fmi final
NAV
(shares * price + shares * 40) / shares outstanding
Contango vs. Backwardation
- Contango = If there is little or no convenience yield (the value of having the physical commodity for use over the period of the futures contract), futures prices will be higher than spot prices. - Backwardation = When the convenience yield is high, futures prices will be less than spot prices.
Spot-futures parity theorem - two ways to acquire an asset for some date in the future:
1.Purchase it now and store it 2.Take a long position in futures both must cost the same
Weak EMHtr
A class of EMH that claims all past market trading data (trading volume. past prices, short interest) are reflected in today's stock price. Therefore, technical analysis cannot be used to predict and beat a market, but fundamental analysis can. if there were any patterns in past data that could be used for prediction, investors would already have exploited them patterns would lose value
Reverse Annuity Mortgage
A home equity loan available to homeowners over 62 years of age- the lender makes payments to the borrower based on the equity in their property (receives payments from FI) the loan comes due upon the sale of the property or death of the owner
Adjustable Rate Mortgage (ARM)
A loan characterized by a fluctuating interest rate, usually one tied to an index
Second Mortgage
A mortgage subordinate to a first mortgage; also referred to as a junior mortgage. (Recorded Second) on the same real estate as the first one
5. Which of the following would be the most appropriate benchmark to use for hedge fund evaluation?
A multifactor model.
noninsured pension fund
A pension fund administered by a financial institution other than a life insurance company.
insured pension fund
A pension fund administered by a life insurance company.
mutual funds
A pool of money used by a company to purchase a variety of stocks, bonds or money market instruments. Provides diversification and professional management for investors. barriers to entry are low
6. Evaluate the criticism that futures markets siphon off capital from more productive uses.
Because long positions equal short positions, futures trading must entail a "canceling out" of bets on the asset. Moreover, no cash is exchanged at the inception of futures trading. Thus, there should be minimal impact on the spot market for the asset, and futures trading should not be expected to reduce capital available for other uses.
Evaluate the criticism that futures markets siphon off capital from more productive uses.
Because long positions equal short positions, futures trading must entail a "canceling out" of bets on the asset. Moreover, no cash is exchanged at the inception of futures trading. Thus, there should be minimal impact on the spot market for the asset, and futures trading should not be expected to reduce capital available for other uses.
You know that firm XYZ is very poorly run. On a scale of 1 (worst) to 10 (best), you would give it a score of 3. The market consensus evaluation is that the management score is only 2. Should you buy or sell the stock?
Buy. In your view, the firm is not as bad as everyone else believes it to be. Therefore, you view the firm as undervalued by the market. You are less pessimistic about the firm's prospects than the beliefs built into the stock price.
Spot-Futures Parity Theorem
Describes the theoretically correct relationship between spot and futures prices. Violation of the parity relationship gives rise to arbitrage opportunities. parity relationaship is also called the cost of carry LHS: buy stock with deferred delivery in the futures market RHS: buy it in the spot market with immedaite delivery and carry it in inventory (tie up your funds and incur a TMV cost of rf per period but u receive dividend)
securitization example
Essentially, the mortgage-backed security turns the bank into a middleman between the homebuyer and the investment industry. A bank can grant mortgages to its customers and then sell them on at a discount for inclusion in an MBS. The bank records the sale as a plus on its balance sheet and loses nothing if the homebuyer defaults sometime down the road. The investor who buys a mortgage-backed security is essentially lending money to home buyers. An MBS can be bought and sold through a broker. The minimum investment varies between issuers.
investor abuses
Even with heavy regulation, investor abuses still occur. •Market timing is short-term trading of mutual funds that seeks to take advantage of short-term discrepancies between the price of a mutual fund's shares and out-of-date values on the securities in the fund's portfolio. •Late trading involves buys and sells long after prices have been set at 4:00 pm E.T. •Directed brokerage occurs when brokers improperly influence investors on their fund recommendations. •Improperly assessed fees occur when brokers trick customers into thinking they are buying no-load funds or fail to provide discounts properly.
Profit to Short
F0- Pt original futures price - spot price at maturity
TRUE OR FALSE: All else equal, the futures price on a stock index with a high dividend yield should be higher than the futures price on an index with a low dividend yield.
False. For any given level of the stock index, the futures price will be lower when the dividend yield is higher. This follows from spot-futures parity: F0 = S0 (1 + rf - d) T
TRUE OR FALSE: All else equal, the futures price on a high-beta stock should be higher than the futures price on a low beta stock
False. The parity relationship tells us that the futures price is determined by the stock price, the interest rate, and the dividend yield; it is not a function of beta.
