Financial Markets & Instruments || ✨Theory✨ pt. 2 only

option contract

allows the holder an option to buy or sell an underlying instrument at a specified price at or before the specified date in the future

call option

gives the buyer the option to buy shares at the strike price

put option

gives the buyer the option to sell shares at the strike price

contract for difference

allow people to speculate on price changes for an underlying asset, such as a common stock or an index

commodities

include products such as precious metals, energy products, industrial metals, agricultural products, carbon credits

real assets

include tangible products such as real estate, airplanes, machinery, lumber stands

financial intermediaries

services and products that allow their clients to solve financial problems more efficiently that they would by themselves

investment banks

provide advice to their mostly corporate clients and help them arrange transactions such as initial and seasoned securities offerings

note

a legal document that serves as an IOU from a borrower to a creditor or to an investor

treasury note

a debt security backed by the full faith and credit of the United States government with a maturity between one and 10 years

municipal note

a short-term debt security issued by a local or state government, has a maturity from three months to three years

mortgage-backed note

a derivative whose value is derived from unpaid mortgages

structured note

a debt security issued by financial institutions, which return is based on equity indexes, a single equity, a basket of equities, interest rates, commodities or foreign currencies

brokers

agents who fill orders for their clients

exchanges

provide places where traders can meet to arrange their trades

alternative trading systems

also known as electronic communications networks or multilateral trading facilities are trading venues that function like exchanges but that do not excercise regulatory authority over their subscribers

dealers

fill their clients’ orders by trading with them

securitization

the process of buying assets, placing them in a pool, and then selling securities that represent ownership

depository institutions

include commercial banks, savings and loan banks, credit unions and similar institutions that raise funds from depositors and other investors and lend it to borrowers

insurance companies

companies that help people and companies offset risks that concern them

insurance contract

transfers risk from those who buy the contract to those who sell them

credit deafult swap

is also an insurance contract, but historically they have not been subject to the same reserve requirements that most governments apply to more traditional insurance contracts

arbitrageurs

trade when they can identify opportunities to buy and sell identical or essentially similar instruments at different prices in different markets

clearinghouses

arrange or final settelment for trades, guarantee futures contract performance and in other markets may act only as escrow agents

long position

people have that position when they own assets or contracts

short position

people have that position when they have sold assets that they do not own or when they write and sell contracts

levraged position

in many markets traders can buy securities by borrowing some of the purchase price

the leverage ratio

the ratio of the value of the position to the value of the equity investment in it

order

consists of instructions to a broker or brokerage firm to purchase or sell a security on an investor's behalf

well-functioning financial system

a system in which investors can easily move money from the prestent to the future at a fair rate of return, borrowers can obtain funds that they need, hedgers can trade away or offset the risk that concerns them and traders can easily trade currencies for other currencies or commodities that they need

index

represents a given security market, market segment or asset class, often constructed as portfolios of marketable securities

price return index

reflects only the prices of the constituent securities within the index

total return index

reflects not only the prices of the constituent securities but also the reinvestment of all income received since inception

index weighting

the weighting decision determines how much of each security to include in the index and has a substantial impact on an index’s value

price weighting

the simplest method to weight an index, the weight on each constituent security is determined by dividing its price by the sum of all the prices of the constituent securities

equal weighting

assigns an equal weight to each constituent security at inception

market-capitalization weighting

the weight on each constituent security is determined by dividing its market capitalization by the total market capitalization of all the securities in the index

fundemental weighting

weighting attempts to address the disadvantages of market-capitalization weighting by using measures of a company’s size that are independent of its security price to determine the weight on each constituent security

rebalancing

refers to adjusting the weights of the constituent securities in the index

reconstitution

is the process of changing the constituent securities in an index, it is similar to a portfolio manager deciding to change the securities in his or her portfolio