IFM Final Exam - Terms & Concepts

Sovereign Wealth Fund

(Lecture 7 p. 12) funds belonging to a country that has accumulated wealth beyond what the country's central bank needs for reserve management purposes. Typically, they have been funded by a country having an abundant but nonrenewable natural resource, such as oil. In such a case, to ensure that the oil wealth is available to all future generations, the country will try to save some of the oil wealth in financial assets that can be invested for future generations. Other countries, especially in Asia, have been net exporters and have therefore accumulated large foreign reserves, some of which are allocated to ___________ funds and invested more with the objective of achieving a decent return, rather than primarily keeping their money safe. INVESTOPEDIA• Pools of money derived from a country's reserves, which are set aside for investment purposes that will benefit the country's economy and citizens. The funding for a ______ comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources. The types of acceptable investments included in each _____ vary from country to country; countries with liquidity concerns limit investments to only very liquid public debt instruments. • Some countries have created _____to diversify their revenue streams. For example, the United Arab Emirates (UAE) relies on oil exports for its wealth. Therefore, it devotes a portion of its reserves to a ______that invests in other types of assets that can act as a shield against oil-related risk. • The amount of money in these ____ is substantial. As of May 2007, the UAE's fund was worth more than $875 billion. The estimated value of all _____• Sovereign Wealth Fundis pegged at $2.5 trillion.

In the Money/Out of the Money/At the Money

(THREE TERMS COMPARISON) An option is said to be ________ if the price of the asset is above (for a call option) or below (for a put option) the strike price. When the market price equals the strike price, the option is said to be _________. When the price is below (for a call) or above (for a put) the strike price, the option is__________. When prices are a long way from the strike price, the option is said to be deep ____, or deep ______ the money.

Asset class

-(Lecture 8 p. 11) a somewhat ill-defined concept, but suggests that there is a whole group of assets with some common features among them, and to which it is worth allocating some portion of a well-diversified portfolio. The establishment of an index is generally a critical step in the formation of funds dedicated to a specific ________. -As emerging market debt became increasingly recognized as a legitimate _____, more investors made "strategic", that is, permanent, allocations to emerging markets in their portfolios. An ______ : * Is A group of assets with common characteristics * Worthy of a "strategic allocation" * That Fosters development of passive funds

Breaking the buck

-When the net asset value (NAV) of a money market fund falls below $1. -Breaking the buck can happen when the money market fund's investment income does not cover operating expenses or investment losses. This normally occurs when interest rates drop to very low levels, or the fund has used leverage to create capital risk in otherwise risk-free instruments. -The net asset value (NAV) of a money market fund normally stays constant at $1 because investment products usually do not produce capital gains or losses. As such, the principal in a money market fund usually remains constant, making risk exposure non-existent compared to stocks, bonds and non-money market mutual funds. -The occurred on On September 16, 2008, the "Reserve Primary Fund" broke the buck. The "Reserve Primary Fund" was the oldest 2a-7 fund in existence, and its NAV fell to $0.97 after it wrote off the value of its Lehman Brothers holdings following Lehman Brothers' bankruptcy the previous day.

search for yield

-an example of irrational exhuberance, how less credit worthy borrowers get access to credit -a widespread _________ can depress the market compensation for risk temporarily below sustainable levels as investors and investment managers bid up the prices of risky securities. Low nominal rates typically spur this search for yield. Eventually, when the risk materializes (say, interest rates rise or defaults increase), the poor mix of market risk and reward becomes evident as riskier bond prices fall disproportionately. The market shock can trigger large financial losses. The 2007‐08 plunge of the corporate and mortgage bond markets exemplifies how markets can re‐price risk aggressively when the search for yield has gone too far. -With interest rates low like they are today, many are again worried about an excessive ______. -For a savings account, yield is the percentage of interest earned annually. For a stock, the annual dividend divided by the share price.

original sin

-when emerging market issuers are unable to tap international markets in their own currency, this exposes them to currency risk, and has been dubbed ___________.

Noise Trader

1) A trader whose trades are not based on information or meaningful financial analysis 2.) An investor who makes their buy and sell trading decisions without any fundamental data; because of this these investors typically have poor timing and are much more apt to over react to good or bad news about their investments, 3.) Although arbitrageurs exploit the misconceptions of ______, they are at risk for several reasons. Risk of mis-pricing exists as ____ can prevent prices from reverting to mean. ______ limits all investors' positions and keeps arbitrageurs from driving prices all the way to fundamental values.

sudden stop

1. (Lecture 8, p. 20) The notion that a balance of payments crisis in emerging markets leads to a sudden unwillingness of creditors to grant credit to emerging markets. This highlights what is called "rollover risk", that is, the risk that the normal rolling over of debt may simply become impossible for an extended period of time. 2. (INVESTOPEDIA) An abrupt reduction in net capital flows into an economy. A sudden stop is characterized by swift reversals of international capital flows, declines in production and consumption, and corrections in asset prices. -Sudden stops can be triggered either by foreign investors when they reduce or stop capital inflows into an economy, and/or by domestic residents when they pull their money out of the domestic economy, resulting in capital outflows. Since sudden stops are generally preceded by robust expansions that drive asset prices significantly higher, their occurrence can have a very adverse impact on the economy and tip it into a recession. A sudden stop may also be accompanied by a currency crisis or a banking crisis or both.

underwriter

1. A person who evaluates and classifies risks to accept or reject them on behalf of the insurer. 2. • (INVESTOPEDIA) A company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. A ________works closely with the issuing body to determine the offering price of the securities, buys them from the issuer and sells them to investors via the _______'s distribution network. ________ generally receive fees from their issuing clients, but they also usually earn profits when the shares are sold to investors. However, _______assume the responsibility of distributing a securities issue to the public. If they can't sell all of the securities at the specified offering price, they may be forced to sell the securities for less than they paid for them, or retain the securities themselves. 3. Part of the ________ process also involves an implicit commitment by the sell-side to act as market makers, middlemen whose job it is to always provide a quote to both potential buyers and sellers of a specific security, thus trying to help ensure liquidity (the ability to buy ns sell) in the market. 4. The _______ is responsible for buying any part of the issue that cannot be sold into the market.

