Financial Markets Overview
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Questions and Answers

What is a repurchase agreement primarily used for in the money market?

  • To refinance maturing Treasury bills
  • To borrow money by selling and repurchasing securities (correct)
  • To sell securities without any future obligation
  • To purchase government securities directly

Which type of option can only be exercised on its expiration date?

  • Joint Options
  • American Options
  • Currency Options
  • European Options (correct)

What characteristic distinguishes Eurodollars from other deposits?

  • They are regulated by the Federal Reserve.
  • They are dollar-denominated and held in foreign banks. (correct)
  • They are exclusively available to US citizens.
  • They provide lower interest rates compared to US government debt.

What is the primary purpose of the bond market?

<p>To facilitate the lending of money through debt securities (A)</p> Signup and view all the answers

In which of the following ways does the Federal Reserve use repurchase agreements?

<p>To influence the money supply and bank reserves (C)</p> Signup and view all the answers

What is a defining characteristic of perfect competition?

<p>A large number of small companies compete against each other. (B)</p> Signup and view all the answers

What is one of the functions of financial markets?

<p>Mobilization of savings from savers to investors. (A)</p> Signup and view all the answers

Which market structure involves strategic planning, as firms are dependent on each other's actions?

<p>Oligopoly (C)</p> Signup and view all the answers

How does the interaction between investors, industries, and market forces help in financial markets?

<p>It helps determine prices. (A)</p> Signup and view all the answers

What does liquidity in financial markets refer to?

<p>The ease of converting assets into cash. (D)</p> Signup and view all the answers

Which of the following best describes a market structure characterized by many sellers of homogeneous products?

<p>Perfect Competition (A)</p> Signup and view all the answers

What advantage do financial markets provide by connecting buyers and sellers?

<p>They enhance efficiency by saving time and money. (C)</p> Signup and view all the answers

What is NOT a feature of oligopoly market structure?

<p>Price influence by each firm rarely affects competitors. (C)</p> Signup and view all the answers

What is the primary characteristic of the over-the-counter market?

<p>It is characterized by a decentralized organization. (B)</p> Signup and view all the answers

Which of the following assets is typically traded in the money market?

<p>Treasury bills (C)</p> Signup and view all the answers

What distinguishes the primary market from the secondary market?

<p>New securities are issued in the primary market. (B)</p> Signup and view all the answers

What is true regarding commercial paper?

<p>It is issued by institutions with high credit ratings. (C)</p> Signup and view all the answers

Which statement best describes the characteristics of a banker’s acceptance?

<p>It involves short-term debt guaranteed by a bank. (B)</p> Signup and view all the answers

What is a typical maturity period for assets traded in the money market?

<p>One year or less (A)</p> Signup and view all the answers

What is true about the secondary market?

<p>Investors trade already issued securities in this market. (A)</p> Signup and view all the answers

In the capital market, which of the following assets is typically included?

<p>Mortgage-backed securities (D)</p> Signup and view all the answers

What does the equity market primarily provide to companies?

<p>Access to capital to grow their business (C)</p> Signup and view all the answers

Which statement best describes a derivative contract?

<p>A financial instrument based on the value of an underlying asset (A)</p> Signup and view all the answers

What does 'In-The-Money' (ITM) mean in relation to options?

<p>The option would profit if exercised (C)</p> Signup and view all the answers

What is the strike price in options trading?

<p>The price at which an option can be exercised (D)</p> Signup and view all the answers

Which term refers to a situation where an option's strike price is the same as the market rate?

<p>At-The-Money (ATM) (B)</p> Signup and view all the answers

What does the term 'Option Premium' refer to?

<p>The fee paid by the buyer to the seller for the option (A)</p> Signup and view all the answers

What would indicate that an option is 'Out-Of-The-Money' (OTM)?

<p>The strike price is worse than market rate (B)</p> Signup and view all the answers

Which of the following is a characteristic of futures contracts?

<p>They are standardized contracts for future delivery (D)</p> Signup and view all the answers

What does a two-way quote indicate in foreign exchange trading?

<p>The current bid and ask prices of a security (D)</p> Signup and view all the answers

Which party is described as a professional trader who offers prices for buy and sell transactions?

<p>Market maker (B)</p> Signup and view all the answers

Which of the following describes a reciprocal currency?

<p>A currency pair where USD is the quote currency (A)</p> Signup and view all the answers

What is the purpose of the 'three golden rules' in Forex trade execution?

<p>To ensure effective and informed trading decisions (C)</p> Signup and view all the answers

What does 'K.A.P.E.' stand for in the context of reciprocal currency?

<p>Kiwi, Aussie, Pound, Euro (C)</p> Signup and view all the answers

What scenario occurs when a price taker wants to sell in a foreign exchange transaction?

