LM 1: Market Organization & Structure Flashcards
What does the financial system help transfer?
transfer assets, real assets, & financial risks between entities, locations, & time.
What are the 6 purposes people use the financial system? SBRMEI
- saving
- borrowing
- raising equity capital
- managing risks
- exchanging assets
- information-motivated trading
What are the 3 main functions of the financial system? ADC
- Achieve financial purposes for people that use the system
- determine rates of return that allows equilibrium between savers and borrowers
- capital allocation efficiency (allocate capital to best uses.)
What is spot market trades?
trades for immediate delivery
What is information motivated trading?
managers who believe they have knowledge that will allow them to buy low and sell high
What is discover rates of return that equate aggregate savings with aggregated borrowings?
determining expected rate of return between those who demand funds from borrowers and equity issues, and those who supply funds through savings
What is capital allocation efficiency?
economy must use its limited supply of money to allocate money to the most productive uses
What market do governments and companies use to raise funds?
primary capital markets
What are 5 classifications of assets? SCCCR
- securities
- currencies
- contracts
- commodities
- real assets
What is the difference between spot & forward markets?
spot markets transactions are settled immediately, forward market transactions are settled over longer periods
What is the difference between primary markets & secondary markets?
primary markets investors purchase securities directly from issuers, secondary markets investors trade securities with other investors
What is the difference between capital and money markets?
money market are debt securities with durations less than 1 year, capital market securities have longer maturities.
What are the 3 broad categories of securities? FEP
- fixed income
- equities
- pooled funds
What is the difference between public security and private security?
public traded on organized exchange, private sold directly by issuer to investors often only to qualified investors
What are the 3 types of equities? CPW
- common stock
- preferred shares
- warrants
What are pooled investments?
many peoples money put together to buy assets
What are 4 types of pooled investments? MEAH
- mutual funds
- exchange traded funds
- asset backed securities
- hedge funds
What are 4 types of contracts? FFSO
- forward contracts
- futures contracts
- swap contracts
- options contracts
What is counterparty risk?
risk that the other party will fail to deliver.
What is the difference between a forward contract and a futures contract?
forward contract is a private and customizable agreement that settles at the end of the agreement and is traded OTC.
futures contract has standardized terms and is traded on an exchange, where prices are settled on a daily basis until the end of the contract.
What is initial margin?
the initial deposit you must make per contract.
What is the maintenance margin?
the lowest amount of value a contract can fall too before you’re required to deposit more.
What must you do if the value of contracts falls below the maintenance margin?
you must deposit more money until the account value reaches the initial margin
What are swaps?
agreement to exchange rates one fixed rate for a floating rate from another party