Prospectus

1. Also known as an "offer document." 2. (INVESTOPEDIA) A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. A ________ should contain the facts that an investor needs to make an informed investment decision. 3. There are two types of _________ for stocks and bonds: preliminary and final. -The preliminary _______ is the first offering document provided by a securities issuer and includes most of the details of the business and transaction in question. Some lettering on the front cover is printed in red, which results in the use of the nickname "red herring" for this document. -The final ________ is printed after the deal has been made effective and can be offered for sale, and supersedes the preliminary ________. It contains finalized background information including such details as the exact number of shares/certificates issued and the precise offering price. 4. In the case of mutual funds, which, apart from their initial share offering, continuously offer shares for sale to the public, the ______ is used is a final _____. 5. A fund _______ contains details on its objectives, investment strategies, risks, performance, distribution policy, fees and expenses, and fund management.

option premium

1. Amount per share paid by an OPTION buyer to an option seller for the right to buy (call) or sell (put) the underlying security at a particular price within a specified period. 2. The price, also known as the __________, is the amount the buyer of the option pays to acquire the option.

hedge fund

1. An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Legally, ________ are most often set up as private investment partnerships that are open to a limited number of "accredited investors", to include wealthy individuals and large corporations. They require a very large initial minimum investment . Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. However, individuals end up having exposure to hedge funds because their pensions or endowments are accredited and can invest in _______. Therefore, there is debate as to whether ________ impose systematic risk. 2. __________are managed for an absolute return (the return achieved over a certain period of time) and are not compared to other benchmarks or market indices. 3. Because they are expected to achieve high returns via their more flexible investment styles, _______ generally charge high fees, including 2% annual fee, 20% performance fee, withdrawal/redemption fees, and even impose cost "gates" which can completely prohibit investors from withdrawing their money for a period of time. • 2. An type of alternative asset manager, as opposed to a conventional asset manager. In terms of non-traditional investment managers, these are the most important. • 3. The term ________is a misnomer for many, since there are _______ that are largely directional investors, and that in fact take additional risks by "leveraging" up on directional bets - as opposed to be just being relative value investors. 4. Types of _________ include: -global macro funds: employ directional or relative value strategies, and use knoweledge of global economy and/or surperior investment strategies to take advnatage of anticipated trends. -event driven funds: seek profit from a single, one-off event, such as a merger (called merger arbitrage fund). -relative value funds: employ mostly relative value trades. -diversified multi-strategy funds: employ a wide range of strategies to maximize opportunities; tend to be larger funds -funds of funds; use a diversified multi-strategy also by investing in other hedge funds that might specialize in each strategy.

underlying

1. An asset that trades in a market in which buyers and sellers meet, decide on a price, and the seller then delivers the asset to the buyer and receives payment. The ______ is the asset or other derivative on which a particular derivative is based. The market for the ______ is also referred to as the spot market. 2. In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised. 3. In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.

Brady bonds

1. INVESTOPEDIA- Bonds that are issued by the governments of developing countries. ________ are some of the most liquid emerging market securities. They are named after former U.S. Treasury Secretary, who sponsored the effort to restructure emerging market debt instruments. The price movements of ___________ provides an accurate indication of market sentiment toward developing nations. Most issuers are Latin American countries. 2. (Lecture 8, p. 2-3) aimed at granting relief to debtors in return for economic reforms. In addition, the plan was aimed at making Latin American debt tradable, in order to make the debt more attractive by facilitating investor diversification. Generally featured either a reduction in the face value of the loans (resulting in "discount bonds") or a reduction in the interest rate paid on the bonds (resulting in "par" bonds). An important feature of the bonds was that they were collateralized by pledges of U.S. zero-coupon treasuries. Other uncollateralized bonds were issued, and the market became quite creative in producing various types of debt structures, leading emerging market bond traders to talk in a mysterious lingo full of, among other acronyms, DCBs, PDIs, and my personal favorite, FLIRBs.

maturity transformation

1. INVESTOPEDIA- converting short-term liabilities (deposits) into long-term assets (bank loans that earn interest) 2. Like a bank, the ARS market provided maturity transformation. Lenders effectively held short-term instruments that appeared to have a lot of liquidity, because they thought they could always get out at the next auction. But by the same token, borrowers felt they had locked up money for a long time, and probably at reasonable rates. Unlike banks, the providers of funds had no guarantees or backstops akin to the FDIC deposit insurance that protects bank depositors. In other words, ARS formed a component of the unregulated shadow banking system, benefiting from the lack of required capital (thereby offering a lower spread between borrowing and lending rates). But when things went wrong, things went really wrong. Since then, the ARS market has become significantly impaired. And like SIVs, the problems came back on to bank balance sheets, in this case, under pressure from regulators and from threat of lawsuit.

Maturity Mismatch/Maturity Transformation

1. The conversion of short-term liabilities into long-term assets. 2. The investment challenge typically faced by banks, thrifts and other depositary financial institutions that arises when long-term investments are funded with short-term liabilities. The problem primary occurs in periods of unanticipated inflation when income adjustments fail to keep up with the rising cost of borrowing. 3. INVESTOPEDIA: The tendency of a business to mismatch its balance sheet by possessing more short-term liabilities than short-term assets and having more assets than liabilities for medium- and long-term obligations. How a company organizes the maturity of its assets and liabilities can give details into the liquidity of its position. 4. Banks borrowing short-term, in the form of demand deposits and short-term certificates of deposit, but lending long-term; mortgages, for instance, are frequently repaid over 30 years. By doing this, banks transform debts with very short maturities (deposits) into credits with very long maturities (loans), and collect the difference in the rates as profit. However, they are also exposed to the risk that short-term funding costs may rise much faster than they can recoup through lending. If there is a panic and a bank run, savers may all try to withdraw money at once. Equally, the money markets may suddenly dry up as lenders stop providing short-term loans to each other.

implied volatility

1. The estimated volatility of a security's price. In general, i_______ increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets. Implied volatility is sometimes referred to as "vols." 2. Volatility derived from the price of options, is called __________, and is a hugely important measure of expected market risk.

