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Investments > Exam 4 Comprehensive > Flashcards

Exam 4 Comprehensive Flashcards

1
Q

Top Down Analysis 3 Filters

A
  1. Global Economic Analysis
  2. Industry Analysis
  3. Company Analysis
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2
Q

What is included in the global economic analysis (Top Down Analysis)

A

Business cycles, monetary and fiscal policy, economic indicators

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3
Q

What is included in the industry analysis (Top Down Analysis)

A

Industry structure, competition, government regulation, and business cycle exposure

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4
Q

What is included in the company analysis (Top Down Analysis)

A

Earnings, cash flow, financial ratios

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5
Q

Gross Domestic Product (GDP)

A

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.

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6
Q

Nominal GDP

A

The dollar value of economic output in terms of the current year.

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7
Q

Real GDP

A

The value of economic output adjusted for inflation. More consistent year-to-year comparison since it accounts for inflation. (Nominal GDP - Inflation)

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8
Q

4 Stages of a Business Cycle

A

Peak
Contraction
Trough
Expansion

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9
Q

Cyclical Sectors

A

Business sectors that have a high sensitivity to the GDP business cycle

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10
Q

Defensive Sectors

A

Business sectors that have a low sensitivity to the GDP business cycle

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11
Q

Leading Economic Indicators (Change ahead of the economy)

A
  1. Average weekly hours, manufacturing
  2. Average weekly initial claims for unemployment insurance
  3. Manufacturers’ new orders, consumer goods, and materials
  4. Index of supplier deliveries
  5. Manufacturers’ new orders, nondefense capital goods
  6. New private housing units authorized by local building permits
  7. Stock prices, 500 common stocks
  8. Money supply (M2) growth rate
  9. Index of consumer expectations
  10. Interest rate spread, 10-year Treasury bonds less federal funds rate
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12
Q

Coincident Economic Indicators (Change in conjunction with the changing of the economy)

A
  1. Employees on nonagricultural payrolls
  2. Personal income less transfer payments
  3. Industrial production
  4. Manufacturing and trade sales
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13
Q

Lagging Indicators (Change After the Economy is changing)

A
  1. Average duration of unemployment
  2. Ratio of trade inventories to sales
  3. Change in index of labor cost per unit of output
  4. Average prime rate charged by banks
  5. Commercial and industrial loans outstanding
  6. Ratio of consumer installment credit outstanding to personal income
  7. Change in Consumer Price Index for services
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14
Q

Dollar Denominated Return (4 Steps)

A

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

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15
Q

Labor Force

A

All nonmilitary working-age people who are employed or unemployed but seeking employment

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16
Q

Unemployment Rate

A

Percentage of the labor force that is unemployed but seeking employment

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17
Q

Labor Force Participation Rate

A

Labor force divided by the non-military working age population

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18
Q

Consumer Price Index (CPI)

A

Measures the average prices paid by urban consumers for a fixed “basket” of consumer goods and services

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19
Q

Core CPI

A

Measures the average prices paid by urban consumers for a fixed “basket” of consumer goods and services, excluding food and energy.

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20
Q

Change in CPI is equal to what?

A

Inflation

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21
Q

M1

A

Currency and check deposits. Most basic form of money supply

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22
Q

M2

A

M1 plus time deposits, savings accounts, and money markets

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23
Q

Discount Rate

A

The interest rate the Fed charges its member banks on loans.

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24
Q

Federal Funds Rate

A

The short-term rate at which banks lend to each other.

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25
Q

Open Market Operations

A

The buying and selling of bonds directly on the secondary market for purposes of increasing or decreasing the money supply

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26
Q

Fiscal Policy

A

The government determination of tax rates and spending policies

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27
Q

Industry Life Cycle

A

Start Up (Rapid and increasing growth)
Consolidation (Stable growth)
Maturity (Slowing growth)
Relative Decline (Minimal or negative growth)

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28
Q

Porter’s Five Forces

A
  1. Threat of New Entrants
  2. Bargaining Power of Buyers
  3. Bargaining Power of Suppliers
  4. Threat of Substitute Products
  5. Intensity of Rivalry
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29
Q

The US represents about what percentage of global market values?

A

30%

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30
Q

Forward Contract

A

Agreement between a buyer and a seller, who both commit to a transaction at a future date at a price set by negotiation today.

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31
Q

Futures Contract

A

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.

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32
Q

Difference between Forward Contract and Futures Contract

A

Futures contract is managed through an organized exchange

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33
Q

Futures Price

A

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

34
Q

Requirements of a Futures Contract

A
  1. Identity of the underlying commodity or commercial instrument
  2. Futures contract size
  3. Futures maturity (expiration) date
  4. Delivery/settlement procedure
  5. The futures price
35
Q

Long Position

A

A market position where the holder benefits from price increases and loses from price decreases.

