Topic 1: Investment Alternatives Flashcards
(42 cards)
Investors will try to increase return and reduce what?
Reduce risk
What does portfolio analysis look at?
Doesn’t look at individual securities in isolation rather looks at the individuals contribution to the portfolio
Direct Investment - Non marketable financial assets can’t be traded on _______________ or can’t be sold onto another _____?
No traded on any marketable market exchanges
Direct Investment - What is the Money Market
provides short-term funds. deals in short-term loans, generally for a period of a year or less(highly liquid). Low risk.
instruments e.g. T-Bills and Commercial Bills
Instruments
an instrument is a tradable asset, or a negotiable item, such as a security
Direct Investment - What are Fixed Income Securities
debt instruments that pay a fixed amount of interest—in the form of coupon payments—to investors.
e.g. Bonds
Direct Investment - What are Equity Securities?
represent ownership claims on a company’s net assets
common stock and preferred stock
What is Common stocks
represents equity ownership in a corporation
Shareholders
What is a preferred stock?
has characteristics of both stocks and bonds.
No voting rights to shareholders.
Dividend Payout before common stock
Direct Investment - What are Derivatives
Things that the return is derived from another instrument
E.g. Options and Futures
What are Options
Options trading is how investors can speculate on the future direction of the overall stock market or individual securities/
What are stock options
the price of a given stock dictates the value of the option contract.
What is a Call option?
A call option gives you the opportunity to buy a security at a predetermined price by a specified date.
What is a Put option?
allows you to sell a security at a future date and price.
Strike price and expiration date
Predetermined price. . Traders have until an option contract’s expiration date to exercise the option at its “strike price”.
The price to purchase option is called a ______ and its calculated based on the underlying security’s _________.
a premium, and it’s calculated based on the underlying security’s price and values.
Intrinsic Value
is the difference between an option contract’s strike price and current price of the underlying asset.
Extrinsic Value
represents other factors outside of those considered in intrinsic value that affect the premium, like how long the option is good for
What does the term in-the-money and out-of-the-money mean?
Depending on the underlying security’s price and the time remaining until expiration, an option is said to be in-the-money (profitable) or out-of-the-money (unprofitable).
Call Option: Once the underlying asset’s price has exceeded the ____ , you can sell the call option which is called _____ and earn the difference between the ____ you paid and the current premium. Alternatively, you can exercise the option to buy the _____ asset at the agreed-upon _____.
break-even price, closing your position, premium, underlying strike price
Put options. Once the asset’s ___ has fallen below the break-even level, you can ___ the options contract and therefore _________and collect the difference between the _____ you paid and the current premium. Alternatively, you can exercise the option to _____ the underlying asset at the agreed-upon _____.
price, sell, closing your position, premium, sell, strike price
What are Futures?
are a type of derivative contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price
E.g. like a spot sale at a future date, but terms are specified
now
What is Hedging against investment risk
means strategically using financial instruments or market strategies to offset the risk of any adverse price movements.
The futures markets typically use ____. Leverage means that the trader does not need to put up 100% of the contract’s _______ when entering into a trade. Instead, the broker would require an ______, which consists of a _____ of the total contract value.
3
High leverage, value amount, Initial Margin amount, fraction