Market Neutral Investing/ Relative value trading

1. The idea of _______________ is to profit whether the broad direction of the market is up or down. This is done by taking both long positions that will benefit from price rises and short positions that will benefit from price falls. As long as the long position outperforms the short position, it doesn't actually matter whether the market goes up or down, the market-neutral position will make money. 2. To give a very simple illustration, suppose an investor takes a market neutral position by selling short $1 million of stock A and buying long $1 million of stock B. Suppose the market is rising. The bet is that stock B will rise more than stock A. So if stock A rises by 5 percent and stock B by 10 percent, the investor will make $50,000 (losing $50,000 on their short of stock A and gaining $100,000 on their long position in stock B). If the market is falling, the bet is that stock B will fall less than stock A. So suppose that stock B falls 5 percent and stock A falls 10 percent. Again, the investor will make $50,000 (they lose $50,000 on their long position in stock B but gain $100,000 by shorting stock A). Thus, whether the market goes up or down in general, as long as the market neutral investor has correctly identified that stock B is a better investment than Stock A, he will make money. This raises the important distinction between a "directional trade" and a "relative value" trade. 3. Winslow Jones created hedge funds in order to achieve this.

short position

1. The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value. 2. In the context of options, it is the sale (also known as "writing") of an options contract.

What's the difference between Fama's variants of efficient market theory: weak, semi-strong, and strong?

1. Weak form - market prices reflect past market prices 2. Semi-strong - market prices reflect past market prices and publicly available information 3. Strong form - market prices reflect all public and non-public information

short position

1. a market position where the holder benefits from price decreases and loses from price increases 2. The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value. 3. In the context of options, it is the sale (also known as "writing") of an options contract. 4. A ______ will gain from a fall in the asset's value.

long position

1. a market position where the holder benefits from price increases and loses from price decreases 2. (INVESTOPEDIA) The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value. 3. In the context of options, the buying of an options contract. 4. A ______ will gain from a rise in the asset's value.

Expected Utility

1.) A cost-benefit calculation people make when the outcome of a choice is uncertain. Gives people an expectation of what they will get from a possible choice. 2.) Theory of utility in which "betting preferences" of people with regard to uncertain outcomes (gambles) are represented by a function of the payouts (whether in money or other goods), the probabilities of occurrence, risk aversion, and the different utility of the same payout to people with different assets or personal preferences. 3.) This is part of the normative model of how we should make decisions. It is a theory that says we make decisions by considering the possible alternatives and choosing the most desirable one. To arrive to the most desirable alternative, we first rank the alternatives in order of preference.

Arbitrage

1.) A technique employed to take advantage of differences in prices across markets. Arbitrage may also involve the purchase of rights to subscribe to a security, or a convertible security, and the sale or about the same time of the security underlying the rights or convertible security 2.) Buying securities in one marketplace and selling them in another to take advantage of a price disparity. For example, buying 100 shares of ABC at 25 on the NYSE and immediately selling 100 shares of ABC at 25.25 on the Pacific Stock Exchange.

Information Cascade

1.) Is the transmission of information from those participants who act first and whose decisions influence the decisions of others. Those who are acting on the choices of others may be ignoring their own preferences in favor of imitating the choices of others. In particular, ___________s may occur with respect to the release of accounting information because accounting information is noisy. For example, the release of earnings is noisy because it is uncertain what the current earnings imply about future earnings. 2.) Occurs when people observe the actions of others and then make the same choice that the others have made, independently of their own private information signals.

Survivorship Bias/Negative Evidence (Taleb's generalization of survivorship bias)

1.) Only funds that are still active are counted in the average performance i.e. managers who fail are not included so it shows an upward bias in average fund performance 2.) Concentrating on the people or things that survived some process and inadvertently overlooking those that did not because of their lack of visibility

Technical Analysis

1.) Research into the demand and supply for securities, based on trading volume and price studies. Technical analysts use charts to identify and project price trends. Unlike FUNDAMENTAL ANALYSIS, technical analysis is not concerned with the financial position of a company. 2.) Studying market statistics; looking at past and current price movements; also called "charting" 3.) The study of supply/demand relationships, investor psychology, monetary changes, and the study of price and volume movements of the market as a whole, and individual stocks in particular, in order to determine the probability of direction and degree of future price movement. Whereas fundamental analysis is concerned with the company (and its sales, earnings, products, management etc.), technical analysis is concerned only with the stock of the company (i.e., the changes in the supply/demand relationship for the stock in the market place).

Random Walk

1.) The path of a variable whose changes are impossible to predict. Usually applied to stocks. 2. Stock price behavior reflecting no serial correlation. The efficient market hypothesis implies that stock prices follow a random walk.

Efficient Market

1.) The theory that asset prices reflect all publicly available information about the value of the asset 2.) The argument that stocks are usually priced correctly and that bargains are hard to find because stocks are followed closely by so many investors 3.) It is impossible to consistently beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant and publicly available information

relative value trade

A _______ makes money in the situation in which the investor has correctly predicted that one investment will outperform another, whether that outperformance is in the up (a higher positive return) or down (a smaller negative return) direction. -In ________ strategies, you make money as long as you guess correctly whether stock A or stock B will do better, regardless of market direction. - _______, which form the essence of market neutral strategies, are extremely common in hedge funds, and require the ability to short one side of the market, which traditional investment managers generally cannot do.

payoff structure

A _______ shows the payoff to an option or set of options as a function of the spot price of the underlying.

future

A __________is a standardized contract that trades on an organized exchange. It is a contract between a party and an organized exchange to sell something, not now, which would be selling on the "spot" market, but at a specific point in the future for a specific price. A ______contract is completely pre-specified. _______ contracts are very specific as to what is to be delivered. The contracts expire on specific dates, and are for pre-specified amounts. With a ______, counterparty risk is essentially eliminated because the exchange (or more properly, the clearinghouse associated with the exchange) is the counterparty. The clearinghouse is backed by its members, who are highly capitalized for the purpose. ________ contracts can generally be cash-settled. There is no need to negotiate anything with the counterparty to the contract. Buyers and sellers of ______ contracts have to provide margin, that is, they must deposit with the exchange a certain amount of the value of the contract, and they must maintain that margin as the price of the contract changes. In other words, the contracts are marked to market, and the margin of whoever is gaining on the mark to market position is credited while the margin account for the loser is debited. If the margin falls below a "maintenance margin", the person must pony up the cash to get back up to the maintenance margin.

