Financial Markets and Instruments Overview
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Questions and Answers

What is one of the primary functions of money?

  • A contract for services
  • A security for investments
  • A medium of exchange (correct)
  • A form of credit

    • Which of the following are active players in financial institutions?

  • Sales managers
  • Treasurers (correct)
  • Accountants
  • Regulators (correct)

    • What defines arbitrageurs in the context of financial markets?

  • Investors who exploit market inefficiencies (correct)
  • Investors who hold long-term assets
  • Investors who sell securities to the public
  • Investors who manage risk portfolios

    • What is referred to as a portfolio when held by an investor?

    <p>A collection of financial instruments</p> Signup and view all the answers

    Which type of financial market participant includes households?

    <p>Retail investors</p> Signup and view all the answers

    Which of the following describes hedge funds?

    <p>Utilize complex strategies like leverage and short-selling</p> Signup and view all the answers

    Which of the following is NOT considered a monetary financial institution?

    <p>Hedge fund</p> Signup and view all the answers

    What type of financing do venture capitalists typically provide?

    <p>Equity investments in start-ups and small businesses</p> Signup and view all the answers

    What is the main role of dealers within financial institutions?

    <p>To facilitate trades between buyers and sellers</p> Signup and view all the answers

    Which of the following best describes non-bank financial intermediaries?

    <p>Institutions like hedge funds and family offices</p> Signup and view all the answers

    What role do financial institutions play in the financial system?

    <p>They facilitate financial and monetary transactions.</p> Signup and view all the answers

    What is typically a characteristic of private equity investments?

    <p>Investments in companies not publicly traded</p> Signup and view all the answers

    Who is responsible for measuring the value of other goods in terms of money?

    <p>Money as a unit of account</p> Signup and view all the answers

    In finance, what defines a financial instrument?

    <p>A contract that can be traded and defines benefits and costs</p> Signup and view all the answers

    Which statement best differentiates buy-side from sell-side?

    <p>Buy-side focuses on buying and investing, sell-side focuses on selling.</p> Signup and view all the answers

    What defines a family office in financial management?

    <p>A company that manages wealth for affluent families</p> Signup and view all the answers

    What does a clearinghouse primarily do in financial markets?

    <p>Intermediates between buyers and sellers and settles trades</p> Signup and view all the answers

    Which of the following best describes a derivative instrument?

    <p>A contract whose value is based on another underlying asset</p> Signup and view all the answers

    How is the settlement time for futures contracts typically described?

    <p>At a pre-specified future date</p> Signup and view all the answers

    What type of financial instrument represents ownership of an asset?

    <p>Equity-based instruments</p> Signup and view all the answers

    Which of the following options is NOT a function of a clearinghouse?

    <p>Regulating trading hours</p> Signup and view all the answers

    Which of the following is true about foreign exchange instruments?

    <p>They can include swaps or options on currencies</p> Signup and view all the answers

    What distinguishes debt-based financial instruments from equity-based ones?

    <p>Debt instruments represent a loan made to the owner of an asset</p> Signup and view all the answers

    What is the primary purpose of a clearinghouse?

    <p>To improve market efficiency and stability</p> Signup and view all the answers

    What is the primary difference between fixed income securities and equity?

    <p>Equity typically does not have a defined maturity.</p> Signup and view all the answers

    Which of the following describes commercial paper (CP)?

    <p>An unsecured short-term debt instrument.</p> Signup and view all the answers

    What distinguishes a Treasury bill (T-bill) from other securities?

    <p>It is a short-term obligation issued by sovereign governments.</p> Signup and view all the answers

    In the event of a company's default, who has the preferential claim on assets?

    <p>Bondholders hold a preferential claim.</p> Signup and view all the answers

    How do bonds differ from loans in terms of delivery?

    <p>Loans are typically delivered by banks, not traded.</p> Signup and view all the answers

    What is meant by the term 'repurchase agreement' (repo)?

    <p>It is an agreement to sell and repurchase a security later.</p> Signup and view all the answers

    What primarily characterizes bonds compared to stocks?

    <p>Bonds typically have defined terms or maturity.</p> Signup and view all the answers

    What are standard or bullet bonds characterized by?

    <p>They have a fixed coupon rate.</p> Signup and view all the answers

    What is the primary purpose of a green bond?

    <p>To fund projects with positive environmental or climate benefits</p> Signup and view all the answers

    Which of the following types of derivatives represent contingent claims?

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

    How do inflation-indexed bonds adjust their payouts?

    <p>By linking coupons and principals to future inflation rates</p> Signup and view all the answers

    What are asset-backed securities (ABS) typically collateralized by?

    <p>A pool of assets generating cash flow, such as loans or leases</p> Signup and view all the answers

    What characterizes collateralized debt obligations (CDOs)?

    <p>They are tranched products, introducing correlation risks</p> Signup and view all the answers

    Who are the two counterparties involved in a derivatives transaction?

    <p>Buyer (long position) and seller (short position)</p> Signup and view all the answers

    What is one of the uses of bonds for borrowers?

    <p>To provide external funds for long-term investments</p> Signup and view all the answers

    Which of the following is NOT an example of securitized products?

    <p>Investment-grade corporate bonds</p> Signup and view all the answers

    What does a cash-flow CDO primarily involve?

    <p>Issuing bonds against an investment in cash flows</p> Signup and view all the answers

    Which of the following best characterizes equity securities?