With respect to hedge fund investing, the net return to an investor in a fund of funds would be lower than that earned from an individual hedge fund because of: 1. Both the extra layer of fees and the higher liquidity offered. 2. No reason; fund of funds earn returns that are equal to those of individual hedge funds. 3. The extra layer of fees only.
Funds of funds are usually considered good choices for individual investors because they offer diversification and usually more liquidity. One problem with funds of funds is that they usually have lower returns. This is a result from both the additional layer of fees and cash drag (resulting from the desire for liquidity).
Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?
Hedge funds tend to invest in more illiquid assets so that an apparent alpha may be in fact simply compensation for illiquidity. Hedge funds' valuation of less liquid assets is questionable. Survivorship bias and backfill bias result in hedge fund databases that report performance only for more successful hedge funds. Hedge funds typically have unstable risk characteristics making performance evaluation that depends on a consistent risk profile problematic. Tail events skew the distribution of hedge fund outcomes, making it difficult to obtain a representative sample of returns over relatively short periods of time.
Which of the following would be a viable way to earn abnormally high trading profits if markets are semistrong-form efficient? 1. Buy shares in companies with low P/E ratios. 2. Buy shares in companies with recent above-average price changes. 3. Buy shares in companies with recent below-average price changes. 4. Buy shares in companies for which you have advance knowledge of an improvement in the management team.
In a semistrong-form efficient market, it is not possible to earn abnormally high profits by trading on publicly available information. Information about P/E ratios and recent price changes is publicly known. On the other hand, an investor who has advance knowledge of management improvements could earn abnormally high trading profits (unless the market is also strong-form efficient).
A good part of a company's future prospects are predictable. Given this fact, stock prices can't possibly follow a random walk.
In an efficient market, any predictable future prospects of a company have already been priced into the current value of the stock. Thus, a stock share price can still follow a random walk.
fixed rate mortgages
Locks in the borrower's interest rate over the life of the mortgage.
sales load
MF COST 12b-1 fees- related to the distribution cost of MF shares cannot exceed .75% of a fund's average net assets per year
load fund
MF COST up front sales or commission charge
Suppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH?
Market efficiency implies investors cannot earn excess risk-adjusted profits. If the stock price run-up occurs when only insiders know of the coming dividend increase, then it is a violation of strong-form efficiency. If the public also knows of the increase, then this violates semistrong-form efficiency.
Would a market-neutral hedge fund be a good candidate for an investor's entire retirement portfolio? If not, would there be a role for the hedge fund in the overall portfolio of such an investor?
No, a market-neutral hedge fund would not be a good candidate for an investor's entire retirement portfolio because such a fund is not a diversified portfolio. The term market-neutral refers to a portfolio position with respect to a specified market inefficiency. However, there could be a role for a market-neutral hedge fund in the investor's overall portfolio; the market-neutral hedge fund can be thought of as an approach for the investor to add alpha to a more passive investment position such as an index mutual fund.
8. Is statistical arbitrage true arbitrage? Explain.
No, statistical arbitrage is not true arbitrage because it does not involve establishing risk-free positions based on security mispricing. Statistical arbitrage is essentially a portfolio of risky bets. The hedge fund takes a large number of small positions based on apparent small, temporary market inefficiencies, relying on the probability that expected return for the totality of these bets is positive
7. Which of the following hedge fund types is most likely to have a return that is closest to risk-free?
Of the equity hedge funds, market neutral strategies should have a return that is closest to risk-free; however, they are not completely risk-free and typically have exposure to both systematic and unsystematic risks.
Flat Benefit Formula
PF pays a flat amount for every year of employment
final pay formula
Pension fund that pays retirement benefits based on a percentage of the average salary during a specified number of years at the end of the employee's career times the number of years of service. (salary at the end * % * number of years worked)
career average formula
Pension fund that pays retirement benefits based on the employee's average salary over the entire period of employment. (average salary * % * number of years worked)
pass-through securities
Pools of loans (such as home mortgage loans) sold in one package. Owners of pass-throughs receive all of the principal and interest payments made by the borrowers bank gets servicing fee
Profit to Long
Pt - F0 Spot price at maturity - original future price
3. What is the difference in cash flow between short-selling an asset and entering a short futures position?
Short selling results in an immediate cash inflow, whereas the short futures position does not: Action Initial CF Final Short sale +P0 -PT Short futures 0 F0 - PT
Hedge: You own a large position in a relatively illiquid bond that you want to sell.
