Alternative Investments Flashcards
What are some common underlying assets to derivatives?
stocks, bonds, commodities, currencies, interest rates and market indices
A derivative is what
a security whose price is dependent or “derived” from one or more underlying assets
A derivative itself is a contract between whom
one or more parties
An option is the right to do what
contractual right to buy or sell a stock at a specified price within a specified time period
European options can only be exercised when
on the expiration date
How is the value of a derivative determined?
By the performance of the underlying asset
What are some common types of derivatives?
options (puts and calls) futures contracts, forward contracts, swaps
What are other terms for the price of an option?
premium, price, value, cost to buy
When can you exercise American options?
at any time
Who is obligated in the sale of an option?
the seller is obligated to satisfy the contract if the holder wishes to exercise the option
A put is an option to do what with a stock?
sell - you buy a put when you expect a stock to go down
A call is an option to do what?
buy - you buy a call when you expect the stock to go up
LEAPS stands for what
Long-term equity anticipation securities
options with expiration dates greater than 1 year (most non leaps contracts are for 3-9 months)
Futures contract definition
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
Is the contract exchange optional in a future?
No, it is mandatory
What is a spot price
price for current delivery of the commodity
The price specified in a futures contract is the what price?
the futures price - as opposed to the spot or current price
Warrants definition
contracts issue by corporations to buy a specified number of shares, at a specified price, within a certain time, usually 3-10 years
Exercising a warrant does what re: a corporations stock?
creates additional shares of a corporation’s outstanding stock
What have a shorter lifespan, rights or warrants
Rights - rights are typically a few weeks or months
Warrants continue from one to several years
Tangible assets include what
collectibles, natural resources, and precious metals
What is the primary source of investment return on a tangible asset?
capital appreciation
Collectibles definition
an item which derives its value from its rarity and desirability - antiques, coins, art
Natural resources examples
oil, coal, water and land
Precious metals definition
relatively scarce, highly corrosion resistant, valuable metals including gold, silver, platinum and palladium
Promissory note definition
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
What is a promissory note called when a bank is the maker?
a CD
Investor managed real estate
the investor/owner of the real estate is also the manager
REIT
publicly traded, closed end investment co that invest is a diversified portfolio of real estate or real estate mortgages.
Equity trust REIT holds what
real estate - mortgage trust holds mortgages
REIT shares are liquid or non-liquid
liquid, also easily marketable and often sell at discounts to their actual book value
Real estate mortgage investment conduit are now called
CMO - collateralized mortgage obligation
RELP
real estate limited partnership - buys apartments, offices, shopping centers, warehouses, hotels.
RELPs pass rental income to whom
to the limited partners
Who manages a RELP?
General partner
What does the general partner do in a RELP?
decides which properties to buy and sell, administrative duties such as distributions to LPs
What did the Tax Reform Act of 1986 do re: Passive Losses
investors could no longer use RELP losses to offset their income from salaries and other investments
Who issues REMIC securities
Freddie Mac, Fannie Mae and Ginnie Mae
Most CMOs are issued how
in REMIC form as pass through investment vehicles organized as an association, corporation, partnership or trust
Is CMO income subject to double taxation?
No
REMICs group principal and interest how?
Into separately traded securities
REMIC tranches have different what
interest rate payments, maturities, stipulations for prepayment, and risk levels (senior and subordinate)
Guaranteed Investment Contract
GIC
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
GIC is what type of contract?
insurance