Structured Investment Vehicle (SIV)

INVESTOPEDIA - A pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products such as asset-backed securities (ABS). Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that have less liquidity but pay higher yields. The SIV earns profits on the spread between incoming cash flows (principal and interest payments on ABS) and the high-rated commercial paper that it issues. SIVs often employ great amounts of leverage to generate returns. • SIVs are less regulated than other investment pools, and are typically held off the balance sheet by large financial institutions such as commercial banks and investment houses. They gained much attention during the housing and subprime fallout of 2007; tens of billions in the value of off-balance sheet SIVs was written down as investors fled from subprime mortgage related assets. Many investors were caught off guard by the losses because little is publicly known about the specifics of SIVs, including such basics as what assets are held and what regulations determine their actions. SIVs essentially allow their managing financial institutions to employ leverage in a way that the parent company would be unable to due to capital requirement regulations.

regulatory arbitrage

INVESTOPEDIA - A practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation. Arbitrage opportunities may be accomplished by a variety of tactics, including restructuring transactions, financial engineering and geographic relocation. Regulatory arbitrage is difficult to prevent entirely, but its prevalence can be limited by closing the most obvious loopholes and thus increasing the costs associated of circumventing the regulation. An interesting example of regulatory arbitrage came from Blackstone's 2007 IPO. In an unusual move, Blackstone went public as a master limited partnership in an effort to avoid the higher tax rates imposed on corporations. In order to retain these tax advantages, Blackstone also had to avoid classification as an investment company. Through carefully negotiating the tax regulations, Blackstone hopes to exploit a 'regulatory arbitrage' between the tax code's legal definitions and economic substance. Lecture 11, p. 14 The idea of regulatory arbitrage is that if it is possible to conduct activity in a heavily regulated way and similar activities in a relatively unregulated way, people will find a way to migrate activity towards the unregulated market and thereby capture higher profits. Frequently, regulatory arbitrage takes place across regulatory jurisdictions, which, since regulation is often done on a national basis, may mean that financial activity tends to migrate to less regulated countries.

The Minsky Model of Crises (aka the "Financial Instability Hypothesis")

Lecture 11 p. 1-2 1. The essence is that FIH posits a procyclical model of behavior, and therefore suggests financial crises are not an aberration, but in fact an integral characteristic of an economic system. 2. The _________ grounds this idea of procyclicality in a specific way, by specifying three types of "economic units", based on the relationship between income and debt service of an individual borrower: • • Hedge finance is the most conservative type of finance. With hedge finance, the borrower's income is enough to cover the interest due, as well as enough to amortize (i.e. pay down) the principal of a loan. Such a borrower is called a "hedge finance unit" (and should not, by any stretch of the imagination, be associated with a "hedge fund"). • • Speculative finance is a type of finance in which the borrower's income is enough to cover interest payments, but not enough to pay down principal. Therefore, the borrower (called a "speculative finance unit") must continuously roll over the principal as it comes due. • • Ponzi finance (named after the famous early 20th century financial swindler Charles Ponzi) is a type of finance whereby a borrower's current income cannot even cover interest payments, meaning that the borrower's interest has to be capitalized, that is, added to the borrower's principal balance. Such borrowers are called "Ponzi finance units". 3. Hyman Minsky's general model of financial crises, called the Financial Instability Hypothesis (FIH) that has been revived as an explanation of the Great Recession. It was popularized, in particular, by Paul McCulley, formerly of PIMCO (several of his many articles influenced by Minsky are on the reading list). But Charles Kindleberger's "Mania, Panic and Crashes", generally regarded by economists as the classic exposition of financial crises (hence, also on your reading list), also places Minsky's theories at the center of his general model of financial crises. Hyman Minsky's general model of financial crises, called the Financial Instability Hypothesis (FIH) that has been revived as an explanation of the Great Recession. It was popularized, in particular, by Paul McCulley, formerly of PIMCO (several of his many articles influenced by Minsky are on the reading list). But Charles Kindleberger's "Mania, Panic and Crashes", generally regarded by economists as the classic exposition of financial crises (hence, also on your reading list), also places Minsky's theories at the center of his general model of financial crises.

shadow banking system

Lecture 11 p. 13 • The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions. The shadow banking system has escaped regulation primarily because it did not accept traditional bank deposits. As a result, many of the institutions and instruments were able to employ higher market, credit and liquidity risks, and did not have capital requirements commensurate with those risks. Subsequent to the subprime meltdown in 2008, the activities of the shadow banking system came under increasing scrutiny and regulations.

derivative

Lecture 9 and 10 -A financial ________is a financial instrument that has a payoff derived from other financial instruments. -Example: forwards, futures, options, credit default swaps, Collateralized mortgage obligations (CMOs) _______ are contracts between two individuals that have a zero-sum payoff. That is, whatever gain one party makes is a loss to the other party. Does this mean the party that loses is unhappy? Not necessarily. Because they may be taking the _____ position, not for its return, but for its ability to dampen or eliminate the volatility of their return, in other words, to take out financial insurance. - _______ can be used, and the general history of derivatives is that they are usually first developed, as hedging instruments. In other words, if you have a financial risk, you may be able to lay off or "hedge" that risk by purchasing a _______ that has a payoff structure that is the opposite of your existing risk. Risk, in this sense, is defined as simply having an uncertain payoff, that is, your return will depend on the way the future turns out, which is, of course, uncertain.

