Created by Joseph Normile
over 6 years ago
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Question | Answer |
Real Asset | Used to produce income, such as factory or machine |
Financial Asset | Claim on income produced by real asset, Bonds, stocks, derivative security |
Derivative Security | Financial Asset that has its value determined by something else, such as stock, bond, interest rate. A contract between 2 parties, bet, and sum from payoff for both sides equal to zero. |
Fixed Income Security | Provides a form of fixed, periodic pays and return of the principal at maturity |
Purpose of Derivative | Reduce risk, induce risk, one side sees risk reduced while other takes on risk. |
Financial Markets | Where financial assets are traded. Can be one-on-one private transactions, organized around a dealer, structured and organized exchanges (NYSE, CME). |
Clearning houses | Intermediary between buyer and seller of asset that ensures execution of trade, collection of monies, delivery of asset, collection of data. |
Novation | Substitution of one counterparty for another. Derivatives clearinghouses usually become buyers to all sellers and sellers to all buyers. |
Market Measures of Activity | trading volume (number of trades), market value, notional value (potential exposure in derivatives), open interest (total number of contracts outstanding) |
Use of derivatives | Risk management: reducing risk with derivatives (hedging) Speculation Reduced Transaction Costs: lower transaction cost than individual securities Regulatory Arbitrage: circumventing regulation |
End User | Party that buys derivatives |
Market Makers | Create derivatives |
Economic Observers | includes regulators |
Market Order | Purchase at current price |
Limit order | instruction to trade a security at a specified or better price |
Stop Loss Order | sell once price reaches a specified level |
Lease Rate | Payment made on a borrowed asset |
Short Selling Reasons | speculation, means of borrowing money, hedging |
Haircut | the extra amount of money the owner of the asset asks the short seller to provide. |
Repo Rate | Interest paid on the short sale proceeds and the haircut if it is a bond |
Short Rebate | Interest paid on the short sale proceeds and the haircut if it is a stock |
Forward Contract | Sale transaction consummated in the future of which all details are laid out today |
Forward (Long Position) | =Spot price @ expiration - Price Named in Forward Contract |
Forward (short position) | =Price named in forward contract - Spot price @ expiration |
Value of Long Forward | Price of Underlying - present value of forward contract price |
Forward Price | PV(Forward Price)=Price of Underlying The price named in the forward contract that does not require any cash payment up front |
Forward Spot Parity | Fe^-rt = S F=Se^rt |
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