Financial Markets and Derivatives Quiz
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Questions and Answers

What does a futures contract allow a farmer to do?

  • Lock in a selling price for their crop today (correct)
  • Avoid selling their crop
  • Buy crops at a fixed price in 6 months
  • Sell at the market price in 6 months

    • A farmer using a futures contract will always benefit from market price increases.

    False

    What is the primary function of financial markets?

    To facilitate the trading of financial assets

    Financial markets allow for the separation of ownership and __________.

    <p>management</p> Signup and view all the answers

    Which of the following is NOT a function of financial markets?

    <p>Direct management of companies</p> Signup and view all the answers

    Match the types of financial assets with their main mode(s) of trading:

    <p>Equities = Exchanges, Electronic Trading Systems, OTC Fixed Income Securities = Dealer Markets, Exchanges Derivatives = Over-the-Counter, Exchanges</p> Signup and view all the answers

    Derivatives are only traded on exchanges.

    <p>False</p> Signup and view all the answers

    Financial markets facilitate __________ across the economy.

    <p>risk allocation</p> Signup and view all the answers

    Which of the following instruments are considered capital market instruments?

    <p>Corporate equities</p> Signup and view all the answers

    Debt instruments in the capital market are considered less risky compared to equity instruments.

    <p>True</p> Signup and view all the answers

    What do equity holders receive that is not guaranteed?

    <p>Dividends</p> Signup and view all the answers

    A financial instrument whose value depends on another asset is called a ________.

    <p>derivative</p> Signup and view all the answers

    Match the following capital market instruments to their characteristics:

    <p>Corporate Equities = Ownership share in a corporation Bonds = Debt securities used to raise capital Futures = Contracts to buy/sell at a specified price Options = Rights to buy or sell an asset at a future date</p> Signup and view all the answers

    Which of the following is an example of a derivative?

    <p>Futures contracts</p> Signup and view all the answers

    Equity investments are guaranteed to provide returns based on the company's performance.

    <p>False</p> Signup and view all the answers

    What is the primary purpose of derivative securities?

    <p>To hedge risk or for speculation</p> Signup and view all the answers

    Which of the following is a primary benefit of a passive investment strategy?

    <p>Minimisation of transaction costs</p> Signup and view all the answers

    Active investors are guaranteed to outperform passive investors.

    <p>False</p> Signup and view all the answers

    What type of investor attempts to identify undervalued securities?

    <p>Security selectors</p> Signup and view all the answers

    Investors in high tax brackets would tilt their portfolios towards stocks that yield ______ and not dividends.

    <p>capital gains</p> Signup and view all the answers

    Match the following strategies with their descriptions:

    <p>Market timers = Change beta based on forecasts Security selectors = Invest in undervalued securities Sector selectors = Identify undervalued or overvalued sectors Passive investors = Minimise management fees</p> Signup and view all the answers

    What is a significant drawback of passive investment strategies?

    <p>Performance dictated by index</p> Signup and view all the answers

    The assumption of strong form efficiency implies that all information is available to all investors.

    <p>True</p> Signup and view all the answers

    What must active investors overcome to achieve excess returns?

    <p>Higher management fees and transaction costs</p> Signup and view all the answers

    What is the current value of £450,000 to be received in one year, assuming a risk-free rate of return of 10%?

    <p>£409,091</p> Signup and view all the answers

    If the total investment is £400,000, it is wise to invest if the present value of expected returns is greater than £400,000.

    <p>True</p> Signup and view all the answers

    What additional factor is considered if the selling price of the investment is uncertain?

    <p>risk premium</p> Signup and view all the answers

    The formula for Present Value (PV) is PV = £450,000 divided by (1 + ______).

    <p>0.1</p> Signup and view all the answers

    What is the NPV if you invest £400,000 and receive £450,000, considering a risk-free rate and accounting for risk?

    <p>Not beneficial</p> Signup and view all the answers

    An investment is always beneficial if the expected future cash flow is greater than the initial investment.

    <p>False</p> Signup and view all the answers

    How do you calculate the Net Present Value (NPV)?

    <p>By summing the present values of future cash flows and subtracting initial investments.</p> Signup and view all the answers

    Match the following terms with their definitions.

    <p>Present Value = Current worth of a future sum of money Net Present Value = Present value of future cash flows minus initial investment Risk Premium = Additional return expected for taking on risk Opportunity Cost = Cost of foregoing the next best alternative</p> Signup and view all the answers

    What is the present value of an annuity of £19,000 for 10 years at a 12% interest rate?

    <p>£107,354</p> Signup and view all the answers

    An annuity of £19,000 for 10 years at a 12% interest rate is better than receiving £100,000 immediately.

    <p>True</p> Signup and view all the answers

    What is the formula to calculate the annualized rate of return based on the future value of an investment?

    <p>r = (F/D)^(1/n) - 1</p> Signup and view all the answers

    To calculate the number of years it will take to double an investment, use the formula n = log(F/D) / log(1 + r). If you start with an initial investment of £1, the future value will be ___.

    <p>£2</p> Signup and view all the answers

    Match the following financial terms with their definitions:

    <p>Present Value = Current worth of a future sum of money Compound Interest = Interest on interest earned Annuity = Series of equal payments at regular intervals Future Value = Value of an investment after earning interest for a period</p> Signup and view all the answers

    How many years will it take to double an investment at a 10% annual interest rate?

    <p>7.27 years</p> Signup and view all the answers

    Compounding can only occur once a year.

    <p>False</p> Signup and view all the answers

    What is the rate of return on an £8,000 deposit that grows to £10,000 in 5 years?

