Alternative Investments

Question 1

What are some common underlying assets to derivatives?

Answer 1

stocks, bonds, commodities, currencies, interest rates and market indices

Question 2

A derivative is what

Answer 2

a security whose price is dependent or “derived” from one or more underlying assets

Question 3

A derivative itself is a contract between whom

Answer 3

one or more parties

Question 4

An option is the right to do what

Answer 4

contractual right to buy or sell a stock at a specified price within a specified time period

Question 5

European options can only be exercised when

Answer 5

on the expiration date

Question 6

How is the value of a derivative determined?

Answer 6

By the performance of the underlying asset

Question 7

What are some common types of derivatives?

Answer 7

options (puts and calls) futures contracts, forward contracts, swaps

Question 8

What are other terms for the price of an option?

Answer 8

premium, price, value, cost to buy

Question 9

When can you exercise American options?

Answer 9

at any time

Question 10

Who is obligated in the sale of an option?

Answer 10

the seller is obligated to satisfy the contract if the holder wishes to exercise the option

Question 11

A put is an option to do what with a stock?

Answer 11

sell - you buy a put when you expect a stock to go down

Question 12

A call is an option to do what?

Answer 12

buy - you buy a call when you expect the stock to go up

Question 13

LEAPS stands for what

Answer 13

Long-term equity anticipation securities

options with expiration dates greater than 1 year (most non leaps contracts are for 3-9 months)

Question 14

Futures contract definition

Answer 14

agreement for the purchase or sale of a commodity, financial asset, or currency at a specified price and time in the future. Contract exchange MUST take place the future MUST happen

Question 15

Is the contract exchange optional in a future?

Answer 15

No, it is mandatory

Question 16

What is a spot price

Answer 16

price for current delivery of the commodity

Question 17

The price specified in a futures contract is the what price?

Answer 17

the futures price - as opposed to the spot or current price

Question 18

Warrants definition

Answer 18

contracts issue by corporations to buy a specified number of shares, at a specified price, within a certain time, usually 3-10 years

Question 19

Exercising a warrant does what re: a corporations stock?

Answer 19

creates additional shares of a corporation’s outstanding stock

Question 20

What have a shorter lifespan, rights or warrants

Answer 20

Rights - rights are typically a few weeks or months
Warrants continue from one to several years

Question 21

Tangible assets include what

Answer 21

collectibles, natural resources, and precious metals

Question 22

What is the primary source of investment return on a tangible asset?

Answer 22

capital appreciation

Question 23

Collectibles definition

Answer 23

an item which derives its value from its rarity and desirability - antiques, coins, art

Question 24

Natural resources examples

Answer 24

oil, coal, water and land

Question 25

Precious metals definition

Answer 25

relatively scarce, highly corrosion resistant, valuable metals including gold, silver, platinum and palladium

Question 26

Promissory note definition

Answer 26

written, dated and signed two party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date

Question 27

What is a promissory note called when a bank is the maker?

Answer 27

a CD

Question 28

Investor managed real estate

Answer 28

the investor/owner of the real estate is also the manager

Question 29

REIT

Answer 29

publicly traded, closed end investment co that invest is a diversified portfolio of real estate or real estate mortgages.

Question 30

Equity trust REIT holds what

Answer 30

real estate - mortgage trust holds mortgages

Question 31

REIT shares are liquid or non-liquid

Answer 31

liquid, also easily marketable and often sell at discounts to their actual book value

Question 32

Real estate mortgage investment conduit are now called

Answer 32

CMO - collateralized mortgage obligation

Question 33

RELP

Answer 33

real estate limited partnership - buys apartments, offices, shopping centers, warehouses, hotels.

Question 34

RELPs pass rental income to whom

Answer 34

to the limited partners

Question 35

Who manages a RELP?

Answer 35

General partner

Question 36

What does the general partner do in a RELP?

Answer 36

decides which properties to buy and sell, administrative duties such as distributions to LPs

Question 37

What did the Tax Reform Act of 1986 do re: Passive Losses

Answer 37

investors could no longer use RELP losses to offset their income from salaries and other investments

Question 38

Who issues REMIC securities

Answer 38

Freddie Mac, Fannie Mae and Ginnie Mae

Question 39

Most CMOs are issued how

Answer 39

in REMIC form as pass through investment vehicles organized as an association, corporation, partnership or trust

Question 40

Is CMO income subject to double taxation?

Answer 40

No

Question 41

REMICs group principal and interest how?

Answer 41

Into separately traded securities

Question 42

REMIC tranches have different what

Answer 42

interest rate payments, maturities, stipulations for prepayment, and risk levels (senior and subordinate)

Question 43

Guaranteed Investment Contract GIC

Answer 43

insurance contract that guarantees the owner principal repayment and a fixed or floating interest rate for a predetermined period of time - Pension or 401k would use insurance co for this

Question 44

GIC is what type of contract?

Answer 44

insurance