CFA 45: Market Organization and Structure Flashcards
information-motivated traders
trade to profit from information that they believe allows them to predict future prices
primary captial markets (primary markets)
markets in which companies and governments raise capital (funds)
secondary market
where investors sell securities to others
money markets
trade debt instruments maturing in one year or less
capital markets
trade debt instruments of a duration longer than one year
traditional investment markets
include all publicly traded debts and equities and shares in pooled investment vehicles that hold publicly traded debts and/or equities
alternative investment markets
include hedge funds, prive equities, commodities, real eastate securities and real estate properties, securitized debts, operating leases, machinery, collectibles, and precisous gems; investments are often hard to trade and value
warrant
attached option that gives its holder the right to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date; EXERCISE PRICE is the price that the warrant holder must pay to buy the security
forward contract
An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a later date for a price established at the start of the contract.
counterparty risk
The risk taht the other party to a contract will fail to honor the terms of the contract
futures contract
A variation of a forward contract that has essentially the same basic definition but with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and an organized electronic or floor trading facility.
clearinghouse
An entity asscociated with a futures market that acts as middleman between the contracting parties and guarantees to each party the performance of the other.
initial margin
The amount that must be deposited in a clearinghouse account when entering into a futures contract.
maintenance margin
The minimum amount that is required by a futures clearinghouse to maintain a margin account and to protect against default. Participants whose margin balances drop below the required maintenance margin must replenish their accounts.
variation margin
Additional margin that must be deposited in an amount sufficient to bring the balance up to the initial margin requirement.
swap contract
An agreement between two parties to exchange a series of future cash flows.
interest rate swap
A swap in which the underlying is an interest rate. Can be viewed as a currency swap in which both currencies are the same and can be created as a combination of currency swaps.
commodity swap
A swap in which the underlying is a commodity such as oil, gold, or an agricultural product.
currency swap
A swap in which each party makes interest payments to the other in different currencies.
equity swap
A swap transaction in which at least one cash flow is tied to the return to an equity portfolio position, often an equity index.
option contract (option)
A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time. Also referred to as contingent claim or option contract.
call option
An option that gives the holder the right to BUY an underlying asset from another party at a fixed price over a specific period of time.
put option
An option that gives the holder the right to SELL an underlying asset to another party at a fixed price over a specific period of time.
European-style option contract
Said of an option contract that can only be exercised on the option’s expiration date.
American-style option contract
Said of an option contract that can be exercised at ANY time up to the option’s expiration date.
block brokers
A broker (agent) that provides brokerage services for large-size traders.
investment banks
Financial intermediaries that provide advise to their mostly CORPORATE clients and help them arrange transactions such as intial and seasoned securities offerings.
exchanges
Places where traders can meet to arrange their trades.
alternative trading systems (ATS)
electronic communications networks (ECNs)
multilateral trading facilities (MTFs)
Trading venues that function like exchanges but that do not exercise regulatory authority over their subscribers except with respect to the conduct of the subscribers’ trading in their trading systems.
dark pools
Alternative trading systems that do not display the orders that their clients send to them.
dealers
A financial intermediary that acts as a principal in trades.
liquidity
The ability to purchase or sell an asset quickly and easily at a price close to FAIR MARKET VALUE. The ability to meet short-term obligations using assets that ar the most readily converted into cash.
broker-dealer
A financial intermediary (often a company) that may function as a principal (dealer) or as an agent (broker) depending on the type of trade.
special purpose vehicle (SPV)
special purpose entity (SPE)
A non-operating entity created to carry out a specified purpose, such as leasing assets or securitizing receivables; can be a corporation, partnership, trust, limited liability, or partnership formed to facilitate a specific type of business activity.
depository institutions
Commerical banks, savings and loan banks, credit unions,, and similar institutions that raise funds from depositors and other investors and lend it to borrowers.
arbitrageurs
Traders who engage in arbitrage.
long position
A position in an asset or contract in which one owns the asset or has an exercisable right under the contract.
short position
A postiion in an asset or contract in which one has sold an asset one DOES NOT OWN, or which a right under a contract can be exercised against oneself.
margin loan
Money borrowered from a broker to purchase securities.
