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BUS 350 > Final > Flashcards

Final Flashcards

1
Q

What is the bias of the Dow Jones?

A

The market is characterized by different movements

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2
Q

In technical analysis, what is a support?

A

an area where you can expect to see the downward trend to halt temporarily because of a strong concentration of demand.

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3
Q

In technical analysis, what is a resistance?

A

an area where you can expect to see the upward trend to halt temporarily because of a strong concentration of supply.

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4
Q

What is the basic peak and trough pattern?

A

The problem now is to find out when it is too high or too low. When a series of rising or declining peak and troughs is interrupted, then you can start to think that it could be the sign of a reversal.

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5
Q

What are the three ways to represent a chart?

A
  1. line
  2. western bar
  3. candlestick
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6
Q

What is a trendline?

A
  1. Trendlines are straight lines that join a series of ascending bottom or a series of descending tops.
  2. The violation of a trendline is a good indication of a reversal or the beginning of a reversal.
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7
Q

What should be the pattern for the volume?

A

Volume should evolve the same way than the trend.

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8
Q

What is a head and shoulder formation?

A

one of the more reliable, and occurs at the top or the bottom.
Volume is bigger during the formation of the left shoulder, but volume is lower during the head formation and the right shoulder formation.

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9
Q

What is a broadening formation?

A

see a series of price fluctuations that become wider and wider.

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10
Q

What is a triangle formation?

A

is also composed of successive rallies, but this time, a peak is lower than the previous one.

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11
Q

What is a rectangle formation?

A

the most classic one (same peaks and troughs).

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12
Q

What are the characteristics of moving average?

A
  1. A change in direction of a MA is a lag indicator, but it is often the confirmation of the change in direction of the security.
  2. The MA can be used itself as a support or a resistance, like a trendline.
  3. The violation of a MA may indicate a change in trend.
  4. The longer period a MA covers, the more important is the MA.
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13
Q

What is the crossover strategy using moving average?

A

The use of different MA

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14
Q

What is the retracement rule?

A

A retracement is a temporary reversal in the direction of a stock’s price that goes against the prevailing trend.

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15
Q

What do momentum measure and why do we use it?

A

measures share price changes.

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16
Q

What is the concept of divergence?

A

The momentum changes direction before the price is signaling a trend reversal.

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17
Q

How do we trade the news?

A

The objective is to jump on the right side as soon as possible.
The different news that traders speculate on are:
politics, geopolitics,
earnings, economic indicators such as GDP, unemployment, capacity utilization can provide indications of where the economy is leading.

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18
Q

Why is it difficult to trade the news?

A
  1. It is often difficult to interpret the news. Connections between companies, industries, resources, events are more and more complex.
  2. Some people already had the information beforehand.
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19
Q

How do you trade the tape?

A

Tape reading allows trader or investor (by observing the evolution of the price, the volume, the bid, the ask and their respective size) to have a good idea of where the stock is going.

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20
Q

What is trading correlation?

A

Another way to trade is to think about correlations that exist in the financial markets.

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21
Q

What is the distressed security strategy?

A

the purchase and sale of securities that are similar or behave similarly in order to profit from a difference in price of these two securities.

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22
Q

What is the single hedge system called long/short strategy that hedge fund were using when they were first created?

A

“The Hedge Principle”. The idea is to buy stocks that are predicted to go higher than the market in general and short stocks that are supposed to fall more than other stocks.

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23
Q

What is the equity market neutral strategy?

A

A hedge fund strategy that seeks to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, etc. This strategy creates a hedge against market factors.

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24
Q

What is short selling? How does it work

A

Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline.

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25
Q

What is the up-tick rule?

A

an investor can short a security only if the trade takes place at a price that is higher than the previous trade.

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26
Q

What is horizontal merger?

A

merger or business consolidation that occurs between firms that operate in the same space, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.

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27
Q

What is vertical merger?

A

a merger between two companies that operate at separate stages of the production process for a specific finished product.

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28
Q

What is the risk associated with a merger strategy?

A
  1. the speculator may face when it is a cash tender offer is that after having taking the long position on the stock of the targeted company and before the confirmation of the deal, the stock market in general could drop significantly.
  2. the deal doesn’t go through for different reasons: ego, hostility instead of agreement, the structure of the companies, the deals for managers, regulation, economic conditions.
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29
Q

What is a secured bond?

A

Secured (senior) bonds are backed by a legal claim on some specified property of the issuer.

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30
Q

What is a zero coupon bond?

A

bonds that don’t have coupon payments. The holder is buying the bond below its par.

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31
Q

What is a step-up note?

A

the coupon rate increases over time. If there are multiple increases, it is a multiple step-up note.

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32
Q

What is a deferred coupon bond?

A

coupon payment is deferred for a certain time.

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33
Q

What is a callable bond?

A

What is a callable bond?

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34
Q

What is the interest rate risk associated with bonds? (meaning, how do the price of bonds change when the interest rate increases, and when it decreases)

A

If the interest rate goes up, then the value of the bond goes down.
If the interest rate goes down, then the value of the bond goes up.

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35
Q

How does maturity affect the interest risk of a bond?

