Week 5 Flashcards
What kind of investment is a student loan like?
It’s like the student is issuing a bond, which will pay back at a set rate to the investor over time
What would an equity approach to student loans look like?
It might involve a contract whereby the investor take a percentage of the student’s income after graduation.
In what sense is student loan in a bubble?
Because of the hype or mania to get elite status, and because it may not be the best investment anymore, as in some cases companies are training non-college-educated people to give the skills needed directly, which lowers expected income for college graduates
What is a forward contract?
Contract to deliver at a future date at a specified price
What is hedging?
Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset.
What is the daily settlement?
In the futures market, every day a ‘settle’ price is defined, which is the last trade of the previous day (unless the settlement committee determines a different price). The trader’s margin account is then either credited or debited with the amount: change-in-settle price x contract amount.
What is contango?
Contango is a when the spot price of a commodity is lower than the futures price.
What is backwardation?
Backwardation is when the spot price of a commodity is higher than the futures price
What is a margin call?
A margin call occurs when the value of an investor’s margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with borrowed money (typically a combination of the investor’s own money and money borrowed from the investor’s broker). A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value, known as the maintenance margin.
What is the maintenance margin?
Maintenance margin is the minimum equity an investor must hold in the margin account after the purchase has been made; it is currently set at 25% of the total value of the securities in a margin account as per Financial Industry Regulatory Authority (FINRA) requirements.
What is an arbitrageur?
Arbitrageurs are investors who exploit market inefficiencies of any kind, but mainly benefit from price discrepancy. They are necessary to ensure that inefficiencies between markets are ironed out or remain at a minimum.
In price discrepancy scenarios, the arbitrageur might buy the issue on one exchange and short sell it on the second exchange, where the price is higher.
What is the primary purpose of purchasing futures if they are rarely delivered?
To protect against price fluctuations
What is an option?
An option is a contract. Unlike a future, you have the option to buy or sell; that is, there’s no obligation to exercise.
What is a call or a put option?
A call option is a right to buy at your discretion; a put option is a right to sell.
What are the terms of an option contract?
Exercise date, or strike date; exercise, or strike price; definition and amount of underlying shares
