General Derivatives Flashcards
derivative
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets.
over the counter market
sold through decentralized trading markets, less fees and regulations. Brokers deal with each other and means less transparency. AKA unlisted stock. Usually smaller companies do this.
In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as “unlisted stock”, these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.
short selling
Borrowing an asset and promising to return it in a different time. Immediately sell the object and get current market price. Make money if the value of the asset decreases.
short position
make money if the price decreases
long position
make money if the price increase
lease rate for a short sell
The amount of money paid over a specified time period for the rental of an asset, such as real property or an automobile. The lease rate that the lender earns from allowing someone else to use his property compensates him for not being able to put that property to another use during the term of the lease.
maintenance margin
Maintenance margin is the minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account. Keep in mind that this level is a minimum, and many brokerages have higher maintenance requirements of 30-40%.
margin
Borrowed money that is used to purchase securities. This practice is referred to as “buying on margin”.
margin call
A broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when your account value depresses to a value calculated by the broker’s particular formula.
mark to market
A measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution’s or company’s current financial situation.
Check the current value of an asset based on market conditions.
arbitrage
The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.
risk averse
Losing an amount of money is worse than gaining the same amount of money.
A description of an investor who, when faced with two investments with a similar expected return (but different risks), will prefer the one with the lower risk.