Understand why options give asymmetric payoffs, and particularly the difference between the asymmetry for buyers of options versus sellers of options.

Lecture 9. p. 8 Option Payoff Structures Options are a very flexible tool for managing or taking risk. To understand how, we look at payoff structures for a few types of options and option strategies (combining more than a single option). A payoff structure shows the payoff to an option or set of options as a function of the spot price of the underlying. It is important to realize that options give asymmetrical payoffs because the optionality gives a limited downside for the holder of the option (i.e. the holder will not exercise an option with a large loss) while the writer of the option has a limited upside (because his counterparty will not exercise the option if it means handing a lot of cash to the writer of the option). The asymmetric nature of the payoffs gives rise to kinked payoffs that look like hockey sticks, so the payoff diagrams are sometimes called hockey stick diagrams. The key to constructing a payoff structure is to realize that buying an option entails paying a premium, while selling or writing an option involves receiving a premium. Thus, buying an option has a negative payoff, equivalent to the option premium, until the option is in the money, while selling an option has a positive payoff, equivalent to the premium, until the option is in the money.

market maker

Part of the underwriting process also involves an implicit commitment by the sell-side to act as ______, middlemen whose job it is to always provide a quote to both potential buyers and sellers of a specific security, thus trying to help ensure liquidity (the ability to buy and sell) in a market. Generally, a company that underwrites a specific security makes some implicit commitment to act as a market maker in that security.

Procyclical Behavior

Procyclical behavior is when economic agents behave in a way to reinforce the current stage of the economic or financial cycle. Thus, when times are booming, economic agents will be willing to take more and more risk, feeding ever more speculative activities. In particular, Minsky speaks of credit booms, and procyclical forces that will push a credit boom into an unsustainable situation. Once the economy or financial system is contracting, economic agents will act, once again, to reinforce the contraction. In Minsky's model, this happens, in particular, as creditors withdraw credit, thus exacerbating the economic contraction and a sell-off in asset markets.

VIX- volatility index

Some of the most closely tracked market indicators are measures of implied volatility. The most well-known measure of implied volatility is called the ________ (which stands for _______). It is derived from options prices on the S&P 500 index of stocks. It is widely cited in the financial press, and is often referred to as the fear index, since it indicates, in effect, the degree of uncertainty on the S&P 500, the most important stock index (and therefore arguably the most important risky market) in the world.

Arbitrageur

Someone who takes advantage of temporary geographic differences in the exchange rate by simultaneously purchasing a currency in one market and selling it in another market

(1) Covered Position vs. (2) Naked Position

TWO TERMS Lecture 9, p. 7-8 1. If one uses an option as a hedge, that is, if one owns a long (short) position in the underlying and sells a call (put), then one is said to be taking a ________ position. _____ is the act of completing an offsetting transaction so as to eliminate a liability or obligation. 2. The opposite is called a ______ position. In a ______ position, the writer of the option has no long or short position in the underlying. A securities position that is not hedged from market risk. Both the potential gain and the potential risk are greater when a position is (2) ______ instead of (1)______. A (1)______ position is hedged from market risk. If an investor simply holds 500 shares of Ford, he or she has a (2)______ position in Ford. If the investor wanted to (1) ____ this position, he or she could buy put option contracts, which would help protect against downward movements in the price of Ford shares. Whether to have a (2)______ position is rarely a concern for most small investors, but it is a concern for large investment holders and institutions.

Credit Default Swap (CDS) Spread

The amount of the annual premium (as a percent of the amount of protection) is referred to as the __________. The ________ is a measure of default risk. The higher the _______, the more the protection seller needs to be compensated in case of a default. A CDS contract has an expiration date, after which the contract is null and void. Market practice has converged on the bulk of CDS being written for a term of 5 years. For example, if the ________ is 100 bps, the protection buyer would pay $100,000 per $10 million of protection, annually.

Fat Tail distribution

The far right and far left of the distribution (the "tails") would have much higher probabilities than they would in a normal distribution. distributions that have a short head (the few choices that are popular) and a long tail (the many choices that appeal to only small groups of customers).

investment mandate

The large investment managers also manage institutional money outside of mutual funds, in the form of specialized ________. A _________ is a requirement by a large institutional investor, such as a pension fund or endowment, to manage their money in a specific way. For instance, specialized ________ might restrict the investment manager to invest only in highly-rated assets, or to eschew investments in enterprises they would deem morally dubious (e.g. companies in the tobacco or defense industries, or companies that are thought to contribute heavily to pollution or that support repressive political regimes through their business activities). Only quite large institutional investors can get specialized ______. For instance, when I was at PIMCO in the early 2000s, you could get a specialized _______ only if you had PIMCO manage at least $100 million of your money.

What's the difference between active and passive portfolio management?

The question to ask is "can investors that deviate in their security selection from market indices thereby systematically outperform that index?" The answer is no and there are two wrong ways to test: 1. Looking at all asset managers out there to see i they outperform on average. This leads to "negative evidence." Ie: survivorship bias. 2. Managers who consistently outperform the markets. "Fooled by randomness." We put too much weight on skill and not enough on luck.

counterparty risk

The risk that the other party to a transaction will not fulfill their obligations; includes settlement risk and credit risk. ________ is lower for futures contracts than for forward contract.

What is the difference between the Sell Side vs. the Buy Side?

The sell side is responsible for helping end-users tap the capital markets. The buy side of the market consists of the ultimate buyers of securities and their agents. The buy side is much more disaggregated.

Minsky Moment/Reverse Minsky Journey

This process of gradually unwinding credit availability to Ponzi units, speculative units, and finally possibly even hedge units, is what McCulley dubs a "reverse Minsky journey". When a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs the worse the crisis will be. This crisis is named after Hyman Minsky, an economist and professor famous for arguing the inherent instability of markets, especially bull markets. He felt that long bull markets only ended in large collapses. • The phrase "Minsky moment" was coined by Paul McCulley in 1998 while referring to the Asian Debt Crisis of 1997, in which speculators put increasing pressure on dollar-pegged Asian currencies until they eventually collapsed. These types of crises occur because investors take on additional risk during prosperous times or bull markets. The longer a bull market lasts, the more risk is taken in the market. Eventually, so much risk is taken that instability ensues. For example an investor might borrow funds to invest while the market is in an upswing. If the market drops slightly, leveraged assets might not cover the debts taken to acquire them. Soon after, lenders start calling in their loans. Speculative assets are hard to sell, so investors start selling less speculative ones to take care of the loans being called in. The sale of these investments causes an overall decline in the market. At this point, the market is in a Minsky moment. The demand for liquidity might even force the country's central bank to intervene.

