Market Organization and Structure

Question 1

Spot Market

Answer 1

• immediate delivery for exchanging assets

Question 2

A financial asset is

Answer 2

• a claim on a real asset and future income generated by those assets
  ie stocks, bonds

Question 3

Forward market

Answer 3

• contracts that call for the future delivery of assets and include forwards, futures, and options

Question 4

Money market

Answer 4

• securities with maturities of one year or less

Question 5

Currencies trade in which markets

Answer 5

FX
spot
forward
or futures markets

Question 6

Commodities trade in which markets

Answer 6

spot
forward
and futures markets

Question 7

Forward contracts

Answer 7

• agreement to trade the underlying asset at a future date at a prespecified price
• between private parties
• used to hedge risk
• ex. lock in a set price for selling crops

Question 8

Futures contracts

Answer 8

• a standardized forward contract
• higher liquidity
• trade on an exchange
• a clearing house guarantees the performance of all traders

Question 9

Swap contract

Answer 9

• agreement to swap payments of one asset for the other
• interest rate swap: floating rt swap for fixed for a specified per
• currency swap: currencies swap at a fixed point
• equity swap: returns on one investment are swapped for other

Question 10

Credit default swap

Answer 10

• insurance to bondholders

- they make payments to a bondholder if a borrower defaults on its bonds

Question 11

Brokers

Answer 11

• search for sellers and buyers (counterparties)

- do not trade with clients directly

Question 12

Dealers

Answer 12

• trade directly with their clients by taking the opposite side of their trades
• provide liquidity by buying or selling from their own inventory
• profit off the spread

Question 13

Securitization definition

Answer 13

• the process of buying assets, placing them in a pool, and then selling assets that represent ownership of the pool
  ie a mortgage-backed security
• can be done with car loans, credit cards, etc

Question 14

Benefits of securitization

Answer 14

• improves liquidity in the mortgage markets
• reduces cost of borrowing for homeowners
• diversification of portfolio
• losses from default and early prepayments are more predictable

Question 15

Leverage ratio equation

Answer 15

= value of the position / value of the equity investment in it

= A / E

the denominator is what the investor puts in

Question 16

Initial margin requirement def

Answer 16

• the minimum percentage of the purchase price that must be paid by the trader (trader’s equity)

Question 17

Maintenance margin requirement def

Answer 17

• minimum amount of equity to be maintained in the positions

Question 18

Margin call def

Answer 18

• occurs when equity falls below the maintenance margin requirement

Question 19

Margin call formula

Answer 19

Margin call price =

P * ((1 - initial margin) / (1 - maintance margin))

Question 20

Call money rate

Answer 20

• the interest paid on a margin loan

Question 21

Total return of equity investment in levered position formula

Answer 21

Proceeds from sale
- borrowed funds
- margin interest
\+ dividends received
- sales commission 
= remaining equity 

% change: remaining equity - initial investment / initial investment

Question 22

Buy at the ____ price and sell at the ____ price

Answer 22

Buy at BID

Sell at ASK

Question 23

Call markets v continuous markets

Answer 23

• call markets: trading takes place only at specific times of the day, bid-ask quotes are used to arrive at one negotiated price, highly liquid when in session, illiquid with not.
• continuous markets: trades occur at any time the market is open, quote-driven or auction-driven

Question 24

4 characteristics of a well-functioning financial system

Answer 24

• “complete markets”
• liquid market with low cost of trading
• timely and accurate financial disclosures
• prices that reflect fundamental values (informationally efficient)