What are clearing instructions?

A

It indicates how the final settlement of trades should be arranged. They include details of the entities responsible for clearing and settling the trade.

45
Q

What are primary markets?

A

They are markets where issuers first sell their securities to investors.

46
Q

What are secondary markets?

A

It is the part where previously issued securities and financial instruments are traded.

47
Q

What is a call market?

A

All bid and ask prices for an asset are gathered to determine one price where the quantity offered for sale is close to the quantity demanded.

48
Q

What is a continuous market6

A

Transactions can take place whenever the market is open.

49
Q

What is the advantage of a call market?

A

It is that it makes it easier for buyers and sellers to find each other by gathering all traded at the same place at the same time.

50
Q

What is a pure auction market?

A

It is one where participants submit their bid and ask prices to a central location.

51
Q

What is a dealer market?

A

It consists of individual dealers who are assigned specific securities. They create liquidity by purchasing and selling against their own inventory of securities.

52
Q

What is a brokered market?

A

Brokers arrange trades amoung their clients.

53
Q

What are the features of a well-functioning securities market? Describe them.

A
  • Timely and accurate disclosures: market participants can make well-informed decisions.
  • Liquidity: costs of trading are minimized.
  • Complete markets: allow people to solve their financial problems.
  • External or informational efficiency: prices respond to changes in fundamental values.
54
Q

What are the objectives of market regulations?

A
  • Control fraud or deception of market participants.
  • Control agency problems by setting minimum standards or competence for agents and by defining and enforcing minimum standards of practice.
  • Promote fairness by creating a level playing field for market participants.
  • Set mutually beneficial standards for financial reporting.
  • Prevent undercapitalized financial firms from exploiting their investors by making excessively risky investments.
  • Ensure that long-term liabilities are funded.
55
Q

What formula determines the price at which an investor will get a margin call?

A

equity investments (5 decks)

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