Lectures

Question 1

Real assets

Answer 1

Assets used to produce goods and services

Question 2

Financial assets

Answer 2

Are claims to the income generated by real assets
Determine how the national pie is split among the investors
Contribute to the productive capacity if the economy indirectly
Allow for separation of ownership and control of the firm
And facilitate the transfer of funds to enterprises with attractive investment opportunities

Question 3

Sectors of the financial environment

Answer 3

Households are net savers
Businesses are net borrowers
Governments can be both

Question 4

Derivative securities

Answer 4

The diverse risk and tax preferences of households
Businesses offer uniform types of securities
-> industry that creates complex securities out of primitive ones

Question 5

Active and passive management

Answer 5

Active: finding undervalued securities, timing the market
Passive: holding an efficient portfolio

Question 6

Proprietorships and partnerships

Answer 6

\+:
Ease of formation
Subject to few regulations
No corporate income taxes
-:
Difficult to raise capital
Unlimited liability
Limited life

Question 7

Corporations

Answer 7

\+:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
-:
Double taxation
Cost of set-up and report filing

Question 8

Conflict between managers and stockholders

Answer 8

Managers act in their interest
BUT:
Managerial compensation packages
Direct intervention by stockholders
Threat of firing
Threat of takeover

Question 9

Conflict between stockholders and bondholders

Answer 9

Stockholders prefer riskier projects (upside), while bondholders prefer limited risk as they receive only fixed payment
Bondholders are concerned about additional debt -> covenants

Question 10

Maximum margin

Answer 10

50%

You can borrow up to 50% of the stock value, set by the Fed

Question 11

Maintenance margin

Answer 11

Minimum amount of equityin trading before additional funds must be put into account

Question 12

Margin call

Answer 12

Notification from broker you must put up additional funds

Question 13

A derivative

Answer 13

Is an instrument whose value depends on the values of other underlying variables
Futures
Forwards
Swaps
Options

Question 14

Futures contract

Answer 14

An agreement to buy or sell an asset at a certain time in the future for a certain price

Traditionally traded in open outcry system, now electronic trading

Question 15

Spot contract

Answer 15

An agreement to buy or sell immediately or within a very short period of time at a specified price

Question 16

Exchanges trading futures

Answer 16

Chicago board of trade
Chicago mercantile exchange
Euronext
Eurex
BM&F brasil

Question 17

Futures price

Answer 17

Is the price at which you agree to buy or sell

It is determined by supply and demand (as in spot contract)

Question 18

Exchanges trading options

Answer 18

Chicago board options exchange
Philadelphia stock exchange
International securities exchange
Eurex

Question 19

Hedgers

Answer 19

Use the market to reduce their risk exposure to market variables such as exchange rate, a commodity price or an interest rate

Question 20

Speculators

Answer 20

Use the market to take a position on the future direction of a market variable

Question 21

Arbitrageurs

Answer 21

Attempt to lock in riskless profit by entering into transactions in two or more markets

Question 22

Stock split n-for-m

Answer 22

Suppose you own G options with a strike of K
Then
The strike is reduced to mK/n
Number of options is increased to nG/m

Question 23

American vs European option

Answer 23

American is worth at least as much as European
Usually some chance of early exercise
Exception: american call on a non-dividend paying stock - should never be exercised early

Question 24

Protective put portfolio

Answer 24

Stock+put

Payoff is St or X

Question 25

Put-call parity

Answer 25

Protective put: S0+P= call+t-bill: C+X/(1+r)

Question 26

Costs of trading

Answer 26

commission: fee paid to the broker for the transaction
spread: cost of trading with dealer (ask - bid)

Question 27

short-selling bans

Answer 27

reaction to 07-09 by imposing bans
Beber & Pagano (2013):
detrimental to liquidity
slowed price discovery, especially in bear markets
failed to support prices, except possibly for US financial stocks

Question 28

short sales

Answer 28

illegal to sell the stock you do not own

you can borrow share certificates from sb who owns the stock