from ch 12 to end - final Flashcards
“Spot” in ForEx
settlement within a couple days
“forward: in ForEx
settlement for some date in the future
“swap” in ForEx
the simultaneous transacting of a spot and a forward transaction
what are the impacts of a weaker $
- higher inflation
- more competitive exports
- foreign currency earnings translate back to more USD
- fewer foreign currency units needed to repay USD debt
- more expensive foreign goods
initial margin
cover future movement in the underlying index
variation margin
covers the actual movement in prices each day and sometimes intraday
futures or forwards
lock in a rate or price to be paid or received in the future for a specified amount of a financial instrument or commodity at a specified date
futures
standardized agreements and traded on an exchange
forwards
traded OTC and are customized
details of forwards and futures
the dollar amount, financial instrument, specified price, and date of delivery
interest rate swaps
an exchange of payments based on a “notional” payment amount
what are interest rate swaps commonly used for?
the exchange of a fixed rate of interest for a floating rate of interest
details of interest rate swaps
- Notional principal value to which the interest rates are applied
- Fixed interest rate
- Formula and type of index used to determine the floating rate
- Frequency of payments
- Maturity date
cross currency swap
similar to an interest rate swap except that:
- there is a periodic exchange of payments in two different currencies
details of a cross-currency swap
- principal value to be exchanged and to which the interest rates are applied
- fixed interest rate, if any
- formula and type of index used to determine the floating rate(s)
- frequency of payments
- maturity date
credit default swap
a contract that protects investors against the risk of default on specific debt securities
how do payments in a CDS work?
- The buyer provides periodic(usually quarterly) payments(premium) to the seller who is providing protection(insurance)
- The seller receives the payments from the buyer but is obligated to reimburse the buyer only if the securities specified in the swap agreement default
total return swaps
allows investors to potentially buy large stakes that couldn’t be purchased directly in the equity market
options contracts
Gives you the right but not the obligation to buy/sell in the future at a specified price
details of an options contract
- Specifies the type of option - right to buy or sell
- strike price, aka, the exercise price
- formula and type of index used to determine the floating rate
- premium or cost
- date or dates that the options can be exercised
- maturity date
Call option
right to buy underlying financial instrument at exercise(strike) price within a specified period of time
in the money for a call option
MP > exercise/strike price
at the money
MP = exercise/strike price
out of the money for a call option
MP < exercise/strike price
put option
right to sell underlying financial instrument at exercise(strike) price within a specified period of time
in the money for a put option
MP < exercise price
out of the money for a put option
MP > exercise price
London Interbank Offered Rate (LIBOR)
- Was the most widely used floating rate index
- Prior to the great recession, this rate reflected an active market for the rate at which banks would borrow from/lend to one another
banks
- facilitate the flow of funds from savers to borrowers
- Deposit accounts for savers
- Loans for borrowers
Net Interest Margin
difference between the interest income generated on assets(loans), relative to the amount paid on liabilities(deposits) is the largest income generator for most banks
deposit “beta”
Lag in any increase in rates to depositors and increase the rate on loans asap
how are banks funded?
- deposit accounts
- borrowed (wholesale) funds
- long-term sources of funds
what is generally the largest source of funding for banks?
deposit accounts
demand deposit (checking account0
requires small minimum balance pays no interest
savings deposit
- higher interest than a checking account
- does not permit check writing
- little/no required minimum
certificates of deposit (CDs)
require a minimum amount of funds to be deposited for a specified period
money market deposit account
- Differs from conventional time deposits in that they do not specify a maturity
- Provide limited check-writing and number of withdrawals per month
federal funds purchased
depository institutions borrow short-term funds from each other at or around the federal funds rate
repurchase agreement
One party sells securities to another with an agreement to repurchase the securities at a specified date and price
eurodollar borrowings
Short-term borrowings of U.S. dollars from foreign banks or foreign branches of U.S. banks outside the United States
Primary credit rate
a lower interest rate for best-capitalized institutions
Secondary credit rate
a higher interest rate for less well capitalized institutions
federal funds sold
depository institutions to lend short-term funds to each other at or around the federal funds rate
reverse repurchase agreement
bank lends funds and takes securities as collateral from another institution with an agreement to return the securities and receive the cash back at a specified date and price
LFI rating system is composed of the following three components:
1) Capital Planning and Positions
2) Liquidity Risk Management and Positions
3) Governance and Controls
CAMELS components
- capital adequacy
- asset quality
- management
- earnings
- liquidity
- sensitivity to market risk
basics of a savings and loans institution
- A deposit institution specializing in mortgage lending
- Typically, <$1B in assets and serving local communities
- Classified as either stock owned or mutual (owned by depositors)
basics of finance companies
- Specialty providers of short- and medium-term credit
- May be independently owned or a subsidiary within a larger organization (e.g., Ford providing auto loans)
- > $1 Trillion in assets across Finance Companies
consumer financial protection bureau
responsible for regulating various consumer finance products and services that may be offered by finance companies and other institutions
credit union basics
- A special form of mutual depository institution owned by the depositors
- Offer similar accounts and services as banks, but are nonprofit
- Lower loan rates and higher deposit rates
mutual fund
buys investments with money pooled from multiple investors and invests those funds in a wide variety of assets
securities firms and broker-dealer basics
- Act as an intermediary between investors and issuers in equity offerings
- Provide advisory services to corporations and governments
- Provide liquidity to markets through market-making activities
- Sell securities to their clients and perform analysis of companies
- Perform proprietary trading activities
Financial Industry Regulatory Agency
a non-profit agency that overseas securities firms
