chapitre 1 Flashcards
3 main investing rules
- diversify
- don’t buy and sell with crowd
- control costs
Best way to apply the 3 rules
Hold index fund
What can you invest in?
Equities
Fixed income: IOUs
Mutual funds, ETFs
Derivatives
Alternative investments: private equity, hedge funds
What are IOUs short term and long term
Short: T-bills, money market, CDs
Long (>1year): bonds
Difference between mutual funds and ETFs
Mutual fund grows ass people invest in it and money is thn invested in stocks, Etf is a traded stock
Name 3 derivatives
Options
Futures
Forwards
What is the biggest, most active market in the world?
Derivatives market
2 main differences between derivatives and stocks
- Their payoff depends on some other asset or data
- They are not used to raise funds like stocks or bonds, but for investors to make bets against other investors
Define a forward contract
A forward contract calls for delivery of an asset at a specified maturity date for an agreed-upon price, to be paid at contract maturity
- Long position: take delivery at maturity. Short position: make delivery at maturity
In what way are futures different than forwards?
-standardized contracts: create liquidity
- market to market
- exchange mitigates credit risk
Options, explain their features
- An option gives the right to buy or sell: not the obligation
- European option, option than can only be exercised on its maturity date
- American opt: can be exercised any time before or on maturity date
What is a call
Option to: buy a certain underlying asset, at a certain strike/exercise price, by a certain date, the maturity or exercise date
What is a put
Same as a call, but for selling
What do both calls and puts require?
Payment of a premium up front
Compare options with forwards and futures
2 points of difference, there is no obligation in an options, whereas an foward/future implies the obligation to buy or sell at maturity, and an option must be purchased, the price being the premium, while it costs nothing to enter a frowrd/future contract.
