Topic 1 Flashcards
Short selling is
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).
What is an arbitrageur:
An individual who looks for arbitrage opportunities and usually works for investment banks or investment funds.
The basic function of primary markets is
where financial assets are issued and sellers obtain funds.
The basic function of secondary markets is
where issued assets are exchanged, providing liquidity to their owners.
An arbitrage operation implies obtaining a positive profit at zero risk, and without any cost.
TRUE
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)
FALSE; technical analysis
Investors trade the stocks in primary markets. Firms are financed in the secondary markets.
FALSE
Minor investors only trade in primary markets. Institutional investors only trade in secondary markets.
FALSE
Primary markets are not regulated. Contrarily, secondary markets are regulated.
FALSE
Firms are financed in primary markets. Secondary markets provide liquidity to stocks
TRUE
Generally speaking, financial assets can be classified in three groups:
Equity, debt and derivatives
If you short sell a stock, you are expecting that its price;
will decrease.
The market value of a share is…
…the price of the share in the secondary market.
It is the value investors attach to the firm.
Arbitrage opportunities arise when:
An investor can obtain a riskless benefit without the requirement of an initial investment.
Financial assets are issued in the primary markets
TRUE
An arbitrage opportunity allows investors to obtain risky profits with positive initial cost.
FALSE
According to the level of regulation, the financial markets can be sovereign (or corporate) debt markets, stock markets and derivative markets.
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).
Short selling is a suitable trading strategy when we believe that a stock price is going to increase in the future.
FALSE
An OTC market is an organised market.
FALSE
In the OTC markets, the financial contracts are standardised, liquidity is high, and the level of regulation is high
FALSE
An OTC market is an unregulated market where each operation is unique (no standardised)
TRUE
When pursuing the strategy of short selling:
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.
The level of regulation determines whether a market is a derivatives market, a fixed income market or an equity market.
FALSE
According to the level of regulation, markets can be:
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.
