Section 2 Flashcards
What is stock lending?
Stock / securities lending is the market practice whereby securities are temporarily transferred by one party (the lender) to another (the borrower).
The borrower will return the securities to the lender wither at the end of an agreed term or on demand.
The borrower provides the lender with suitable assets as collateral
why may borrowers borrow on a stock lend
- most commonly to cover a short position (e.g. a market maker may have sold a quantity of a security without actually holding any to settle the sale)
- short selling
why may lenders lend on a stock lend
typically lenders are institutions with portfolios of sufficient size to make lending worthwhile, whose securities would otherwise be held passively
how do lenders make money on a stock lend
payments equivalent to income are made to the lender to ensure they are not missing out (dividends, coupons etc)
what is short selling
the activity of borrowing securities in order to sell them in the open market at today’s price, in the expectation that the price will fall in the near future.
The securities will then be brought back at a lower price in order to return them to the security lender.
If this is the case a profit is earned even though the market is falling
what is a contract for difference?
an agreement between two parties to exchange the difference between the opening price and closing price of a contract at the close of the contract multiplied by some underlying specified size of contract
what can CFDs be traded on
any financial asset
what is a swap?
CFDs that are traded OTC
what do CFDs allow for
investors to receive all the benefits of owning equities for example without actually having to own the physical stock in the underlying company
these allow investors to go short or long in a more cost effective and simpler manner than owning the asset itself
what is an equity swap
A CFD where one party agrees to pay another the return on some specified underlying equity over a period of time.
So the difference between the opening equity price and the closing equity price is paid from one party to another
this is usually in exchange for some fixed rate of return
pg. 328
what is an interest rate swap
interest rate swaps involve the net periodic settlement between two parties of a fixed rate of interest and a variable rate of interest (usually based on LIBOR) applied to some notional principal amount of money.
what is a currency swap?
is one where a foreign currency is involved in cash flows
Parties would perhaps do this to hedge/match some underlying fixed interest liability in the respective currencies
currency swaps ay also (although not always) involve the exchange of principal at the outset, which is returned at the end of the agreed term.
what is a inflation swap used for
to transfer inflation risk between counterparties
how are inflation swaps different to fixed vs floating rate swaps
they use a real rate coupon vs floating and also pay a redemption at maturity