A

the longer the bond’s maturity, the greater the bond’s price sensitivity to changes in interest rates.

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36
Q

How do coupons affect the interest risk of a bond?

A

the lower the coupon rate, the greater the bond’s price sensitivity to changes in interest rates.

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37
Q

What is the downgrade risk?

A

We have already seen that rating agency assign credit ratings to issues

38
Q

What is the primary measure of liquidity?

A

We can measure the liquidity risk with the size of the bid-ask spread.

39
Q

What are the different bonds that the U.S. Treasury issue?

A
  1. tbill
  2. treasury note
  3. bond
40
Q

What are TIPS?

A

Treasury Inflation Protection Securities: coupon rate has for reference rate the CPI, or rate of inflation.

41
Q

What are STRIPS?

A

The Treasury Notes and Bonds are not zero-coupon securities. Because of the huge demand, the private sector created zero-coupon notes and bonds
The yield on zero-coupon securities is called spot rate.

42
Q

What are the two types of municipal bonds?

A
  1. Tax-Backed Debt: they are secured by taxes.

2. Revenue Bonds: the revenues are generated by the project itself.

43
Q

What are the four C’s you have to consider when evaluating the credit risk?

A
  1. character
  2. cashflow
  3. collateral
  4. capability
44
Q

What kind of assets could be used for asset back securities?

A
  1. home equity loans
  2. auto loans
  3. credit cards
45
Q

Draw the four different shapes that we could observe for the yield curve?

A
  1. positively
  2. negatively
  3. humped
  4. flat
46
Q

What are the 3 theories that try to explain the shape of the yield curve?

A
  1. Expectations Hypothesis
  2. Liquidity Preference Theory
  3. Segmented-Market Hypothesis
47
Q

What is the expectation hypothesis for the yield curve

A
  1. Expectations for rising short-term rates in the future cause a rising yield curve
  2. Expectations for falling short-term rates in the future will cause a declining yield curve
    Similar explanations account for flat and humped yield curves
48
Q

What is the liquidity preference theory for the yield curve?

A

that the yield curve should generally slope upward and that any other shape should be viewed as a temporary aberration

49
Q

What is the segmented market hypothesis for the yield curve

A

This theory contends that the shape of the yield curve ultimately is a function of the investment policies of major financial institutions

50
Q

What is an intramarket yield spread?

A

The yield spread between two fixed-income securities with the same maturity, within the same sector.

51
Q

Why would investors put some value on convexity?

A

The idea is that in an environment in which the interest rate has the tendency to go down, then investors want more duration because the price of the bond will be more sensitive to change in interest rate, which is good in that direction.

52
Q

What is the distressed security strategy?

A

An hedge fund can specialize in looking for companies that are in trouble; they are in bad shape financially, or close to bankruptcy. Then the hedge fund can buy it for very cheap, restructure it and sell it again to make profit.

53
Q

What is a vulture fund?

A

Some hedge funds or private equity firms are specialized in investing in debts that are very close to default: they are distressed securities funds or vulture funds.

54
Q

What is a forward?

A

A forward contract is an agreement to buy or sell an asset at a certain future time for a certain price.

55
Q

What is the difference between a forward contract and a future contract?

A

A future contract is a type of forward contracts but the differences are that:

  1. Futures contracts are usually traded on an exchange such as the Chicago Board of Trade (CBOT).
  2. Futures contracts are highly standardized.
  3. Performance on future contracts is guaranteed by a clearinghouse.
  4. Traders post margin in order to trade futures contracts.
  5. Futures markets are highly regulated.
56
Q

What is the relationship between futures prices and expected spot price?

A

Futures prices will converge to spot prices by the delivery date.

57
Q

How can you trade commodities?

A
  1. The Chicago Board of Trade (CBOT)
  2. The Chicago Mercantile Exchange (CME)
  3. The New York Mercantile Exchange (NYMEX)
58
Q

What are the different kind of players in the commodities market?

A
  1. Commercials: they are the companies or institutions that are part of the production process, and need or produce these goods.
  2. Large speculators have vast amount of money to invest or speculate in commodities, so they can diversify their risks.
  3. Small speculators are individual traders who try to take advantage of some imbalances.
59
Q

What can be the reasons for change of supply and demand in commodities?

A
  1. Demography
  2. Monetary policy
  3. Demography
  4. Monetary policy
60
Q

Why does the formula for forward or futures doesn’t hold for some type of commodities?

A

Inability of investors and speculators to short the underlying asset.

61
Q

What may be the reasons to invest in commodities?

A

To take advantage of changes in supply and demand

62
Q

What is the trilemma in international economics?

A

The trilemma in international economics states that it is not possible for a country to adopt the three following policies at the same time:
A fixed exchange rate
A free capital flow, so no capital control
An independent monetary policy

63
Q

What could be a source of profit for speculators when countries don’t respect the principles from the trilemma in international economics?

A

Some countries may have a limited reserve, so at a certain point, when those reserves are depleted, the currency depreciates, and often dramatically after such intervention; it is the source of large profits for speculators, like Soros in 1992.

64
Q

What is the carry trade strategy?

A

An investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.

65
Q

What is global macro strategy?

