Chapter 2 Flashcards
Intermediary
A financial institution that facilitates the transfer of funds between borrowers and lenders
Bill
A short term debt instrument that is issued at a discount to its face value
Discount
The difference between the fave value and the price of a financial asset, such as a bond or bill, where the face value exceeds the price
Discount instrument
Financial asset that when first issued, is below its face or par value, and when repaid at maturity includes principal and interest
Balance sheet
Statement of an individuals or organisations assets, liabilities and equity at a given date
Transaction costs
The costs involved in making financial deals, such as the costs of issuing new securities
Economies of scale
Economies of scale occur when the average cost of producing a product or service decreases as the amount produced increases
Price discovery
The revealing of information about future cash market prices
Deep markets
Markets where there are numerous buyers and sellers
Thin markets
Markets in which there are not many buyers and sellers
Arbitrage
The simultaneous buying and selling of a product to take advantage of price differences. In this process, the price differences are reduced
Liquidity
The quickness and ease of converting assets into cash. Sometimes called marketability
Intertemporal
An adjective meaning across time
Hedging
The practice of managing risk exposure, often by using contracts (such as derivatives) that have an offsetting exposure
Forward contract
An agreement by two parties to carry out a financial transaction at a future (forward) point in time
Money market
A market in which short term debt instruments with maturities up to a year are traded
Capital markets
The financial markets where the longer term, relatively riskier debt and equity securities trade
Primary market
Financial market in which new securities are sold and most of the funds raised go to the issuer
Secondary market
Financial market in which existing securities are bought and sold between investors
Auction
A market where the orders of traders are matched directly by the brokers
Dealer
In the case of financial markets, an agent that takes ownership of the financial assets, and then makes a market by buying and selling those assets to investors
Intermediated
Parties are bought together by the help of a mediator
Bank bills
Unsecured short-term marketable securities issued by companies with payment arranged through a bank
Broker
An agent who, for a fee or commission, carries out transactions such as the buying and selling of shares for a client
Over-the-counter (OTC) market
A market that is not organised by an exchange organisation
Repos
Repurchase agreements where financial institutions sell some of their government securities in exchange for cash, simultaneously agreeing to buy them back at a fixed later date
Treasury bill
Short-term debt instruments issued by the government for short-term financing
Certificates of deposit
Short-term debt instruments mainly issued by banks requiring short-term funding. Investors providing the funds do have the flexibility to sell them in the liquid secondary market before the deposit held by the bank matures
Promissory note
A written promise by the borrower to pay the lender a specified amount of money at some future specified date. Usually a short-term instrument issued by a corporate of good credit standing
Commercial paper
A short-term debt instrument issued directly into the market by companies with good credit ratings, with the aid of a financial institution, and known in New Zealand as promissory notes
Yield
The return on an investment, normally expressed as a percentage of its current value. By convention, it is quotes as an annual rate
Capital notes
Bond issues that are not supported by any underlying security and pay higher interest than corporate bonds supported by underlying assets
Preference shares
Shares that give their holders priority over ordinary shareholders and have some characteristics common to debt instruments
Convertible notes
Debt instruments that can be converted into shares
Rights issue
If a company is seeking extra funds, it may offer the existing shareholders the right to subscribe for the extra shares. The right is renounceable if it can be sold to another party. The right is non-renounceable if it can be exercised only by the shareholder and not be sold.
Market index
A measure of price levels in a market
Spread
The difference between buying and selling quotations
Exchange rate
The price at which one foreign currency can be exchanged for another
Spot market
A market that involves transactions that are settled without delay
Forward market
A market for forward contracts that involve delayed settlement
Derivative instrument
Any instrument whose value is derived from the underlying asset on which it is based
Futures contract
An exchange-traded, legal contract between a buyer, who agrees to take delivery of a specified asset at a predetermined time, and a seller who agrees to delver the asset
Settlement date
Also known as expiry date. It refers to the date when a contract expires
Expiry date
The date when an option terminates, also known as the expiration date
Long position
To agree to buy at a future date
Short position
A selling position - the sale of a financial asset
Swaps
Financial instruments that involve the exchange of cash flows between two parties
Initial margin
The preliminary amount that needs to be deposited with a broker by the market player so that a futures contract may be bought or sold
Marking to market
The process of adjusting an initial deposit of a good to its current market value. Usually occurs daily in the futures market.
Margin call
The call for extra funds when adverse movements in the price of a contract erode the initial deposit to below a specified level
Clearing house
A financial institution that guarantees the contract exchange between buyers and sellers of financial contracts; for example, futures contracts
Hedger
A market player who wishes to protect their existing position by reducing risk
Long hedge
This is when a market player buys a futures contract to protect an underlying physical position
Short hedge
This is when a market player sells a futures contract
Speculator
A market player who takes on risk in order to make a potential profit
Expectations
Beliefs or views about possible outcomes, such as the future direction of interest rates
Arbitrageur
A market player who carries out arbitrage
Delivery date
Date at which the contract expires and the specified transaction is carried out
Exercise price
The price at which an option is to be settled, also known as the strike price
Strike price
The price at which an option is to be settled or exercised
Call option
An option where the buyer has the right, but not the obligation, to buy the underlying asset at a predetermined price before a specified date
Put option
An option where the buyer has the right, but not the obligation, to sell an underlying asset at a predetermined price before a specified date
Premium
The payment from the buyer to the seller of an option
Writer of an option
The seller of an option
Exercise an option
When the holder of an option uses or takes up the option on or before the expiration date