36
Q

Short Position

A

A market position where the holder benefits from price decreases and loses from price increases

37
Q

Speculator

A

Someone who takes a chance to make a potential profit

38
Q

Hedger

A

Trader who seeks to transfer price risk by taking a futures position opposite to an existing position in the underlying asset

39
Q

Underlying Asset

A

The commodity or financial instrument on which the futures contract is based

40
Q

Short Hedge

A

Adding a short futures position to a long position in the underlying asset

41
Q

Full Hedge

A

A futures position that is equal, but opposite, the position in the underlying asset

42
Q

Long Hedge

A

Adding a long futures position to a short position in the underlying asset

43
Q

Futures Margin

A

Deposit of funds in a futures trading account dedicated to covering potential losses from an outstanding futures position

44
Q

Initial Margin

A

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.

45
Q

Marking-to-Market

A

In futures trading accounts, the process whereby gains and losses on outstanding futures positions are recognized on a daily basis

46
Q

Maintenance Margin

A

The minimum margin level required in a futures trading account at all times.

47
Q

Margin Call

A

Notification to increase the margin level in a trading account.

48
Q

Reverse Trade

A

A trade that closes out a previously established futures position by taking the opposite position

49
Q

Reasons to close out a futures contract before maturity

A
  1. Capture current gain or loss without further price risk

2. Avoid delivery requirement that comes from holding until maturity

50
Q

Cash Price (Spot Price)

A

Price of a commodity or financial instrument quoted for current delivery.

51
Q

Cash Market (Spot Market)

A

Market in which commodities or financial instruments are traded for immediate delivery.

52
Q

Cash-Futures Arbitrage

A

Strategy for earning risk-free profits from an unusual difference between cash and futures prices.

53
Q

Basis

A

The difference between the cash price and the futures price for a commodity, i.e., Basis = Cash price – Futures price.

54
Q

Carrying-Charge Market (Contago)

A

Futures Price is larger than the Cash Price, so the Basis is negative

55
Q

Inverted Market

A

Futures Price is smaller than the Cash Price, so the Basis is positive

56
Q

Spot-Futures Parity

A

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

57
Q

Initial Margin for futures contracts is usually in what percentage range of the contract value?

A

5-15%

58
Q

Derivative Security

A

Security whose value is derived from another security

59
Q

What type of security are options

A

Derivative security

60
Q

Call Option

A

Grants its holder the right, but not the obligation, to buy a stock at a specified strike price.

61
Q

Put Option

A

Grants the holder the right, but not the obligation, to sell a stock at a specified strike price.

62
Q

Strike Price (Exercise Price)

A

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.

63
Q

What is the size of standardized stock options?

A

100 shares

64
Q

What 6 terms must an option on common stock state?

A
  1. The identity of the underlying stock
  2. The strike/exercise price
  3. Option contract size
  4. Option maturity/exercise date
  5. Option exercise style
  6. Delivery/settlement procedure
65
Q

American options vs European options exercise styles

A

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

66
Q

Stock Index Option

A

An option on a stock market index

67
Q

Cash-Settled Options

A

An option contract settled by a cash payment from the option writer to the option holder when the option is exercised

68
Q

Intrinsic Value

A

The payoff that an option holder receives assuming the underlying stock price remains unchanged from its current value.

69
Q

Call Option Intrinsic Value

A

The greater of either the Stock Price - Strike Price or 0.

70
Q

Put Option Intrinsic Value

A

The greater of either the Strike Price - Stock Price or 0.

71
Q

Option Time Value

A

The difference between an option’s price and intrinsic value

72
Q

3 Lessons About Intrinsic Value

A
  1. Investors can calculate the intrinsic value of an option whether it’s dead or alive
  2. At expiration, the value of an option equals its intrinsic value
  3. Before expiration, the value of an option equals its intrinsic value plus its time value
73
Q

In-The-Money Option

A

Any option with a positive intrinsic value.

74
Q

At-The-Money Option

A

Any option with a strike price exactly equal to the underlying price.

75
Q

Out-Of-The-Money Option

A

An option that would not yield a positive payoff if the stock price remained unchanged until expiration.

76
Q

Option Writing

A

Taking the seller’s side of an option contract.

77
Q

Call Writer

A

One who has the obligation to sell stock at the option’s strike price if the option is exercised

78
Q

Put Writer

A

One who has the obligation to buy stock at the option’s strike price if the option is exercised.

79
Q

Covered Call

A

Strategy of selling a call option on stock already owned

80
Q

Money Multiplier

A

1/Reserve Requirement

Investments (3 decks)

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