Topic 1

Question 1

Short selling is

Answer 1

To borrow a financial asset in order to sell it;
the objective is to repurchase it later (to give it back to the original owner/lender) at a lower price (hopefully).

Question 2

What is an arbitrageur:

Answer 2

An individual who looks for arbitrage opportunities and usually works for investment banks or investment funds.

Question 3

The basic function of primary markets is

Answer 3

where financial assets are issued and sellers obtain funds.

Question 4

The basic function of secondary markets is

Answer 4

where issued assets are exchanged, providing liquidity to their owners.

Question 5

An arbitrage operation implies obtaining a positive profit at zero risk, and without any cost.

Answer 5

TRUE

Question 6

A financial analysis is an agent that evaluates shares that are either undervalued or overvalues using as a unique tool historical prices of those shares (and specially focusing on graphs that are formed with those historical prices)

Answer 6

FALSE; technical analysis

Question 7

Investors trade the stocks in primary markets. Firms are financed in the secondary markets.

Answer 7

FALSE

Question 8

Minor investors only trade in primary markets. Institutional investors only trade in secondary markets.

Answer 8

FALSE

Question 9

Primary markets are not regulated. Contrarily, secondary markets are regulated.

Answer 9

FALSE

Question 10

Firms are financed in primary markets. Secondary markets provide liquidity to stocks

Answer 10

TRUE

Question 11

Generally speaking, financial assets can be classified in three groups:

Answer 11

Equity, debt and derivatives

Question 12

If you short sell a stock, you are expecting that its price;

Answer 12

will decrease.

Question 13

The market value of a share is…

Answer 13

…the price of the share in the secondary market.
It is the value investors attach to the firm.

Question 14

Arbitrage opportunities arise when:

Answer 14

An investor can obtain a riskless benefit without the requirement of an initial investment.

Question 15

Financial assets are issued in the primary markets

Answer 15

TRUE

Question 16

An arbitrage opportunity allows investors to obtain risky profits with positive initial cost.

Answer 16

FALSE

Question 17

According to the level of regulation, the financial markets can be sovereign (or corporate) debt markets, stock markets and derivative markets.

Answer 17

FALSE;

They can be either organised (where operations are regulated and liquidity tends to be high) or unregulated and OTC (over-the-counter) (each operation is unique).

Question 18

Short selling is a suitable trading strategy when we believe that a stock price is going to increase in the future.

Answer 18

FALSE

Question 19

An OTC market is an organised market.

Answer 19

FALSE

Question 20

In the OTC markets, the financial contracts are standardised, liquidity is high, and the level of regulation is high

Answer 20

FALSE

Question 21

An OTC market is an unregulated market where each operation is unique (no standardised)

Answer 21

TRUE

Question 22

When pursuing the strategy of short selling:

Answer 22

an investors sells a stock that they fo not own, so that they have to buy back the share at the new traded market price when the position is closed.

Question 23

The level of regulation determines whether a market is a derivatives market, a fixed income market or an equity market.

Answer 23

FALSE

Question 24

According to the level of regulation, markets can be:

Answer 24

Organised markets: regulated markets where operations are standardised and liquidity tends to be high.

Unregulated markets and OTC (over-the-counter): each operation is unique.