The Environment of AI

Question 1

What are the 5 financial markets that AI trade in?

Answer 1

1. Primary Markets: IPO (exit strategy for AI);
2. Secondary Market: Consist of both Physical exchanges and OTC markets
3. Third market, non members trade exchange listed securities;
4. Fourth Market: Direct exchange of large volume of securities facilitated by ECN (Electronic Communication Network)
5. Private Markets do not use exchange trading or OTC trading

Question 2

Who are the buy side institutions in AI?

Answer 2

1. Plan sponsor
2. Foundation (charitable purpose)
3. Endowment (Universities)
4. Family office,
5. Sovereign/ non-federal wealth funds
6. Alternative Investment Funds, include hedge funds, funds of funds, private equity funds, and commodity trading advisers
7. Separately Managed Account (SMA),
8. Single investor (HNI)

Question 3

Who are the sell side (selling Investment Research and provide transaction execution services) institutions in AI?

Answer 3

Large Dealer Banks, for example Goldman Sachs, Barclays, JP Morgan

Retail brokers: They act as the middleman between buyers and securities sellers.

Question 4

What does the buy-side do? What does the sell - side do?

Answer 4

Buy side focuses on buying the appropriate securities for their investment portfolio.

Sell side focuses on selling investment research and provide transaction execution services.

Question 5

Who are the outside service providers in AI?

Answer 5

• Prime Brokers (similar services as large dealer banks (GS, PW, MSDW)
• Auditors/ accountants
• Attorneys
• Fund Administrators
• Consultants
• Depositories/ Custodians
• Commercial Banks

Question 6

What is a Plan Sponsor?

Answer 6

An organization, such as a corporation, government entity, or nonprofit organzation, that manages the plan assets for a healthcare or retirement plan for qualified members.

Manages plan assets

Question 7

What is a foundation?

Answer 7

A nonprofit fund established for charitable purposes to support specific types of activities.

Question 8

What is special about foundations and endowments?

Answer 8

They have

• long investment horizons,
• high-risk tolerance, and,
• aside from their planned spending needs, little need for liquidity.

Time, risk and liquidity

Question 9

What is a family office, private welath institution?

Answer 9

They manage the wealth of high net worth families.

They are probibited from being investment advisers to the public.

Question 10

What are Soverign wealth funds?

Answer 10

Pool of funds owned by government and typically managed by the country’s central bank.

Opposite of Soverign debt

Question 11

What are alternative investment funds?

Answer 11

They inlcude hedge funds, funds of funds, private equity funds, and commodity trading advisers

Question 12

What is a separately managed account (SMA)?

Answer 12

Portfolio that is owned by a single investor and managed acording to that investor’s preference by an investment adviser.

Question 13

What is the difference between commercial banking and investment baning?

Answer 13

• Investment banks expedite the purchase and sales of bonds, stocks and other investments and aid companies in making initial public offerings (IPOs).
• Commercial banks act as managers for deposit accounts for businesses and individuals, although they are primarily focused on business accounts, and they make public loans through deposit money that they hold.

Question 14

What is retail banking?

Answer 14

Retail banking or Consumer Banking is the provision of services by a bank to individual consumers, rather than to companies, corporations or other banks. Services offered include savings and transactional accounts, mortgages, personal loans, debit cards, and credit cards.

Question 15

What is proprietary trading

Answer 15

Trade for their own account, know as house account

Question 16

What is special about Cayman Islands, Bermuda and British Virgin Islands?

Answer 16

1. Lack of hedge fund regulation;
2. There is no income tax at the Coporate level.

Question 17

What are primary markets?

Answer 17

They relae to the sale of first time issues (e.g IPO) and additional issues of existing securites

Question 18

What are secondary markets?

Why are they important?

Answer 18

Where seurities trade after their initial issuance.

They provide liquidity and price/ value information.

Question 19

What is OTC market?

Answer 19

Different from physical market, OTC uses telpehone and computer to make trades.

Question 20

What is market maker?

Answer 20

Refers to dealers who determine the bid-ask spread activley participating in the secondary market and posting buy and sell prices.

Question 21

What are third markets?

Answer 21

Non member investment firms make markets in and trade exchange listed securities without going through the exchange.

Question 22

What is the fourth market?

Answer 22

Electronic exchange of securities without the services of a broker or an intermediary. They are facilitated by an Electronic Communication network (ECN)

Question 23

What are private markets?

Answer 23

Different from the other 4. They do not involve exchange trading or OTC trading.

Alternative assets are traded here.

Question 24

What is systemic risk?

Answer 24

Refers to the potential financial collapse of a large financial institution, a major market participant, or the entire financial market.

POTENTIAL FOR FINANCIAL COLLAPSE

Question 25

What is a Prime Broker?

Answer 25

They execute trades on behalf of the AI manager, lend securities to sell short, and provide financing

Question 26

Churning

Answer 26

Illegal excessive trading performed by iM in order to earn excess FEES

Question 27

Soft dollar arrangement

Answer 27

Refers to investment research, products and services, and cash credits given to the investment manager by broker in return for client business.

Investment managers have a duty to use client brokerage to benefit client.

The concern is that the IM may use a more expensive broker to the benefit of the firm at thee expense of the investor.

Question 28

Regulation T Margin Rule

Answer 28

Federal Reserve rule concerning leverage.

You may borrow up to 50% of the purchase price of securities that can be purchased on margin. This is known as the initial margin.

Question 29

3 categories, tax is based on

Answer 29

1. Income (indivdual wage income, rental income, corporate earnings, dividends, interest and capital gains)
2. Wealth (Real estate taxes, Wealth tax (Columbia and India), Estate taxes (transfer to heirs)
3. Transaction

Question 30

What are OTC Exchanges?

Answer 30

An over-the-counter (OTC) market and an exchange market are the two basic ways of organizing financial markets.

OTC markets utilize and telpehone and computers to make trades. They typically involve much larger trade than traditional exchanges.

They are less transparent.

Question 31

What are the 2 ways a secondary market is structured?

Explain each

Answer 31

Call Markets
A call market is a market where a stock can only trade at a specific time.

Continuous Markets
A continuous market can occur at any time as long as the market is open. Buyers and sellers are matched up on a continuous basis and the price is determined through an auction or through bid-ask quotes.

Read more: Exchange Market Structure - CFA Level 1 | Investopedia http://www.investopedia.com/exam-guide/cfa-level-1/securities-markets/exchange-market-structure.asp#ixzz3qYyo8eS7
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Question 32

What is the difference between foundations and endowments?

Answer 32

The primary difference between foundations and endowments is that the foundations are established with a pot of money and no further funds are added to it, whereas endowments can fundraise on an ongoing basis.

Foundations are usually established for charitable purposes by an individual or a family, whereas endowments are public charities (i.e. many donors) for example for purpose of education.