<p>They must sell at a price maker's bid (C)</p> Signup and view all the answers

When is the spot value date typically set in Forex trading?

<p>T+2 days after the transaction date (B)</p> Signup and view all the answers

What is a key characteristic of a bilateral agreement in foreign exchange?

<p>Involves two parties exchanging currencies (B)</p> Signup and view all the answers

What is the status of the USD Put at USD/IDR 9,200.00 option?

<p>ITM (C)</p> Signup and view all the answers

Which USD Call option is identified as OTM?

<p>USD Call at USD/IDR 9,200.00 (A)</p> Signup and view all the answers

What does ATM stand for in options trading?

<p>At The Money (B)</p> Signup and view all the answers

Which of the following is true about forwards?

<p>They are unstandardized and customizable. (D)</p> Signup and view all the answers

What is a defining characteristic of swaps?

<p>They involve exchanging financial obligations between parties. (C)</p> Signup and view all the answers

In the context of market makers and price takers, which statement is correct?

<p>Price Takers must accept the price set by Market Makers. (A)</p> Signup and view all the answers

What does it mean for an option to be OTM?

<p>The option's strike price is worse than the current market price. (A)</p> Signup and view all the answers

Which option is considered ATM?

<p>USD Call at USD/IDR 9,000.00 (B)</p> Signup and view all the answers

Flashcards

Market

A place where buyers and sellers meet to exchange goods or services. It's known for transparency, regulations, and clear guidelines.

Perfect Competition

Involves many small companies competing with similar products, with no control over prices, and free entry and exit.

Oligopoly

This structure has a small number of large companies that sell similar or different products. Their pricing and strategies are interdependent.

Financial Market

Financial markets are marketplaces for buying and selling financial assets, like stocks and bonds. They connect borrowers and lenders.

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Market Structure

This explains how different industries are classified based on their competition.

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Price Determination

Financial markets establish prices for assets based on supply and demand.

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Mobilization of Savings

Financial markets facilitate the flow of money from savers to investors.

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Ensures Liquidity

Financial markets allow investors to easily buy or sell assets and convert them into cash.

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Money Market

A market where short-term debt securities with maturities of one year or less are traded. Participants can lend and borrow these securities.

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Commercial Paper

A type of short-term, unsecured debt issued by large institutions or corporations to finance short-term cash flow needs.

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Banker's Acceptance

A form of short-term debt issued by a firm, but guaranteed by a bank. It is essentially a time draft that is accepted by a bank.

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Capital Market

A market where medium and long-term financial assets like stocks and bonds are traded.

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Primary Market

A financial market where new securities are issued for the first time.

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Secondary Market

A financial market where already issued securities are traded between investors.

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Over-the-Counter (OTC) Market

A market characterized by a decentralized organization, customized procedures, short-term maturities (usually 3 months to 5 years), and various denominations.

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The Money Market

An organized exchange market where participants can lend and borrow short-term, high-quality debt securities with average maturities of one year or less.

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Repurchase Agreement (Repo)

A short-term borrowing method where a security is sold with an agreement to repurchase it at a higher price later.

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Treasury Bill

A type of debt security issued by the government with a full guarantee. It is a safe investment with a short term (typically under 1 year).

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Eurodollars

Dollar-denominated deposits held in banks outside the U.S., not subject to Federal Reserve regulations, usually offering slightly higher interest rates.

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Federal Reserve's Use of Repurchase Agreements

The practice of using repurchase agreements (repos) as a tool to regulate the money supply and bank reserves.

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What is the Equity Market?

A market where shares of companies are bought and sold, giving businesses access to capital and investors the chance to own a piece of the company.

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What is the Derivatives Market?

A financial market where contracts based on the value of underlying assets, like futures or options, are traded.

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What is an Option?

A type of derivative contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price within a set time.

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What is the Strike Price of an Option?

The price at which the option holder can buy or sell the underlying asset.

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What does 'In-The-Money' mean for an option?

When the strike price is above the current market rate of the asset, meaning buying or selling the asset at the strike price would result in a profit.

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What does 'At-The-Money' mean for an option?

When the strike price is the same as the current market rate. Exercising the option results in neither profit nor loss.

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What does 'Out-Of-The-Money' mean for an option?

When the strike price is below the current market rate, meaning buying or selling the asset at the strike price would result in a loss.

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What is an Option Premium?

The price paid by the buyer of the option to the seller. It represents the value of the option, essentially a risk compensation to the seller.

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ITM

An option is considered In The Money (ITM) when its strike price is less favorable than the current market price, leading to potential gains for the option holder.

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OTM

An option is considered Out Of The Money (OTM) when its strike price is more favorable than the current market price, making it unlikely to be exercised.

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ATM

When an option's strike price is equal to the current market price, it is considered At The Money (ATM). The option's value is neither in nor out of the money and depends on market movements.