    <p>Instruments that represent ownership interest in a company</p> Signup and view all the answers

    What is the main difference between forwards and futures?

    <p>Futures have standardized contracts and specific maturities</p> Signup and view all the answers

    What is a defining characteristic of options as financial derivatives?

    <p>They give the holder the right, but not the obligation, to trade an asset</p> Signup and view all the answers

    Which of the following primarily uses collateralized debt obligations (CDOs)?

    <p>Banks to manage portfolio risk and funding sources</p> Signup and view all the answers

    In a swap agreement, which variable is typically uncertain?

    <p>Interest rate or foreign exchange rate</p> Signup and view all the answers

    What financial instruments can both call and put options be based on?

    <p>Stocks, bonds, ETFs, and mutual funds</p> Signup and view all the answers

    What type of share represents ownership with preferred treatment in dividends?

    <p>Preferred shares</p> Signup and view all the answers

    Study Notes

    Financial Markets and Instruments

    • Financial markets encompass various platforms enabling buyers and sellers to trade financial instruments.
    • Financial instruments represent legal agreements between parties outlining conditions for receiving benefits (financial asset) or incurring costs (financial liability/equity).
    • Portfolios, broker/trader books, and trading books categorize collections of financial instruments.
    • Financial institutions facilitate transactions like deposits, loans, investments, and currency exchange.
    • Financial institutions include banks, insurance firms, and brokerage businesses.
    • Money functions as a medium of exchange, a unit of account, and a store of value.

    Players in Financial Markets

    • Four key players exist: retail investors, firms, governments, and financial intermediaries.
    • Financial intermediaries include banks, central banks, pension funds, hedge funds, and family offices.
    • Intermediaries assist individuals and businesses in financial markets.
    • Non-bank intermediaries operate outside regular banking regulations.
    • The first three players (retail investors, firms, and governments) are part of the real economy

    Types of Funds

    • Regulated Funds:
      • Exchange-traded funds (ETFs) replicate stock indices, trading on exchanges.
      • Pension funds invest in pooled funds offering retirement income.
      • Collective Investment Schemes (CIS) or OPCVMs are financial intermediaries who provide investment access to markets otherwise unavailable.
    • Unregulated Funds:
      • Private equity involves investments in privately held companies.
        • Venture capital is a type of financing provided to startup companies and small businesses with growth potential.
      • Hedge funds utilize sophisticated investment strategies for qualified investors.
      • Family offices manage investments and wealth for wealthy families.

    Buy-Side vs. Sell-Side

    • The buy-side invests in securities, while the sell-side promotes and sells securities.
    • Fund managers are key players on the buy-side.
    • Sales personnel, brokers, and traders are players on the sell-side

    Players in Financial Institutions

    • Market makers, traders, brokers, dealers, hedgers, arbitrageurs, speculators, structurers, fund managers, and others (analysts, risk managers, regulators, treasurers) are involved.
    • Arbitrageurs profit from exploiting market inefficiencies.
    • Brokers act as intermediaries between investors and exchanges.

    Purposes of Financial System

    • Clearing and Settlement: Facilitating payments
    • Pooling and Subdividing: Bringing together resources
    • Transferring Resources: Across time and space
    • Managing Risks: Mitigating potential losses
    • Providing Information: Guiding decisions
    • Addressing Incentive Problems: Fighting fraud and market manipulation

    Types of Financial Instruments

    • Cash Instruments: Assets with immediate settlement (real assets, securities, cash).
    • Derivative Instruments: Instruments deriving their value from other assets (futures, options, forwards).
    • Equity-based: Represents ownership stake
      • Stock
    • Debt-based: Represented by loans
      • Bonds
    • Foreign Exchange: Involve multiple currencies

    Financial Markets

    • Primary Market: for new securities issues (IPO, follow-on).
    • Secondary Market: for existing securities trading.
    • Over-the-Counter (OTC) Markets: for customized transactions (e.g., foreign exchange).
    • Organized Markets: for standardized transactions on exchanges (e.g., stock).

    Securitization

    • Pooling debt assets into securities and selling them to investors.
    • Common types include mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized debt obligations (CDOs).

    Securities

    • Fixed-income Securities: Debt instruments with defined maturity, periodic payments. (e.g. CDs, Commercial paper, Treasury Bills, Repurchase agreements, bonds)
    • Equity Securities: Represents ownership in a company (common stock, preferred stock)

    Derivatives

    • Options: Provide the right, but not the obligation, to buy or sell an underlying asset at a set price.
    • Forwards: Agreements to buy or sell an asset at a future date at a predetermined price.
    • Futures: Standardized forward contracts traded on exchanges.
    • Swaps: Agreements to exchange cash flows at future dates.
    • Credit Derivatives: Provide protection against credit risk.

    Bank Balance Sheet

    • Includes assets (cash, loans, securities) and liabilities (deposits, debt, equity).

    Financial Instruments Purposes

    • Capital Raising, funds for firms and governments

    • Consumption Smoothing: Facilitating spending across time

    • Risk Management: Transfer risk via derivatives and portfolio construction

    • Speculation: Profiting from price changes

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    Related Documents

    Introduction to Financial Instruments and Financial Markets PDF

    Description

    This quiz explores the structure and functions of financial markets and instruments. It covers key players, such as retail investors and financial intermediaries like banks and pension funds. Gain insight into how transactions are facilitated and the role of money in these systems.

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