Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
51 Cards in this Set
- Front
- Back
|
What are three types of derivative securities? |
1. Spot Contracts-immediate exchange of assets and funds between a buyer and a seller.
2. Forward Contracts-exchanged of a non-standardized asset for cash at a future date.
3. Futures Contracts-exchange of a standardized asset for cash at a future date. |
|
|
What is a derivative security? |
A security with a payoff linked to another, previously issued, security. |
|
|
What is an option? |
An option is a contract that gives the holder the right, but not obligation to buy or sell an underlying asset at a specified price within a specified period.
An option is linked to the price of an underlying security relative and to a reference of strike price. |
|
|
Why are defaults on futures contracts rare? |
Because the exchange assumes the defaulting party's obligations. |
|
|
How does the exchange's clearinghouse guarantee all trades? |
By buying all futures sales and selling all futures purchases. |
|
|
The buyer in a futures contract profits when... |
the value of the underlying asset increases before contract expiration. |
|
|
The seller in a futures contract profits when... |
the value of the underlying asset decreases before contract expiration. |
|
|
A call option is in the money when... |
the price of the underlying security is above the exercise price. |
|
|
A call option is out of the money when... |
the price of the underlying security is below the exercise price. |
|
|
The call option buyer and writer face what type of losses and gains? |
Buyer: Limited losses (the call premium) but unlimited gains.
Writer: Unlimited losses and limited gains (the call premium). |
|
|
The best-case scenario for the put option buyer is... |
for the price of the underlying asset to fall to zero. |
|
|
What is an options intrinsic value? |
The underlying asset's price minus the option's exercise price. |
|
|
What is an options time value? |
The options price minus it's intrinsic value. |
|
|
What is the dollar value of a stock index option? |
The product of the index times a multiplier. |
|
|
The buyer of an option on a futures contract has the right to... |
buy (or sell, if a put option) the underlying futures contract before expiration. |
|
|
What is the CFTC? (Commodities Futures Trading Commission) |
The primary regulator of futures markets, thus the main regulator of options on futures contracts. |
|
|
What is the SEC (Securities and Exchange Commission) |
The primary regulator of stock markets and this the main regulator of stock options and stock index options. |
|
|
Counterparties typically swap... |
interest rates, currencies, credit risks, commodities and/or equities.
Swaps are typically long-term contracts. |
|
|
An interest rate swap is... |
an exchange of fixed-interest payments for floating interest payments. |
|
|
How does an interest rate swap work? |
The swap buyer agrees to make a number of fixed interest rate payments on specified dates to the swap seller, who agrees to make a number of floating interest rate payments on specified dates to the swap buyer. Both interest rates are based on a contractual amount called the notional principal. |
|
|
What is a currency swap? |
A hedge against exchange risk from mismatched currencies on assets and liabilities. |
|
|
What is a cap and how does it work? |
A cap is a call (buy) option on interest rates. If the interest rates rises above the cap, the seller compensates the buyer in return for an up-front premium. |
|
|
What is a floor and how does it work? |
A floor is a put (sell) option on interest rates. If the interest rate falls below the floor, the seller compensates the buyer in return for an up-front premium. |
|
|
What is a collar and how does it work? |
A combination of a cap and a floor. FI's buy collars to finance cap and floor positions and if they are concerned about interest rate volatility. |
|
|
What are three types of futures contracts? |
1. Interest rate futures-underlying asset is the interest rate on a bond or short-term fixed-interest security.
2. Currency future-underlying asset is the exchange rate of a currency.
3. Equity stock index futures-underlying asset is a major US or foreign stock market index. |
|
|
What is a call option? |
Gives the buyer the right to buy the underlying security from the option writer at a specified price. (Exercise or strike price). |
|
|
What is a put option? |
Gives the buyer the right to sell the underlying security to the option writer at a specified price. (Exercise or strike price). |