Take a short position in T-bond futures, to offset interest rate risk. If rates increase, the loss on the bond will be offset to some extent by gains on the futures.
2. Why might individuals purchase futures contracts rather than the underlying asset
The ability to buy on margin is one advantage of futures. Another is the ease with which one can alter one's holdings of the asset. This is especially important if one is dealing in commodities, for which the futures market is far more liquid than the spot market.
Normal Backwardation
The condition in futures markets in which futures prices are lower than expected spot prices.
5. What is the difference between the futures price and the value of the futures contract?
The futures price is the agreed-upon price for deferred delivery of the asset. If that price is fair, then the value of the agreement ought to be zero; that is, the contract will be a zero-NPV agreement for each trader. Over time, however, the price of the underlying asset will change and this will affect the value of the contracT
Fannie Mae
The government buy mortgages from banks so the banks can lend $
A hedge fund with net asset value of $62 per share currently has a high water mark of $66. Is the value of its incentive fee more or less than it would be if the high water mark were $67?
The incentive fee is typically equal to 20 percent of the hedge fund's profits beyond a particular benchmark rate of return. However, if a fund has experienced losses in the past, then the fund may not be able to charge the incentive fee unless the fund exceeds its previous high-water mark. The incentive fee is less valuable if the high-water mark is $67, rather than $66. With a high-water mark of $67, the net asset value of the fund must reach $67 before the hedge fund can assess the incentive fee. The high-water mark for a hedge fund is equivalent to the exercise price for a call option on an asset with a current market value equal to the net asset value of the fund.
How might the incentive fee of a hedge fund affect the manager's proclivity to take on high-risk assets in the portfolio
The incentive fee of a hedge fund is part of the hedge fund compensation structure; the incentive fee is typically equal to 20% of the hedge fund's profits beyond a particular benchmark rate of return. Therefore, the incentive fee resembles the payoff to a call option, which is more valuable when volatility is higher. Consequently, the hedge fund portfolio manager is motivated to take on high-risk assets in the portfolio, thereby increasing volatility and the value of the incentive fee.
Good News, Inc., just announced an increase in its annual earnings, yet its stock price fell. Is there a rational explanation for this phenomenon?
The market may have anticipated even greater earnings. Compared to prior expectations, the announcement was a disappointment.
We know that the market should respond positively to good news and that good-news events such as the coming end of a recession can be predicted with at least some accuracy. Why, then, can we not predict that the market will go up as the economy recovers?
The market responds positively to new news. If the eventual recovery is anticipated, then the recovery is already reflected in stock prices. Only a better-than-expected recovery should affect stock prices.
Examine the accompanying figure, which presents cumulative abnormal returns both before and after dates on which insiders buy or sell shares in their firms. How do you interpret this figure? What are we to make of the pattern of CARs before and after the event date?
The negative abnormal returns (downward drift in CAR) just prior to stock purchases suggest that insiders deferred their purchases until after bad news was released to the public. This is evidence of valuable inside information. The positive abnormal returns after purchase suggest insider purchases in anticipation of good news. The analysis is symmetric for insider sales.
Which of the following is most accurate in describing the problems of survivorship bias and backfill bias in the performance evaluation of hedge funds?
The problem of survivorship bias is that only the returns for survivors will be reported and the index return will be biased upwards. Backfill bias results when a new hedge fund is added to an index and the fund's historical performance is added to the index's historical performance. The problem is that only funds that survived will have their performance added to the index, resulting in upward bias in index returns.
TRUE OR FALSE: The beta of a short position in the S&P 500 futures contract is negative.
The short futures position will profit when the S&P 500 Index falls. This is a negative beta position.
Why is there no futures market in cement?
There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support the futures market would not materialize. Only those commodities and financial securities with significant volatility tend to have futures contracts available for hedgers and speculators.
Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis?
Thinly traded stocks will not have a considerable amount of market research performed on the companies they represent. This neglected-firm effect implies a greater degree of uncertainty with respect to smaller companies. Thus positive CAPM alphas among thinly traded stocks do not necessarily violate the efficient market hypothesis since these higher alphas are actually risk premiums, not market inefficiencies.
If stock prices follow a random walk, then capital markets are little different from a casino.
