Financial Markets and Derivatives Quiz

Financial instruments that are used to raise long-term capital, finance company growth, and large-scale investments.

They represent ownership shares in a corporation. Holders receive dividends (not guaranteed) and have prorated ownership in the firm's underlying assets.

An investor who owns equity in a company is considered a residual claimant, meaning they have a claim on the company's assets and profits after all other creditors have been paid.

Financial instruments whose value is dependent on another asset (the underlying asset), such as stocks, interest rates, exchange rates, or commodities.

A future contract is an agreement to buy or sell an asset at a specified price on a future date.

A wheat farmer could use a futures contract to lock in a minimum price for their wheat, protecting them from a potential price drop.

Derivatives are used to hedge risk by mitigating potential losses or for speculation by trying to profit from price movements.

Derivatives include futures, options, swaps, and forwards.

A type of investment strategy where portfolios are designed to match specific levels of risk and return, often using index funds, sector funds, or ETFs.

A strategy that assumes all relevant information is publicly available and priced into the market, making active trading less likely to outperform.

Active investors use sophisticated methods like market timing, security selection, and sector analysis to try to outperform the market.

Investors who adjust their portfolio's risk based on their market predictions.

Investors who carefully select specific undervalued securities or sell overvalued ones to generate returns.

Investors who focus on identifying under- or overvalued sectors or industries as a whole.

Active investing generates returns by outperforming other investors, creating a zero-sum game where some gain at the expense of others.

Active investment strategies require sufficiently strong predictions to offset higher management fees and transaction costs incurred compared to passive strategies.

The value today of a series of future payments, discounted to reflect the time value of money.

An investment that provides a series of regular payments over a set period of time.

The rate at which an investment grows over time.

The amount of money you get back after investing for a certain period, taking into account compound interest.

The time it takes for an investment to double in value given a specific compound interest rate.

The frequency at which interest is calculated and added to the principal.

The return you get on an investment, expressed as a percentage.

The process of calculating the present value of future cash flows.

A contract that locks in a future selling price for a commodity. This helps farmers mitigate risk by guaranteeing a specific selling price regardless of market fluctuations.

A type of risk management strategy that aims to reduce the potential for financial losses. It involves using financial instruments to offset potential losses from unfavorable price movements.

Markets where financial assets are traded, facilitating the exchange of value between buyers and sellers. They can operate on a centralized exchange or over-the-counter (OTC), where transactions happen directly between parties.

Financial assets that derive their value from an underlying asset. They can be used to hedge risks or speculate on future price movements.

A financial market where transactions happen directly between two parties, without the supervision of a centralized exchange.

A standardized financial contract traded on regulated exchanges. It offers participants a transparent and efficient way to manage risk or speculate on price movements.

The ability of financial markets to provide information about the value of assets and projects. This reflects market consensus and expectations, guiding the allocation of resources towards promising projects.

The ability of financial markets to facilitate the movement of resources across time. This allows for the transfer of wealth from savers to borrowers, enabling investment and consumption in different timeframes.

The present value is the value today of a future cash flow, calculated by discounting the future cash flow at a rate reflecting the opportunity cost of capital.

The opportunity cost of capital is the return you could earn by investing in an alternative investment with similar risk.

A risk-free rate of return is the rate of return you expect to receive on an investment that has no risk of default.

The discount rate represents the opportunity cost of capital and may include a risk premium.

The risk premium is an additional return you demand for taking on more risk.

Net Present Value (NPV) is the present value of all future cash flows from a project, discounted at a rate reflecting the opportunity cost of capital, minus the initial investment cost.

A positive NPV means that the project is expected to be profitable and should be accepted.

A negative NPV means that the project is not expected to be profitable and it should be rejected.

A high-level, general-purpose programming language known for its readability and simplicity. It is widely used in various industries, especially data science and machine learning, and is common in finance.

Python is widely used in the industry due to its simple syntax, making it easy to learn for beginners. It also boasts extensive libraries for various applications, including web development, data science, machine learning, and automation.

The formula calculates the end-of-year wealth (F) based on an initial deposit (D), the nominal annual return (r), and the number of times interest is compounded per year (m).

Interest is calculated and added to the principal more than once a year, leading to faster growth of the initial investment compared to simple interest, where interest is only calculated on the principal.

It is a programming concept where actions are executed in a specific order, typically by a computer. They are often used in programs to control the flow of execution.

Python makes it easier to write code that reads like plain English, which can be easier for beginners to understand and learn. This is due to its syntax and features designed for readability.

Python libraries offer pre-written code modules that provide a set of functions and tools for specific tasks. This speeds up development and makes it easier to solve complex problems.

It involves using Python to automate tasks, such as web browsing, data entry, and email sending. Using libraries like Selenium and Requests, you can automate repetitive tasks.