1. Security Markets

Question 1

How are financial markets organized?

Answer 1

1. Dealer markets (intermediary so fixed income, charge a spread)
2. Agency or auction markets / Limit order book (most stock market and some derivate markets)

Question 2

Why do we care how markets are organized?

Answer 2

• Type of market determines way of trading
• Trading is important consideration in portfolio management and asset pricing

Question 3

How do trading costs and market liquidity relate?

Answer 3

• Trading involves costs
• Since trading is costly, investors are concerned about market liquidity

Question 4

What characteristics does market liquidty involve?
(5 kenmerken)

Answer 4

• Ease of sale
• Necesarry price concesions to effect a quick transaction
• Price predictability
• Transaction costs (fixed, variable)
• Depth (how many interested people)

Question 5

What is a dealer market?

Answer 5

In dealer markets, buyers and sellers do not trade with each other, but with “dealers” (usually banks) who act as intermediary and stabilize the market by supplying immediacy

intermediary = mediater. Advantage is that the bank always gives a price

• if I want to sell my bonds, i dont have to wait for a seller

Question 6

What is a bid-ask spread?

Answer 6

The bid-ask spread is the difference between the highest price a buyer will offer (the bid price) and the lowest price a seller will accept (the ask price).

Question 7

What is an Agency market?

Answer 7

In agency markets, order flow meets at central place (e.g., the stock exchange)

So buyers and sellers directly trade with each other

Question 8

In most agency or auction markets there is one market maker or specialist for each stock, what do they do?

Answer 8

“Specialists handle much of the order flow for stocks assigned to them by the exchange and have the affirmative obligation to make fair and orderly markets for their stocks.”
A market where all traders in an asset meet (either physically or electronically) at one place to buy and sell.

Question 9

6 roles of financial markets

Answer 9

• Allocation of capital
• Consumption timing / smoothing: early on in your life you need to borrow money, while later on in your life you have spare cash that you want to invest.
• Separation of ownership and control
• Provision of liquidity: because of markets, you’re able to buy/sell whenever you want.
• Allocation of risk: markets allow people to invest according to their risk profile. If you’re risky you invest in equity, otherwise you invest in debt.
• Information aggregation through prices: markets allow to gather information through stock prices.

Question 10

Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.

If the maintenance margin is 25%, how low can Xtel’s price fall before you get a
margin call?

margin trade when call?

Answer 10

1000P-5 000/ 1000P = 0.25
amount shares * price - amount borrowed / amount shares * price

Question 11

Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.

b. If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin
call?

Answer 11

(total amount borrowed own stake) - sharesp / sharesp