Though stock prices follow a random walk and intraday price changes do appear to be a random walk, over the long run there is compensation for bearing market risk and for the time value of money. Investing differs from a casino in that in the long-run, an investor is compensated for these risks, while a player at a casino faces less than fair-game odds.
Contango
When a future price is above the spot price; Caused by companies wanting to lock in future rates to match future liabilities
If markets are efficient, you might as well select your portfolio by throwing darts at the stock listings in The Wall Street Journal.
While the random nature of dart board selection seems to follow naturally from efficient markets, the role of rational portfolio management still exists. It exists to ensure a well-diversified portfolio, to assess the risk-tolerance of the investor, and to take into account tax code issues.
You believe that bonds today are selling at quite attractive yields, and you are concerned that bond prices will rise over the next few weeks
You want to protect your cash outlay when the bond is purchased. If bond prices increase, you will need extra cash to purchase the bond. Thus, you should take a long futures position that will generate a profit if prices increase.
defined benefit PF
a fund in which the employer agrees to provide the employee with a specific cash benefit upon retirement.
Mortgage Backed Bonds
a group of mortgage assets pledged as collateral against a MBB
Mortgage Backed Securities (MBS)
a type of asset-backed security that is secured by a mortgage or collection of mortgages (separates credit risk)
example
a= .05 and b=.8 .05+.5*1=.85% (predicted) actual= 2% 2-.85= 1.15%
active vs passive strategy
active- expensive suitable only for large portfolios passive: no attempt to outsmart market, accepts EMH, (infex funds and etfs), buy and hold bc EMH is fair priced, low cost
abnormal returns
actual - expected (predicted)
How do the versions of EMH differ?
all prices should reflect AVAILABLE info differ in the notion of what is MEANT by available info TRADING DOES NOT NEED TO OCCUR FOR PRICE TO JUMP
semistrong form
all publicly available information regarding the propsects of a firm must be already reflected in stock price this includes past prices & fundamental data (balance sheet, earnings, etc) investor cannot use publicly available info to try to make profit
What does EMH say about stock prices?
already reflects all available information a forecast about favorable future performance leads to favorable current performance investors rush to trade on new info before price jump
how do you calculate average asset value for mutual funds?
amount invested (after front load fee) + amount after growing it out / 2 yr 2: end of year 1 + amount grown out / 2
futures contract
an agreement to buy or sell at a specific date in the future at a predetermined price (trade in standardized futures exchanges, exchange standardized contract to create liquidity, marked to market, exchange mitigates credit risk)
Smart Beta
any method that is disciplined, objective and deliberately not market cap weighted so a stock rising in price does not necessarily carry with it a higher weight in portfolio
Hedge funds (HFs)
are a type of investment pool that solicits funds from (wealthy) individuals and other investors (example: commercial banks) and invests these funds on their behalf
ETFs
are long-term mutual funds that are also designed to replicate a particular stock market index.
You have a large gain on one of your Treasuries and want to sell it, but you would like to defer the gain until the next tax year.
b. Again, a short position in T-bond futures will offset the interest rate risk.
Why do stock price changes follow a random walk?
because of new information if prices are bid immediately to fair levels given ALL info, it must be they respond only to new info new info is unpredictable stock prices that change in response to new, unpredictable info also must move unpredictably
management fee for HF
computed as a % of total assets under management and run between 1.5-2%
option
contract giving investors an option to buy or sell commodities, equities, or financial assets at a specific future date using a price agreed upon today
Fama-French factors
conventional performance benchmark today is a four factor model use firm characteristics to predict returns and capture risk premiums capture sensitivity to macro factors
Hedge Fund Strategies
directional= bets one sector will outperform another nondirectional=exploit temporarily misalignment in relative valuation across sectors, not betting on broad movement in the entire market (strives to be market neutral)
no load fund
does not charge up front sales or commission charges on the sale of MF shares to an investor
example 2
drops 4% market model expected 2% gain actual - expected -4-2= -6%
how do you calculate net rate of return for mutual funds?
end amount in yr 1 (or yr 2) - how much you placed in fund in the beginning (OG amount)/(Og Amount)
freddie mac
facilitate financing of conventional mortgages
survivorship bias
failed funds drop out
discount points
fees or payments made when a mortgage is issued
amortized mortgages
fixed principal and interest payments that fully payoff the mortgage by its maturity date. Usually 15-30 years
Employee Retirement Income Security Act of 1974 (ERISA)
focused on 5 areas of reform pension plan funding, vesting of benefits, fidicuary responsibility, pension fund transferability and pension fund insurance
if rf>d
futures price will be higher on longer-maturity contracts
performance fees
give fund managers a share of any positive returns hurdle rate- a benchmark that must be realized before a performance fee can be assessed high water mark- manager does not receive a performance fee unless value of fund exeeeds the highest NAV record offshore hfs- attractive to investors bc they provide anonymity and are not subject to US taxes
put option
gives purchaser the right but not the obligation to sell the underlying security
Are markets efficient?