Credit Default Swap (CDS)

• (INVESTOPEDIA) Designed to transfer the credit exposure of fixed income products between parties. A _________ is also referred to as a credit derivative contract, where the purchaser of the _________ makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A _______ is considered insurance against non-payment. A buyer of a _______ might be speculating on the possibility that the third party will indeed default. • The buyer of a _________ receives credit protection, whereas the seller of the ______ guarantees the credit worthiness of the debt security. In doing so, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, the buyer of a _________ will be entitled to the par value of the contract by the seller of the _______, should the third party default on payments. By purchasing a ________, the buyer is transferring the risk that a debt security will default.

the "Greenspan Put"

• 1. A description of the perceived attempt of then-chairman of the Federal Reserve Board, Alan Greenspan, of propping up the securities markets by lowering interest rates and thereby helping money flow into the markets. • Investors assumed that they would be able to liquidate their stocks at a set price at or before a future date as if there was a built-in put option. They believed that Greenspan would manipulate monetary policy and continue to maintain market stability. While the former Fed chair's actions did have an effect on the markets, it was not necessarily his objective. • The term was coined in 1998 after the Fed lowered interest rates following the collapse of the investment firm Long-Term Capital Management. The effect of this rate reduction was that investors borrowed funds more cheaply to invest in the securities market, thereby averting a potential downswing in the markets. 2. Greenspan became well known for a policy that came to be known as "the Greenspan put". The term came from the options markets that we studied earlier. A "put option" gives the holder the right to sell an asset, and is in the money when the spot price falls below the strike price. In other words, if you hold a put option, you are protected against declines in asset prices.

Sell Side

• 1. Broadly speaking, the ____ is responsible for helping end-users tap the capital markets. Thus, they will underwrite securities, including bonds and equities. • 2. The ____ has (i) capital markets specialists that work directly with the borrowers, that advise the borrowers in how to tap markets and that actually undertake the process of issuance, (ii) analysts that provide (hopefully) independent analysis of issuers, as well as broader economic and financial trends, and (iii) a sales force, whose job it is to market the securities to the buy side. 3. The major ____ institutions are the major global banks, many of which you will have heard of, including: • JP Morgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America/Merrill Lynch in the United States; • Commerzbank and Deutsche Bank in Germany; • HSBC, RBS and Barclays in the U.K.; • Credit Suisse and UBS in Switzerland; • BNP Paribas and Société Générale (Soc Gen) in France; • Santander and BBVA in Spain; • ING in the Netherlands; • Nomura, Daiwa and Mitsubishi UFJ in Japan. 4. some institutions are engaged in both the buy side and the ___ at the same time. In particular, some of the largest sell-side institutions in the world, generally the biggest investment banks, have some buy-side functions housed within their broader corporate entity (e.g. proprietary trading and asset management companies).

Buy Side

• 1. The _____of the market consists of the ultimate buyers of securities and their agents. The ____ is much more disaggregated than the sell side because there are few economies of scale. The sell side needs large computer systems, marketing power (including branding), large legal departments, etc. While the ___ also has its share of global giants, it also consists of thousands of mom-and-pop type small hedge funds, personal money management companies, and small family wealth management offices that are dedicated to managing the assets of wealthy families. 2. The importance of the _____ is that it is responsible for actually making the asset allocation decisions that we have spent a good deal of time examining in the first few lectures of the course. Thus, the buy side decides how much capital goes into the stock market, how much into the credit markets, which securities are bought and sold, and which strategies are employed. 3. one could categorize ______ investors by the types of assets in which they invest (especially bonds versus equities), by the investment styles they pursue (e.g. value versus growth investors in equities), by whether they pursue active or passive investment strategies, by whether they serve mostly retail or institutional clients, by whether they are principals or agents, etc

leverage

• 1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. • 2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

forward

• A ________ is simply an agreement between two parties to sell something, not now, which would be selling on the "spot" market, but at a specific point in the future for a specific price. This type of derivative is very frequently used in commodity (agricultural, mining, energy) markets, for the simple reason that there is a great deal of uncertainty about the payoffs to producing commodities. • A _________ is completely customizable, and therefore can be used to offset exactly whatever risk one of the counterparties is trying to hedge.. The two important dimensions in which it is customizable include specifying the nature of what is to be delivered (e.g. 473 tons of South Caroline pine pulp) and the date on which it is to be delivered (e.g. June 17, 2016). • The disadvantage of a ______ is counterparty risk, that is, the risk that the party with whom you have contracted may be unable or unwilling to make good on the contract (e.g. because of financial stress), and also illiquidity. • One cannot easily offset a ________ position. • Parties must negotiate with the counterparty to the contract. • ______ contracts usually entail delivering the underlying (e.g. delivery of the timber in the forward discussed above).

option

• A financial derivative that represents a contract sold by one party (_____ writer) to another party (____ holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). • Call ______ give the option to buy at a predetermined price, so the buyer would want the stock to go up. • Put ______ give the option to sell at a predetermined price, so the buyer would want the stock to go down.

put option

• An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares. • A _____ becomes more valuable as the price of the underlying stock depreciates relative to the strike price.

CDS Spread

• Any sudden and tangible (negative) change in a borrower's credit standing or decline in credit rating. A _______ brings into question the borrower's ability to repay its debt. It is the defining trigger in a credit derivative contract, or credit default swap. If the borrower experiences a credit event, then the buyer of the contract must pay the seller an agreed-upon sum to cover the loss. ________ include bankruptcies or violating a bond indenture or other loan agreement. Any decline in the borrower's credit rating can trigger the swap. ________ always refer to the condition of the borrower pertaining to the underlying asset and not to either the lender or the purchaser of the swap.

