Investment Vehicles Flashcards
A “derivative” security is
A security that has its value derived from the price movements of an underlying security or commodity
Options are derivatives based on
A security’s price movement
Futures are derivatives based on
Commodity, currency and index price movement
Forward contracts are
Custom contracts for delivery of an underlying asset at a fixed price on a future date that are negotiated between buyer and seller.
Forward contracts are not subject to federal regulation.
Call contract allows the holder to?
Buy a security from the writer at a fixed price at any time during the life of the option
Put contract allows the holder to?
Sell a security to the writer at a fixed price at any time during the life of the option
The writer of a put contract is
Obligated to buy the securities at the fixed price
The writer of a call contract is
Obligated to deliver the securities to the holder at the fixed price
Strike price
The fixed price specified in the contract at which the holder can either “call away” the security or “put” the security is called the strike price or exercise price
The life of an options contract is specified by
Expiration date
First option style which can be exercised at any time is an
American style option
Option that can be exercised only at expiration, not before is an
“European style” option
A speculative option strategy
Attempts to profit if the market price of the underlying security rises or falls
Strategies that profit from falling markets are
Bear strategies
Strategies that profit from a rising market are
Bull strategies
What speculative option strategies are “Bullish”
Long Call
Short Put
What speculative option strategies are “Bearish”
Short Call
Long Put
Max gain and loss of a long call is
Max Gain = Unlimited
Max Loss = Premium paid
Max gain and loss of a short naked call is
Max Gain = Premium received
Max Loss = Unlimited
Max gain and loss of a long put is
Maximum Gain = Strike price - Premium (Occurs when stock price falls to zero)
Maximum Loss = Premium paid
Max gain and loss of a short naked put is
Maximum Gain = Premium
Maximum Loss = Strike price - Premium (Occurs when stock price falls to zero)
Long put stops what
Downside loss on long stock
Long call stops what
Upside loss on a short stock
When are Income strategies suitable
Only in a stable market
What establishes a collar position
Long out of the money put and a Short out of the money call
What is the largest Futures exchange in the U.S.
Chicago Mercantile Exchange (CME)
Max potential gain on a Long Stock/Long Put position is
Unlimited
A narrow based index option is either ?? or ??
Industry specific or country specific
What style are equity options exercised
American style
What style are index options exercised
European style
The purchaser of a futures contract has the
Obligation to buy the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading.
The seller of a futures contract has the
Obligation to deliver the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading
Forward contracts are issued
Over the counter (OTC)
Swaps are
Custom contracts that transfer interest rate risk from one party to another in return for a fee
Tax preference items subject to AMT (Alternative Minimum Tax) are
Memory Tool: D E E M
- Depreciation in excess of straight line (accelerated depreciation)
- Excess intangible drill cost
- Excess of percentage depletion
- Municipal bonds that are for “Private Purpose”
What are the 3 ways to measure equity linked annuities
Memory Tool: Annual High Point
Annual Reset - Return of each year added to annuity
High Water Mark - Get the highest point index reached during time
Point to Point - Compares starting point to ending point
Types of Life Insurance Policies
Term Life
Whole Life
Universal Life
Variable Life
Term Life Insurance characteristics
No investment feature
Covers you for a specified amount of time
Whole Life Insurance characteristics
Permanent protection - Premium does not change
Cash value - Invested in the General Account earning interest
Universal Life Insurance characteristics
Flexible - Changes are allowed
Permanent - But you can pay more than the minimum to build cash value
Variable Life Insurance characteristics
Whole life policy
Difference is that the excess is invested in separate account
Invested in the market, which adds risk
Characteristics of a corporation
- Continuity of life
- Free transferability of shares
- Limited liability
- Centralization of management
How many of the characteristics of a corporation are needed to be consider a corporation
3 of the 4
How many of the characteristics of a corporation are needed to be consider a partnership
2 of the 4
Normally Centralization of Management and Limited Liability
Types of Real Estate LP’s
- Existing housing
- New construction
- Government assisted housing
- Raw land (cannot depreciate raw land)
Types of Oil and Gas participation Units
- Income Well (Stripper well)
- Developmental Well (Step out well)
- Exploratory Well (Wildcat wells)
Non-deductible items in AMT
- Personal Exemptions
- Standard deductions
- State and local tax deductions
- Miscellaneous deductions (i.e. tax prep fees)