hard to evaluate the true ability of portfolio managers to beat the market
Hedge Funds vs Mutual Funds
hedge fund- 100 sophiscated investors, minimial disclosure of strategy, flexible risky investments, have lock up periods of liquidity, management and incentive fee mutual fund- regulations require full disclosure, no investor limit, predictable stable investments, no lock up periods of liquidity (investments move in an out), fixed compensation fee
backfill bias
hedge funds report returns only if they choose to
Funds of Funds
hedge funds that invest in one or more other funds pay an incentive fee to each underlying fee that outperforms its benchmark fund of funds add across
4 basic types of mortgages
home, commercial, farm, multifamily dwellings
relative strength: technical analysis
if ratio of stock increases relative to index. then technicians believe strength may last and offer opportunities
event studies
if security prices reflect all current info then price changes must reflect new info one should measure the importance of the event by examinin gprice changes around it
Alt-A mortgages
in between subprime and prime (risk level)
strong form tests
insider information helps insiders profit on their own stocks SEC requires insiders to register their trading activity
An open-end MF
is a fund for which the supply of shares is not fixed, but can increase or decrease daily with purchases and redemptions of shares.
defined contribution PF
is a fund in which the employer agrees to make a specified contribution to the pension fund during the employee's working years
close ended investment company
is a specialized investment company that has a fixed supply of outstanding shares, but invests in the securities and assets of other firms. Do not continuously offer their shares for sale but just offer shares like IPO style and then trade on secondary market
Unit Investment Trust (UIT)
is a specialized investment company that has a fixed supply of outstanding shares, but invests in the securities and assets of other firms. Do not continuously offer their shares for sale.
rf<d
longer maturity futures prices will be lower
semistrong tests: anomalies
low P/E ratio firms provide higher risk adjusted returns does mean market misprice stocks accordin to p/e ratios if two firms have same earnings, the riskier stock can sell at lower price and lower p/e small firm - way higher but could be bc less info book to market ratios- firms with high b-m ratios are more likely to be in financial distress
magnitude issue
magnitude issue - only managers of large portfolios can earn enough trading profits to make the exploitation of minor mispricing worth it
hedge funds types
market directional /more risky - fund seek high returns using leverage moderate risk- market neutral- funds have moderate exposure to market risk mostly longer term investment strategy risk avoidance-market neutral- strive for consistent returns w low risk
bubbles
may not be a sign of market irrationality/ineffiencies bc these are difficult to predict and exploit
subprime mortgage
mortgage for a borrower with a not-so-good credit rating
jumbo mortgages
mortgages that exceed the conventional mortgage conforming limits
collateralized mortgage obligations
multirclass pass through with a different number of bond holders / tranches gives investors great control over the maturity of the MBS
regulations of mutual funds vs hedge funds
mutual funds are super regulated while hedge funds arent (hf avoid regulations by limiting investors "accredited" ones only who make bank)
can passive investing become too big?
no still too many active managers
If weak form of the EMH must the valid the strong form be also valid
nooooo... weak form valids means just public info is there (strong form says both private and public)
conventional mortgages
not federally insured
pension funds
offer savings plans through which fund participants accumulate tax-deferred savings during their working years before withdrawing them in their retirement years •Earnings on funds invested are exempt from current taxation (that is during working years). •Tax payments are not made until funds are withdrawn by the participant (that is during retirement).
how to do annual return after 2 year
og(1+x)^2= value of investment at the end of yr 2
Which would contract the weak form of EMH?
one could have made superior returns by buying a stock after a 10% rise in price and selling after a 10% fall
selection bias issue
only unsucessful investment schemes are made public -> good schemes are remain private
price patterns
paaterns disappear as the mass of traders attempt to exploit it may be possible ocassionally uncover a profitable trading rule but the rule becomes reflected in the price as investors trade
multiperiod parity relationship
parity relationship with multiperiod applications the period to which we apply the net cost of carry is longer the difference between the futures and spot price will be larger as the maturity of the contract is longer d < rf = futures price will exceed spot price
mortgage refinancing
paying off an existing mortgage with a new mortgage that has a lower interest rate
How do FI remove mortgages from balance sheet?