Lecture 11 - Concept 1

• Be able to describe the basic features of the Minsky model (the Financial Instability Hypothesis), and understand how it implies that the financial system is inherently unstable. Be able to apply it to the recent financial crisis.

Lecture 12 - Concept 2

• Be able to discuss how the features of the Eurozone and banking regulation contributed to the onset of the European crisis

Lecture 12 - Concept 5

• Be able to discuss some elements of the Eurozone policy response, especially why Draghi's "whatever it takes" pledge seems to have stemmed the crisis.

Lecture 6 - Concept 5

• Be able to discuss the basic empirical strategies for testing whether markets are efficient (e.g. can active managers/funds beat the market, do market returns actually follow a random walk?)

Lecture 6 - Concept 4

• Be able to discuss the pros and cons of EMT, including the challenge that asset price bubbles pose to the theory.

Lecture 12 - Concept 1

• Be able to explain at a basic level the features that the U.S. and European crisis had in common and the factors that give each of them a distinct character.

Lecture 11 - Concept 6

• Be able to explain what wholesale financing is, and the risks associated with it, in particular, the shadow bank equivalent of a bank run.

Lecture 9 - Concept 2

• Be able to look at the payoff diagram for a particular options strategy and try to give some intuition why an investor might want to either take a long or a short position in that strategy

Lecture 8 - Concept 4

• Be able to say what distinguishes emerging market financing.

Lecture 9 - Concept 3

• Be able to say whether a long/short call/put option is a long or short position in the underlying asset

Lecture 12 - Concept 3

• Be able to trace the key links between banks and sovereigns in the Eurozone crisis. That is, why can financial distress in either banks or in sovereigns spread to the other. Be able to cite a couple of examples.

Lecture 11 - Concept 3

• Be familiar with Paul McCulley's concept of a Shadow Banking System:

Lecture 6 - Concept 6

• Be familiar with some of the empirical anomalies that pose a challenge to EMT (calendar effects, small market effects, Shiller's volatility argument), as well as academics' arguments (as encapsulated in Malkiel) why they do not convincingly invalidate EMT.

Lecture 6 - Concept 3

• Be familiar with the role of arbitrage in making markets efficient and be able to give the basic intuition of Shleifer and Vishny why arbitrage might break down and keep markets from having an efficient outcome.

Lecture 7 - Concept 3

• Be familiar with the role the Money-Market funds played in the financial crisis.

Lecture 9 - Concept 1

• Draw and label options payoffs for different types of options

Lecture 12 - Concept 4

• Know the basic components of a bank balance sheet (what are its main assets, liabilities, and capital). Be able to discuss why a bank might need to delever its balance sheet.

Lecture 8 - Concept 1

• Know the outlines of the development of emerging bond markets, especially, the development and role of Brady bonds.

Lecture 7 - Concept 4

• Know who the main types of institutional investors are and have some broad appreciation of the asset allocation process they undertake.

Passive versus Active Fund Management (lecture 7, p. 6)

• Mutual funds can be passive index funds or actively managed funds. Passively managed funds, better known as "indexing", merely try to track the performance of existing indices (e.g. the S&P 500 or one of the major bond indices). Vanguard and Barclays Global Investors dominate the passively managed fund industry. Follows the idea that markets are sufficiently efficient, that it is folly to try to beat the market, and it is much better to have cheaply managed funds that merely follow major indices. • Active management is the use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. • A mutual fund is an investment vehicle that allows investors to buy into a diversified set of assets without having to spend a lot of money. One share in an index fund, such as Vanguard, gives the investor all the diversification of buying one share in each of the 500 large U.S. companies in the S&P 500.

Open-end vs. closed-end funds

• Open-end versus closed-end funds • Open-end fund: (INVESTOPEDIA) A type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell. • The majority of mutual funds are open-end. By continuously selling and buying back fund shares, these funds provide investors with a very useful and convenient investing vehicle. • It should be noted that when a fund's investment manager(s) determine that a fund's total assets have become too large to effectively execute its stated objective, the fund will be closed to new investors and in extreme cases, be closed to new investment by existing fund investors. • Open-ended funds (lecture 7 p. 7-8) accept as much investor money as they can, and simply invest whatever they get ("put the money to work" as they say on Wall Street). The value of the fund is equal to the pro rata share of the value of the investments in it. In other words, a share of an open-end mutual fund is worth the net asset value (per share) of the mutual fund. You get your money back when you redeem your shares. This automatically reduces the amount of money the mutual fund manager has to manage, and he should reduce his total holdings accordingly. • Closed-end fund (INVESTOPEDIA) is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange. • Also known as a "closed-end investment" or "closed-end mutual fund." • Despite the name similarities, a closed-end fund has little in common with a conventional mutual fund, which is technically known as an open-end fund. • The former raises a prescribed amount of capital only once through an IPO by issuing a fixed number of shares, which are purchased by investors in the closed-end fund as stock. Unlike regular stocks, closed-end fund stock represents an interest in a specialized portfolio of securities that is actively managed by an investment advisor and which typically concentrates on a specific industry, geographic market, or sector. The stock prices of a closed-end fund fluctuate according to market forces (supply and demand) as well as the changing values of the securities in the fund's holdings. • A closed-end fund (Lecture 7 p. 7-8) limits the number of investors. The shares of a closed end fund can trade only on the secondary market, like stocks, for which at any given time there is also a fixed supply. In other words, investors in a closed end fund can only trade with other investors in the fund. As a result, the shares of a closed-end fund do not have to trade at the net asset value of the assets in the fund. For instance, if the current net asset value of a mutual fund is $100 million and there were 10 million shares outstanding, then in an open-end mutual fund, the share price would be $10. In a closed-end fund, the share price could, in principle, be anything. As it happens, closed-end funds typically trade at a discount to open-end funds (i.e. in this case, less than $10), a fact that seems to violate the law of one price, and which has been dubbed the "closed-end fund puzzle". • The advantage of a closed-end fund for the fund manager is that the shares cannot be redeemed, that is, the investor cannot demand her money back from the fund; she can only sell her shares to other investors. This means that the investor does not face pressure to sell their assets to meet redemption pressures from investors. This allows closed-end managers to have a longer-term investment perspective. In principle, this could benefit the purchasers of the fund themselves as the managers are less likely to be forced to sell assets cheaply in a panic situation. Still, while there are many closed-end funds in number, they are now vastly dominated by open-end funds, which account for about 97 percent of the mutual fund market by value.

