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19 Cards in this Set
- Front
- Back
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insurance premium |
The fee a firm pays to an insurance company for the purchase of an insurance policy.
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actuarially fair price |
A price such that the NPV from selling the insurance is zero because the price of the insurance equals the present value of the expected payment.
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moral hazard |
A reduction, due to a firm’s purchasing of insurance, of the firm’s incentive to avoid risk.
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deductible |
A provision in an insurance policy in which an initial amount of loss is not covered by the policy and must be paid by the insured.
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deductible |
A provision in an insurance policy in which an initial amount of loss is not covered by the policy and must be paid by the insured.
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policy limits |
Provisions in an insurance policy that limit the amount of loss that the policy covers regardless of the extent of the damage.
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hedge |
Risk reduction achieved by using contracts or transactions which provide the firm with cash flows that offset its losses from price changes.
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vertical integration |
The merger of two companies in the same industry that make products required at different stages of the production cycle.
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forward contract |
A customized agreement between two parties who are known to each other whereby they agree to trade an asset on some future date at a price that is fixed today.
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futures contract |
A standardized agreement between two anonymous parties traded on an organized futures exchange that contracts the two parties to trade an asset on some future date at a price that is fixed today.
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margin |
Collateral that investors are required to deposit into their brokerage account when entering a transaction that could generate losses beyond the initial investment.
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marking to market |
The daily exchange of cash flows based on computing gains and losses due to the daily change in the market price of a futures contract.
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margin call |
A requirement for investors to inject new cash into their brokerage account when their account balance falls below a maintenance margin requirement due to marking to market cash flows.
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liquidity risk |
The risk of being forced to liquidate an investment (at a loss) because the cash is required to satisfy another obligation (most often a margin requirement).
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basis risk |
The risk that arises because the value of a futures contract is not perfectly correlated with a firm’s exposure.
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speculate |
The use of securities to place a bet on the direction in which the trader believes the market is likely to move.
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duration |
The sensitivity to interest rate changes of an asset or a liability.
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duration mismatch |
A significant difference between the durations of a firm’s assets and liabilities.
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interest rate swap |
A contract in which two parties agree to exchange the coupons from two different types of loans.
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