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Forward contract

A forward contract is an agreement to buy or sell an underlying asset at a specified price on a future date. Both parties are obligated to complete the contract.

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Futures contract

A futures contract is a standardized agreement to buy or sell an underlying asset at a future date, traded on an exchange.

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Swap

A swap is an over-the-counter agreement between two parties to exchange financial obligations in the future.

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Price Maker

A price maker, also known as a market maker, provides liquidity by quoting both a bid and an ask price, facilitating trading.

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Price Taker

A price taker accepts the price offered by the price maker, effectively taking the other side of the trade.

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Foreign Exchange (FX) Contract

An agreement between two parties to exchange one currency for another at a predetermined rate on a specific date.

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Market Maker

A professional trader who provides bid and ask prices for currencies, acting as a middleman between buyers and sellers.

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Two-Way Quote

A two-way quote displays both the bid price (buying price) and the ask price (selling price) for a currency pair.

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Reciprocal Currency

A situation where a currency pair involves the U.S. dollar (USD) as the quote currency, not the base currency.

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Month-end to Month-end Rule

A rule that dictates the spot value date (T+2) for FX transactions based on the transaction date.

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Know Your Role

This rule emphasizes understanding your role as a price maker or a price taker in FX trading.

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Think of the Commodity Currency

This principle highlights the importance of thinking about the currency with a higher economic influence in a pair during FX trading.

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Study Notes

Financial Markets Overview

  • A market is a place where buyers and sellers meet to exchange goods and services.
  • Market structure describes how industries are categorized based on competition levels.
  • Perfect competition has many small companies selling similar products, with no price influence and free entry/exit. Examples include meat, fruit, and vegetable markets.
  • Oligopoly involves a few large companies selling differentiated or identical products, where companies strategically plan. Examples include Smart, Globe, and Sun.
  • Monopoly is when a single company dominates an industry and controls prices, restricting competition. Examples include Meralco (electricity) and Maynilad (water).
  • Monopolistic competition combines traits of monopoly and competition, with sellers differentiating products. Examples include P&G, Jack & Jill, and Unilever.
  • Financial markets facilitate trades between savers and investors or businesses seeking capital.
  • Financial markets are transparent, regulated, and structured with clear guidelines for pricing and transactions.

Functions of Financial Markets

  • Price determination results from interactions of investors, industries, and market forces.
  • Mobilization of savings helps connect those with money with those who need it.
  • Ensures liquidity allows for easy conversion of assets into cash on demand.
  • Saves cost and time by streamlining transactions between buyers and sellers.

Structures of Financial Markets

  • Markets by Nature of Claim:
    • Debt market: Trading of debt instruments like bonds and debentures.
    • Equity market: Trading of equity instruments.
  • Markets by Maturity of Claim:
    • Money market: Trading of assets with maturity in a year or less.
    • Capital market: Trading of assets with maturity over a year.
  • Markets by Timing of Delivery:
    • Cash market: Immediate transaction fulfillment.
    • Futures market: Agreement for future delivery of assets.
  • Markets by Organizational Structure:
    • Exchange-traded markets: Centralized trading platforms.
    • Over-the-counter (OTC) markets: Decentralized trading with customized procedures.

Types of Financial Instruments & Markets

  • Money market instruments: Examples include commercial paper, certificates of deposit, and treasury bills, and usually mature in under a year.

  • Capital market instruments: Examples include stocks and bonds, and usually mature in over a year.

  • Derivative market instruments: Financial contracts with values derived from underlying assets. This includes futures and options.

  • Options: give the buyer a right, but not an obligation, to buy or sell an asset at a specified price.

  • Currency options: Options to buy or sell a currency pair.

  • Treasury Bills: Short-term securities, issued by government, at a discount.

  • Certificates of Deposit (CDs): Time deposits with fixed maturity dates, issued by banks.

  • Commercial papers: Short-term unsecured debt issued to finance short-term needs, issued by institutions with high creditworthiness.

  • Banker's acceptances: Short-term debt, guaranteed by a bank.

  • Foreign exchange market (FX): Currency trading.

  • Bonds market: Trading of debt securities, issued by corporations or governments.

  • Equity market: Trading of shares or ownership in companies.

Additional Market Concepts

  • Bid-Ask Spread: Difference between the best selling price and best buying price for a security.
  • Pip: A unit of measurement for currency trading that represents a small change in exchange rates.
  • Value Terms (ITM/ATM/OTM): In-the-money, At-the-money, Out-of-the-money, used in option pricing.

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Description

Explore the fundamental concepts of financial markets including various market structures such as perfect competition, oligopoly, monopoly, and monopolistic competition. This quiz delves into how buyers and sellers interact and the roles financial markets play in the economy. Assess your understanding of these crucial economic principles.

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