    <p>4.6%</p> Signup and view all the answers

    What is the formula for calculating end-of-year wealth with compounding investment?

    <p>𝐹 = 𝐷 * (1 + rac{𝑟}{𝑚})^{𝑚}</p> Signup and view all the answers

    Python is only used for web development.

    <p>False</p> Signup and view all the answers

    What is the nominal return per year used in the provided investment example?

    <p>24%</p> Signup and view all the answers

    The __________ programming language is known for its readability and popularity in data science.

    <p>Python</p> Signup and view all the answers

    Match the following Python libraries with their primary application:

    <p>Pandas = Data analysis and manipulation Django = Web development framework TensorFlow = Machine learning Selenium = Web automation</p> Signup and view all the answers

    What is a common challenge for beginners learning programming?

    <p>It can be daunting and slow at the beginning.</p> Signup and view all the answers

    Monthly compounding will result in the same end-of-year wealth as annual compounding if the nominal return is the same.

    <p>False</p> Signup and view all the answers

    Name one Python library that is commonly used for data science.

    <p>Pandas</p> Signup and view all the answers

    Study Notes

    ECN241 Asset Pricing - Lecture Notes

    • Course Overview: ECN241 replaces ECN226 "Capital Markets 1". The course aims to train students in investment and capital markets theory, introduce key concepts, and teach Python coding. Weekly IT classes focusing on Python are also included with instructors Xiaoyu Zheng and Teng Jiao.
    • Course Content: The course covers the pricing of capital market securities, fundamental asset pricing models (CAPM, APT), optimal portfolio choice, and market efficiency.
    • Module Coordinator: Jan Toczynski ([email protected]), office GC510, School of Economics and Finance, office hours Tuesdays, 1-3 pm.
    • Teaching Assistants: Xiaoyu Zheng ([email protected]), office hours Thursdays 9-11 am; Teng Jiao ([email protected]), office hours Wednesdays 3-5 pm.
    • Assessment:
      • Midterm exam (20%): 1-hour exam on November 1, 2024, during lecture 6
      • Individual project (30%): coding exercise on portfolio analysis.
      • Final exam (50%): focuses on the theoretical aspects of the course, but includes simple Python/programming questions.

    Real vs. Financial Assets

    • Real Assets: Used to produce goods and services, tangible and intangible. Examples include real estate, natural resources, land, machinery, patents, factories, intellectual property, and human capital/talent.
    • Financial Assets: Do not directly contribute to production, they represent claims on future economic outputs. Examples include stocks, bonds, and deposits.
    • Relationship: Financial assets represent the allocation of income and wealth amongst investors, while real assets generate the net income for the economy. Household wealth = Real Assets + Financial Assets. Financial assets are liabilities for issuers, but assets for the holders.

    Types of Financial Assets

    • 1) Fixed Income/Debt Securities: Represent debt obligations of an issuer to an investor, with a fixed or floating stream of income. Performance is closely tied to the issuer's financial health. Includes short-term (<1 year) money market instruments (e.g., Treasury Bills, Commercial Paper, Federal Funds) and longer-term (>1 year) capital market instruments (e.g., bonds).
    • 2) Equity: Represents ownership in a corporation, offering dividends and ownership in the firm's assets. Investors are residual claimants. Performance relies heavily on the company's success.
    • 3) Derivatives: Assets whose value depends on another asset (underlying), such as stocks, interest rates, or commodities. Examples include futures, options, swaps, and forwards. They are used for hedging risk or speculation.

    Capital Market Instruments

    • Function: Used for long-term capital raising, company growth, and large-scale investments. Fluctuations are usually wider than money market instruments.
    • Types: Includes corporate equities; total residential mortgages; corporate and foreign bonds; total consumer credit.

    Active vs. Passive Investment Strategies

    • Passive: Holds diversified portfolios, avoids mispricing analysis, often mirroring existing market benchmarks. Example: index funds follow market index (S&P 500, UK FTSE100).
    • Active: Attempts to identify underpriced securities or predict market trends. Example: active investors might change portfolio asset allocation based on forecasts.

    Market Efficiency

    • Concept: If markets are efficient, prices will fully reflect all available information, making it impossible for investors to consistently beat the market.
    • Types: Efficient markets can be classified by the type of information used to set prices: weak-form, semi-strong-form, and strong-form efficiency. Weak-form uses historical data, semi-strong-form uses all publicly available information, and strong-form efficiency considers all information, including private information.

    Time Value of Money

    • Definition: Understanding that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
    • Factors: Key factors include investor impatience, inflation, and risk.
    • Concepts: Risk-free rate (RFR) is the return available on an investment with no risk. Investors require a higher return from riskier investments, expressed as a risk premium.

    Net Present Value (NPV)

    • Definition: NPV is the present value of future cash flows, after considering the initial cost.
    • Decision Rule: If NPV is greater than or equal to zero, the project is acceptable, otherwise rejected.

    Python Programming (in ECN241)

    • Programming Language: Python is a high-level, general-purpose programming language. Popular in data science, machine learning, and finance.
    • Rationale: Python is emphasized in this class due to its readability and extensive libraries.
    • How to Learn Python: Using lectures, in-class tutorials, and homework assignments. Specific topics include variable assignment; data types (int, float, bool, str); arithmetic operators; logical operations, and basic examples.

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    Related Documents

    ECN241 Asset Pricing - Week 1 Lecture Slides PDF

    Description

    Test your understanding of financial markets, futures contracts, and capital market instruments with this engaging quiz. Discover how different financial instruments function and their associated risks. Challenge yourself with questions on equity investments and derivatives to deepen your knowledge!

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