Investing Flashcards
___ are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver (e.g., Currency; Debt: bonds, loans; Equity: shares; Derivatives: options, futures, forwards).
Financial instruments
A ___ is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the “underlying”. ___ can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets.
Some of the more common ___ include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most ___ are traded over-the-counter (off-exchange) or on an exchange such as the New York Stock Exchange, while most insurance contracts have developed into a separate industry. In the United States, after the financial crisis of 2007-2009, there has been increased pressure to move ___ to trade on exchanges.
___ are one of the three main categories of financial instruments, the other two being stocks (i.e., equities or shares) and debt (i.e., bonds and mortgages).
Derivative (finance)
In finance, a ___ is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivative instrument. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the ___ price at the time the contract is entered into.
Forward contract or simply a forward
In finance, a ___ is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the ___, between parties not known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price the parties agree to buy and sell the asset for is known as the forward price. The specified time in the ___—which is when delivery and payment occur—is known as the delivery date. Because it is a function of an underlying asset, a ___ is a derivative product.
Futures contract (more colloquially, futures)
In finance, an ___ is a contract which gives the buyer (the owner or holder of the ___) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the ___. The strike price may be set by reference to the spot price (market price) of the underlying security or commodity on the day an ___ is taken out, or it may be fixed at a discount or at a premium. The seller has the corresponding obligation to fulfill the transaction – to sell or buy – if the buyer (owner) “exercises” the ___. An ___ that conveys to the owner the right to buy at a specific price is referred to as a call; an ___ that conveys the right of the owner to sell at a specific price is referred to as a put. Both are commonly traded, but the call ___ is more frequently discussed.
Option
A ___, in finance, is an agreement between two counterparties to exchange financial instruments or cashflows or payments for a certain time. The instruments can be almost anything but most ___ involve cash based on a notional principal amount.
The general ___ can also be seen as a series of forward contracts through which two parties exchange financial instruments, resulting in a common series of exchange dates and two streams of instruments, the legs of the ___. The legs can be almost anything but usually one leg involves cash flows based on a notional principal amount that both parties agree to. This principal usually does not change hands during or at the end of the ___; this is contrary to a future, a forward or an option.
Swap
The ___ on a financial instrument is the nominal or face amount that is used to calculate payments made on that instrument. This amount generally does not change and is thus referred to as ___.
Notional amount (or notional principal amount or notional value)
A ___ is (a difference of) one hundredth of a percent or equivalently one ten thousandth. The related concept of a permyriad is one part per ten thousand. Figures are commonly quoted in ___ in finance, especially in fixed income markets.
1 ___ = (a difference of) 1 permyriad or one-hundredth of one percent.
A per ten thousand sign or basis point (often denoted as bp, often pronounced as “bip” or “beep”)
The ___ is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to “beat the market” consistently on a risk-adjusted basis since market prices should only react to new information.
Because the ___ is formulated in terms of risk adjustment, it only makes testable predictions when coupled with a particular model of risk. As a result, research in financial economics since at least the 1990s has focused on market anomalies, that is, deviations from specific models of risk.
The idea that financial market returns are difficult to predict goes back to Bachelier (1900), Mandelbrot (1963), and Samuelson (1965), but is closely associated with Eugene Fama, in part due to his influential 1970 review of the theoretical and empirical research (Fama 1970). The ___ provides the basic logic for modern risk-based theories of asset prices, and frameworks such as consumption-based asset pricing and intermediary asset pricing can be thought of as the combination of a model of risk with the ___.
Efficient-market hypothesis (EMH)
