1) Introduction to the Course Flashcards
What is A Financial Contract
A written agreement between two parties to exchange payments according to some specified criteria. The two parties are normally called the holder and seller
What is a Contract Holder
Normally the buyer, who pays money at the beginning in exchange for receiving some payments at a later date. (Remember payments may not always be positive, a contract could be free to enter at the start or even one where you pay to hold it)
What is a Contract Seller
The opposite position to the holder, which normally means they receive money at the beginning in exchange for giving out some payments at a later date
What is the Market
The collective term for all participants, both buyers and sellers, that are engaged in trading financial contracts
What is the Exchange
Where most financial contracts are bought and sold
What is a Share or Stock
The financial contract in which a company sells a percentage of the ownership of the company to the holder, which entitles the holder to a percentage share of all future profits
What is the Stock Market
The collective term for all participants buying and selling stocks
What is the Stock Exchange
Where stocks (shares) are bought and sold
What is a Bond
A debt guarantee in which the holder pays now to receive a ‘guaranteed’ fixed payment in the future
What is the Bond Market
The collective term for participants buying and selling bonds and other debt securities
What is an Asset
Implies ownership or property, so sometimes stocks and shares may be called assets because they confer ownership of the company
What is Price and Value
Price - the amount of money required in exchange to buy or sell a contract
Value - a measure of worth to an individual
What is Market Price
The highest (or lowest) amount at which at least one participant in the market is willing to buy (or sell) a contract
What is Money
The circulating medium of exchange as secured by the government
What is Interest Rate
A payment made in exchange for being in debt to another party
What is Simple Interest Rate
What is Compound Interest Rate
What is Continuously Compounded Interest Rate
Explain where Continuously Compounded Interest is derived from
What is the Return on an Investment
What are the Deterministic and Stochastic parts of modelling share prices
Deterministic - contains all known or expected trends.
Stochastic - this contains all the uncertain parts
What is the Stochastic Model for Shares
µ: the deterministic expected rate of growth of the share price.
σ: the volatility, quantifying the risk or uncertainty in share price changes.
dW: the incremental change in a Wiener process
What is Volatility
A statistical measure of the standard deviation of returns for a share price
What is