strike price

• The price at which a specific derivative contract can be exercised. ______ is mostly used to describe stock and index options, in which _____ are fixed in the contract. For call options, the ______ is where the security can be bought (up to the expiration date), while for put options the _______ is the price at which shares can be sold. • Also known as the "exercise price." • The difference between the underlying security's current market price and the option's ______ represents the amount of profit per share gained upon the exercise or the sale of the option. This is true for options that are in the money; the maximum amount that can be lost is the premium paid. • ______ are one of the key determinants of the premium, which represents the market value of an options contract. Other determinants include the time until expiration, the volatility of the underlying security and prevailing interest rates. • _______are established when a contract is first written.

absolute return

• The return that an asset achieves over a certain period of time. -This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset - usually a stock or a mutual fund - achieves over a given period of time. • Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark. • Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets. • In general, a mutual fund seeks to produce returns that are better that its peers, its fund category, and/or the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. As an investment vehicle, an absolute return fund seeks to make positive returns by employing investment

Lecture 7 - Concept 1

• Understand at a very basic level what the sell side of the market does.

Lecture 7 - Concept 5

• Understand how investors use directional or relative value strategies.

Lecture 6 - Concept 1

• Understand that the notion of an efficient market relates to its ability to absorb information (in the sense that the information will be reflected in an asset price), and that Fama's variants of efficient market theory (EMT) are distinguished by the particular information set that is supposed to be absorbed.

Lecture 7 - Concept 2

• Understand the broad differences among different types of buy-side investors.

Lecture 11 - Concept 5

• Understand the causes of the growth of the shadow banking system, including regulatory arbitrage and the demand for safe assets by institutional cash pools (per Zoltan Pozsar)

Lecture 8 - Concept 3

• Understand the difference between push and pull factors in emerging market financing. Understand the "search for yield".

Lecture 8 - Concept 2

• Understand the importance of ratings agencies and indices in bond markets.

Lecture 9 - Concept 4

• Understand the relationship between volatility and options prices, and why, using the Black-Scholes formula, you can back out what volatility the market is implying from options prices. (You certainly do not need to be able to reproduce the Black-Scholes formula).

Lecture 11 - Concept 2

• Understand the role of the Greenspan put in the U.S. financial crisis

Lecture 11 - Concept 4

• Understand what McCulley sees as the key features of a shadow bank

Lecture 6 - Concept 2

• Understand why prices in an efficient market should follow a random walk. Be familiar with the challenges posed to EMT by Mandelbrot's notions that markets may not follow a normally distributed random walk.

Black Swans

Unpredicted, but highly impactful events

Lecture 9 - Concept 5

• Understand why options give asymmetric payoffs, and particularly the difference between the asymmetry for buyers of options versus sellers of options.

traunche

(Lecture 10, p. 8) In a CDO, investors buy different slices of the security, called _______ (French for slice). Each ________ has a different level of "seniority", meaning if some of the assets within the CDO default, investors in different tranches do not share equally in the losses. Rather, losses are imposed sequentially on different tranches, from most junior to most senior. This is what the "structured" refers to in the name of the product. That is, a structure of payments is imposed on the securitization. INVESTOPEIA- One of a series of fund allotments earmarked for a specific purpose, such as a financing round in a start-up. ________ are used by venture capital firms as a means of minimizing risk. It is used to describe instruments such as mortgage-backed securities that can be sliced into smaller pieces for sale to investors. For example, a development-stage company that has sought venture capital funding may initially receive a $2 million ______ out of a $5 million financing round, with the balance to be received after a month.

cash settlement

1. (INVESTOPEDIA) A settlement method used in certain future and option contracts whereby, upon expiry or exercise, the seller of the financial instrument does not deliver the actual underlying but transfers the associated cash position. 2. For example, the purchaser of a cotton future that is cash settled, rather than being required to take ownership of physical bundles of cotton, pays the difference between the spot price of cotton and the futures price.

long position

1. The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value. 2. In the context of options, the buying of an options contract.

Bell Curve

1.) Distribution of scores in which the bulk of the scores fall toward the middle, with progressively fewer scores towards the "tails" or extremes. 2.) Smoothed histogram or bar graph describing the expected frequency for each value of a variable. The name comes from the fact that such a distribution often has the shape of a ___

conventional asset (management)

_______ management uses little leverage (debt), employs "long-only" investment strategies, and is limited in its use of derivatives, at least for speculative purposes. conventional asset management equity funds, exchange traded funds and sovereign wealth funds). Examples of ______ managers: pension funds, mutual funds and insurance companies

alternative asset (management)

______________ management can deploy leverage, sometimes in considerable amounts, take speculative short positions, that is, bet on the decline of an asset's price, and may use derivatives quite liberally. Examples of ______ managers: hedge funds, private equity funds, exchange traded funds and sovereign wealth funds

directional trade

_________makes money only if the market goes in a specific direction. - So, for instance, long positions in both stocks A and B benefit only in the first situation in which the stock market goes up (the investor would earn $150,000) but loses in the second situation in which the market goes down (losing $150,000). Short positions in both A and B would make money if the market as a whole falls, and lose money if the market as a whole rises. -in _________strategies, you make money as long as you guess the direction of the market right (rising or falling). -there are hedge funds that are largely ______ investors, and that in fact take additional risks by "leveraging" up on directional bets. In that case, the term "hedge fund" is really a misnomer.