Mid-sem prac test Flashcards
Prepares us for the mid-sem test
One role of primary financial markets is to facilitate an exchange between:
> Borrowers of funds and sellers of financial assets
Lenders of funds and surplus economic units
Buyers of financial assets and lenders of funds
Deficit economic units and buyers of financial assets
> Deficit economic units and buyers of financial assets
What is the main difference between primary and secondary financial markets is?
> Primary markets are markets where new financial assets are issued while secondary markets deal in existing financial assets
List four example of a derivative type of financial assets
> Futures contracts
Forward contracts
Options
Swaps
What is a ‘derivative’ and what is their point?
Is not a product itself, it’s a contract that derives its value from changes in the price of something else.
(Private investors cannot get near them, but investment banks can.)
Can be used quite a few different ways and can be quite dangerous when in the wrong hands.
> Gambling / Spread bets - directional bets on shares, commodities, property … assets (taking on risk)
> Hedge (reducing risk)
> Arbitrage - taking advantage of short-term anomalies
> Solutions - structured contacts
What is an ‘option’?
Are financial derivatives (versatile securities) sold by an option writer to an option buyer through online or retail brokers.
The investor does not own the underlying asset but makes a bet on the direction of price movement via an agreement with counterparty or exchange.
Offers the buyer, but no the obligation, to buy (call options) or sell (put options) the underlying asset at an agreed-upon price (strike price) during a certain period of time or on a specific date.
(look up how they work)
What is a ‘swap’?
Swap on the interest rates of the principal - does not change hands. Each cash flow comprises one leg of the swap. One cash flow is generally fixed, while the other is variable and based on a benchmark interest rate, floating currency exchange rate or index price.
What are ‘future contracts’?
An exchange-traded futures contract.
Forward - reduce price risk
A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging.
What does ‘financial security’ represent?
Represents a financial asset that can be traded on the secondary market.
List some reasons for governments to intervene in financial markets.
> achieving macroeconomic stabilisation objectives
promoting competitive and efficient financial markets
promotion of financial safety
What is the future value of $200,000 invested for 3 years at an interest rate of 4.5% per annum, compounded monthly?
FV = PV(1+i/m)^m*t
$228,849.57
Which of the following represents the highest effective interest rate?
>3.00% compounded half yearly
>3.90% compounded monthly
>3.85% compounded weekly
((1+i/m)^m)-1 (look for the highest return)
> 3.90% compounded monthly
What does the term structure of interest rates represent?
the variation of interest rates between similar securities differing in maturity