|
|
The three main discouragements to direct investment are... |
1. Monitoring Costs
2. Liquidity Costs
3. Price Risk |
|
|
Through indirect transfer, FI's can... |
1. Reduce monitoring costs
2. Transform assets (buy corp securities and issue them quickly as secondary securities.
3. Reduce transaction costs
4. Act as maturity intermediaries (purposely mismatch maturities.
5. Act as denomination intermediaries (buy large, sell small)
6. Transmit monetary policy
7. Allocate credit (to sectors in need)
8. Act as intermediaries (transfer wealth)
9. Provide payment services |
|
|
Ten risks faced by financial institutions... TOM LIC OF IC |
1. Credit risk 2. Foreign exchange risk 3. Sovereign risk 4. Interest rate risk 5. Market risk 6. OBS risk 7. Liquidity risk 8. Technology risk 9. Operational risk 10. Insolvency risk |
|
|
Five factors have caused the globalization of financial markets... |
1. Increased pool of savings in foreign countries.
2. Growth of international investors.
3. More and faster information
4. Financial institution encouragement of foreign investment.
5. Deregulation |
|
|
Money markets facilitate... |
trading of short term debt instruments, transferring money from those with short term excess funds to those with short term needs for funds.
|
|
|
Types of Money Market Instruments. |
1. T-bills (cover budget deficits and refinance maturing debt) 2. Fed funds (funds transferred between FI's for one day) 3. Repurchase agreements 4. Commercial paper (unsecured note to finance working capital requirements) 5. Negotiable CD's 6. Banker's acceptances (time drafts payable to sellers of goods. |
|
|
Money market participants... |
1. US Treasury 2. Federal Reserve 3. Commercial banks 4. Brokers and dealers 5. Corporations 6. Financial Institutions 7. Individuals |
|
|
Six types of Banking Regulations... |
1. Safety and soundness regulation 2. Monetary policy regulation 3. Credit allocation regulation 4. Consumer protection regulation 5. Investor protection regulation 6. Entry and chartering regulation |
|
|
Safety and soundness regulation layers... |
1. First-Diversify assets. 2. Second-Minimum equity requirements. 3. Third-Guarantee funds. 4. Bank monitoring and surveillance.
|
|
|
Balance sheet regulations... |
1. Commercial bank liquidity 2. Leverage a. Capital to assets ratio b. Risk based capital ratios
|
|
|
Quality thrift lender test... |
...sets a floor on the amount of mortgage related assets a thrift can hold. |
|
|
Finance company assets... |
1. Real estate loans 2. Consumer loans 3. Business loans
|
|
|
Three principal types of life insurance products... |
1. Ordinary life 2. Group life 3. Credit life
|
|
|
Types of Ordinary life policies... TWEVUV |
1. Term 2. Whole 3. Endowment 4. Variable-cash value increases and decreases 5. Universal-change premium amount and contract maturity 6. Variable Universal |
|
|
Measurers of profitability for P&C insurers... |
1. Loss risk 2. Expense risk 3. Investment risk |
|
|
Securities firm and investment bank activities... |
1. Investing 2. Investment banking 3. Market making 4. Trading 5. Cash management 6. Mergers and acquisitions 7. Venture capital
|
|
|
Four types of mutual funds. |
1. Equity 2. Bond 3. Hybrid 4. Money Market |
|
|
How to calculate Net Asset Value and Sales Load of a mutual fund. |
1. NAV-market value of the funds assets divided by the number of outstanding shares. 2. Sales Load-sales agent's one time sales or commission charge. |
|
|
ERISA Requirements (Employee Retirement Income Security Act) |
1. Underfunding 2. Vesting 3. Fund Management 4. Transferability 5. Insurance |
|
|
Risks to financial institutions... TOM LICE ISO |
1. Credit 2. Liquidity 3. Interest Rate 4. Market 5. OBS 6. Foreign Exchange 7. Sovereign 8. Technology 9. Operational 10. Insolvency |
|
|
Two types of liquidity risk. |
1. Liability 2. Asset |
|
|
Five measures of liquidity |
1. Net liquidity statement 2. Maturity ladder 3. Peer group ratio 4. Liquidity index 5. Financing gap |
|
|
How banks manage liquidity? |
1. Sale of liquid assets 2. borrowed funds 3. excess cash reserves |
|
|
Liquidity exposures of life and P&C insurers. |
1. life-surrender value 2. P&C-claims and cancellations |
