Exam 4 Comprehensive Flashcards
Top Down Analysis 3 Filters
- Global Economic Analysis
- Industry Analysis
- Company Analysis
What is included in the global economic analysis (Top Down Analysis)
Business cycles, monetary and fiscal policy, economic indicators
What is included in the industry analysis (Top Down Analysis)
Industry structure, competition, government regulation, and business cycle exposure
What is included in the company analysis (Top Down Analysis)
Earnings, cash flow, financial ratios
Gross Domestic Product (GDP)
A measure of the market value of goods and services provided over a period of time. A measure of the standard of living for people in a country.
Nominal GDP
The dollar value of economic output in terms of the current year.
Real GDP
The value of economic output adjusted for inflation. More consistent year-to-year comparison since it accounts for inflation. (Nominal GDP - Inflation)
4 Stages of a Business Cycle
Peak
Contraction
Trough
Expansion
Cyclical Sectors
Business sectors that have a high sensitivity to the GDP business cycle
Defensive Sectors
Business sectors that have a low sensitivity to the GDP business cycle
Leading Economic Indicators (Change ahead of the economy)
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods, and materials
- Index of supplier deliveries
- Manufacturers’ new orders, nondefense capital goods
- New private housing units authorized by local building permits
- Stock prices, 500 common stocks
- Money supply (M2) growth rate
- Index of consumer expectations
- Interest rate spread, 10-year Treasury bonds less federal funds rate
Coincident Economic Indicators (Change in conjunction with the changing of the economy)
- Employees on nonagricultural payrolls
- Personal income less transfer payments
- Industrial production
- Manufacturing and trade sales
Lagging Indicators (Change After the Economy is changing)
- Average duration of unemployment
- Ratio of trade inventories to sales
- Change in index of labor cost per unit of output
- Average prime rate charged by banks
- Commercial and industrial loans outstanding
- Ratio of consumer installment credit outstanding to personal income
- Change in Consumer Price Index for services
Dollar Denominated Return (4 Steps)
Step 1: Dollars x Amount of Currency per dollar
Step 2: Step 1 Answer x (1 + Percentage investment earning as decimal)
Step 3: Step 2 Answer/Currency per dollar
Step 4: (New Worth - Original Worth)/Original Worth
Labor Force
All nonmilitary working-age people who are employed or unemployed but seeking employment
Unemployment Rate
Percentage of the labor force that is unemployed but seeking employment
Labor Force Participation Rate
Labor force divided by the non-military working age population
Consumer Price Index (CPI)
Measures the average prices paid by urban consumers for a fixed “basket” of consumer goods and services
Core CPI
Measures the average prices paid by urban consumers for a fixed “basket” of consumer goods and services, excluding food and energy.
Change in CPI is equal to what?
Inflation
M1
Currency and check deposits. Most basic form of money supply
M2
M1 plus time deposits, savings accounts, and money markets
Discount Rate
The interest rate the Fed charges its member banks on loans.
Federal Funds Rate
The short-term rate at which banks lend to each other.
Open Market Operations
The buying and selling of bonds directly on the secondary market for purposes of increasing or decreasing the money supply
Fiscal Policy
The government determination of tax rates and spending policies
Industry Life Cycle
Start Up (Rapid and increasing growth)
Consolidation (Stable growth)
Maturity (Slowing growth)
Relative Decline (Minimal or negative growth)
Porter’s Five Forces
- Threat of New Entrants
- Bargaining Power of Buyers
- Bargaining Power of Suppliers
- Threat of Substitute Products
- Intensity of Rivalry
The US represents about what percentage of global market values?
30%
Forward Contract
Agreement between a buyer and a seller, who both commit to a transaction at a future date at a price set by negotiation today.
Futures Contract
Contract between a seller and a buyer specifying a commodity or financial instrument to be delivered and price paid at contract maturity. Futures contracts are managed through an organized futures exchange.
Difference between Forward Contract and Futures Contract
Futures contract is managed through an organized exchange
Futures Price
Price negotiated by buyer and seller at which the underlying commodity or financial instrument will be delivered and paid for to fulfill the obligations of a futures contract
Requirements of a Futures Contract
- Identity of the underlying commodity or commercial instrument
- Futures contract size
- Futures maturity (expiration) date
- Delivery/settlement procedure
- The futures price
Long Position
A market position where the holder benefits from price increases and loses from price decreases.