A

based on macroeconomic imbalances, it is very opportunistic and shaped on the specific circumstances.

66
Q

What is the Soros’ reflexivity theory?

A

Stock prices are not a reflection of underlying value: the markets are always in disequilibrium, not corresponding to specific value connected to reality, and these distortions modify the underlying value.

67
Q

What are the main cycles that theory on financial cycles distinguish?

A
  1. The Kondratieff wave (50 to 54 years) that alternate high growth and low growth periods, with peak and trough wars. It could represent also periods of inflation and deflation pressure.
  2. The 18 year cycle (so 3 of them correspond approximately to a Kondratieff cycle), and it occurs often in real estate, and cycles in the financial industry.
68
Q

What is intermarket analysis?

A

a branch of technical analysis that examines the correlations between four major asset classes: stocks, bonds, commodities and currencies.

69
Q

According to Murphy, what is the chronology of the cycles in different markets?

A
  1. The bond market starts the bull market: the economy contracted a lot, so interest rates went down and there is deflationary pressure. The bond market seems to be more attractive.
  2. When the economy contracts further, then the equity market start to be interested to buy stocks of companies because they are cheap.
  3. Then when the economy turns around and takes off, companies buy more resources, so the commodity markets take off.
70
Q

What should be the relationship between capital account and financial account?

A

CA + FA + Capital Account = 0

71
Q

What are the factors that could appreciate or depreciate a currency?

A
  1. Differences in inflation rates
  2. Changes in real interest rates will also affect exchange rates.
  3. Differences in economic performance will play a role.
72
Q

How the difference in inflation between two countries can influence exchange rates?

A

A rise in the prices of domestically produced goods provoke a depreciation of the domestic currency.
The movement in exchange rates should offset the differences in inflation rates: it is the purchasing power parity.

73
Q

How is a change in real interest rates affecting exchange rates?

A

If a country’s real interest rate increases, then its currency will have the tendency to appreciate.

74
Q

How does the difference in economic performance affect exchange rates?

A

Because of great performance of the economy, higher returns attract foreign investors.

75
Q

What are the factors influencing investment environment?

A

the stability of the political system, the legal system, the tax system, the free movement of capital, the policy of monetary authorities.

76
Q

How does investment environment affect a currency?

A

Change in investment climate can trigger financial flows due to high expected returns.

77
Q

How does monetary policy affect a currency?

A

the Federal Reserve has the possibility to adopt an expansionary monetary policy. As a consequence, we would have probably:

  1. Temporarily drop of real interest rate
  2. Upward pressure on domestic price level
78
Q

How does a fiscal policy affect a currency?

A

a country can use a budget or fiscal policy to finance government expenditures.
1. A restrictive fiscal policy means more taxes and less borrowing from the government.

79
Q

What are the three types of exchange rate regime?

A
  1. The flexible, or floating exchange rates regime
  2. The fixed exchange rates system
  3. The pegged exchange rates system
80
Q

What are the advantages and disadvantages of a flexible exchange rate regime?

A
  1. The advantage is that the market prices reflect the economic fundamentals.
  2. The disadvantage for investors is that they have to deal with the volatility of exchange rates.
81
Q

What are the advantages and disadvantages of a fixed exchange rate regime?

A
  1. The advantage for investors is that there is no more exchange rate risks.
  2. The disadvantage is that countries loose some of their independence, but mainly, there is a credibility issue.
82
Q

What is a swap?

A

Swaps are agreements between firm or investors to exchange cash flow in the future following a formula.

83
Q

What is a plain vanilla interest rate swap?

A

In this case, one party, B, agrees to pay a counterparty, A, cash flows corresponding to a fixed interest rate, while party A agrees to pay party B cash flows corresponding to a floating interest rate.

84
Q

What would be a reason for entering into a interest rate swap?

A

The argument is based on the assumption that some companies have a comparative advantage in floating markets (they can have more advantageous deals than other companies) while other companies have comparative advantages in the fixed market.

85
Q

What is a currency swap?

A

It is a swap that makes one party to pay a fixed rate interest payments on a loan in one currency, and the other party to pay also a fixed interest payment on a similar loan but in another currency.

86
Q

What is an Equity Swap?

A

With equity swaps, we exchange equity returns against LIBOR

87
Q

What are swaps allow to do for companies or investors, meaning what are the advantages of it?

A

it allows firms to use comparative advantages.

88
Q

What is a commodity swap?

A

A commodity swap is a contract where two sides of the deal agree to exchange cash flows, which are dependent on the price of an underlying commodity.

89
Q

What is a credit default swap?

A

A particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap’s seller up until the maturity date of a contract.

90
Q

What is a stop loss strategy?

A

the idea is to buy the number of shares of the stock when its price rises above K and sell them as soon as its price falls below K.

91
Q

What is the delta of an option?

A

The delta Δ of an option is the rate of change of the option price with respect to the price of the underlying asset.

92
Q

What is the Gamma of a portfolio of options?

A

The gamma Γ of a portfolio of options on an underlying asset is the rate of change of the portfolio’s delta with respect to the price of the underlying asset.

BUS 350 (7 decks)

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