Short Position
A market position where the holder benefits from price decreases and loses from price increases
Speculator
Someone who takes a chance to make a potential profit
Hedger
Trader who seeks to transfer price risk by taking a futures position opposite to an existing position in the underlying asset
Underlying Asset
The commodity or financial instrument on which the futures contract is based
Short Hedge
Adding a short futures position to a long position in the underlying asset
Full Hedge
A futures position that is equal, but opposite, the position in the underlying asset
Long Hedge
Adding a long futures position to a short position in the underlying asset
Futures Margin
Deposit of funds in a futures trading account dedicated to covering potential losses from an outstanding futures position
Initial Margin
Amount required when a futures contract is first bought or sold. Initial margin varies with the type and size of a contract, but it is the same for long and short futures positions.
Marking-to-Market
In futures trading accounts, the process whereby gains and losses on outstanding futures positions are recognized on a daily basis
Maintenance Margin
The minimum margin level required in a futures trading account at all times.
Margin Call
Notification to increase the margin level in a trading account.
Reverse Trade
A trade that closes out a previously established futures position by taking the opposite position
Reasons to close out a futures contract before maturity
- Capture current gain or loss without further price risk
2. Avoid delivery requirement that comes from holding until maturity
Cash Price (Spot Price)
Price of a commodity or financial instrument quoted for current delivery.
Cash Market (Spot Market)
Market in which commodities or financial instruments are traded for immediate delivery.
Cash-Futures Arbitrage
Strategy for earning risk-free profits from an unusual difference between cash and futures prices.
Basis
The difference between the cash price and the futures price for a commodity, i.e., Basis = Cash price – Futures price.
Carrying-Charge Market (Contago)
Futures Price is larger than the Cash Price, so the Basis is negative
Inverted Market
Futures Price is smaller than the Cash Price, so the Basis is positive
Spot-Futures Parity
The relationship between spot prices and futures prices that holds in the absence of arbitrage opportunities.
Futures = Spot Price x (1 + Risk-Free Rate)^Fraction of one period
Initial Margin for futures contracts is usually in what percentage range of the contract value?
5-15%
Derivative Security
Security whose value is derived from another security
What type of security are options
Derivative security
Call Option
Grants its holder the right, but not the obligation, to buy a stock at a specified strike price.
Put Option
Grants the holder the right, but not the obligation, to sell a stock at a specified strike price.
Strike Price (Exercise Price)
Price specified in an option contract that the holder pays to buy shares (in the case of call options) or receives to sell shares (in the case of put options) if the option is exercised.
What is the size of standardized stock options?
100 shares
What 6 terms must an option on common stock state?
- The identity of the underlying stock
- The strike/exercise price
- Option contract size
- Option maturity/exercise date
- Option exercise style
- Delivery/settlement procedure
American options vs European options exercise styles
American options (most commonly used with common stock options) can be exercised at any time before expiration, whereas European options (most commonly used with index stock options) can only be exercised at expiration
Stock Index Option
An option on a stock market index
Cash-Settled Options
An option contract settled by a cash payment from the option writer to the option holder when the option is exercised
Intrinsic Value
The payoff that an option holder receives assuming the underlying stock price remains unchanged from its current value.
Call Option Intrinsic Value
The greater of either the Stock Price - Strike Price or 0.
Put Option Intrinsic Value
The greater of either the Strike Price - Stock Price or 0.
Option Time Value
The difference between an option’s price and intrinsic value
3 Lessons About Intrinsic Value
- Investors can calculate the intrinsic value of an option whether it’s dead or alive
- At expiration, the value of an option equals its intrinsic value
- Before expiration, the value of an option equals its intrinsic value plus its time value
In-The-Money Option
Any option with a positive intrinsic value.
At-The-Money Option
Any option with a strike price exactly equal to the underlying price.
Out-Of-The-Money Option
An option that would not yield a positive payoff if the stock price remained unchanged until expiration.
Option Writing
Taking the seller’s side of an option contract.
Call Writer
One who has the obligation to sell stock at the option’s strike price if the option is exercised
Put Writer
One who has the obligation to buy stock at the option’s strike price if the option is exercised.
Covered Call
Strategy of selling a call option on stock already owned
Money Multiplier
1/Reserve Requirement