pooling mortgages and selling them in secondary market securitizing mortgages (issuing securities backed by new mortgage)
most puzzling anomalies
price earnings, small firm, market to book, momentum and long term reversal (fama and french say that this can be explained by risk premiums while other people say these are evidence of inefficient markets)
relative strength: resistance/support levels
price levels above which it is difficult for stock prices to rise or below (RANGES) for example if stock was at 72 and went to 65 then investors are eager to buy it at 72 to break even but it is illogical bc then no one would buy at 71.50 or 71 if investors are buying stock at price they believe they are earning a fair expected return
EMH
prices reflect all available information
private vs public PFs
private PFs- administered by priv corporations (401k) public PFs- administered by federal, state, or local gov (social security)
balloon payment mortgages
require fixed monthly interest payments for 3 to 5 years whereupon full payment of the mortgage principal is due
weak form tests
returns over short horizon have momentu, returns over long horizon often corrects, fads hypothesis: market overreacts to news and corrects in future
IRA
self-directed retirement accounts set up by employees who may also be covered by employer-sponsored pension plans as well as self-employed individuals.
Open-end mutual funds
sell new shares to investors and redeem outstanding shares on demand at their fair market values.
Multiperiod Parity Relationship
similar to relationship between spot and futures price, can determine the proper relationships among futures prices for contracts of diff maturities fo= s0(1+rf-d)^t
Ginnie Mae
sponsoring mortgage backed securities programs of FI institutions (acting asa gaurantor to investors in MBS) used for low income etc
strong form
stock prices reflect ALL info relevant to the firm (including insider info) Advocates for this degree of the theory suggest that investors cannot make returns on investments that exceed normal market returns, regardless of information retrieved or research conducted. The strong form version of the efficient market hypothesis states that all information—both the information available to the public and any information not publicly known—is completely accounted for in current stock prices, and there is no type of information that can give an investor an advantage on the market.
lucky event issue
successful schemes may be just luck
marking to market
the daily settlement of obligations on futures positions
Basis
the difference between the futures price and the spot price
high water mark
the fee structure can give incentives to shut down a poorly performing fund (if fund experiences loss it may not be able to charge incentive unless it recovers to higher value)
call option
the right to buy an asset at a specified price on or before a specified expiration date
if the strong form is valid, must the weak form also be valid
the strong form valid = weak and semistrong valid too
leakage of info and event studies
total impact of the event not captured by the abnormal return due to leakage need to look at cumulative abnoraml return
statistical arbitrage
use of quantitative systems to uncover many perceived misalignments in relative pricing and ensure profit by averaging over all of these small bets
fundamental analysis
using economic and accounting info to predict stock prices (public info) get insights about future not yet recognized by market impossible according to semi-strong form
technical analysis
using past stock history to predict trends/future prices technicians believe the stock price responds supply to fundamental supply/demand imbalances so the adjustment period can be exploited this is impossible according to weak form!!!!!
Long
•- a commitment to purchase the commodity on the delivery date.
initial margin
•- funds or interest-earning securities deposited to provide capital to absorb losses
•Long-term funds invest in portfolios of securities with original maturities of more than one year.
•Equity funds consist of common and preferred stock. •Well diversified, so have systematic risk •Bond funds consist of fixed-income market debt securities. •Extensive interest rate risk because of their long term nature •Hybrid funds consist of both stock and bond securities.
Futures
•Futures are traded on margin. -A good faith deposit to guarantee future performance •At the time the contract is entered into, no money changes hands.
Cross Hedging
•Hedging a position using futures on another asset (because the necessary futures contract is not traded) is called cross-hedging.
arbitrage possibilities
•If spot-futures parity is not observed, then arbitrage is possible. •If the futures price is too high, short the futures and acquire the stock by borrowing the money at the risk free rate. •If the futures price is too low, go long futures, short the stock and invest the proceeds at the risk free rate.
Social Security
•Provides retirement benefits to almost all employees and self-employed individuals in the U.S. •Established in 19 35 to provide a minimum level of retirement income to all retirees. •Funded on a "pay as you go" basis. •Historically, contributions have exceeded disbursements.
Short term mutual funds
•Short-term funds invest in securities with original maturities of less than one year. •Money market mutual funds (MMMFs) are taxable funds consisting of various mixtures of money market securities. •Tax-exempt money market mutual funds contain various mixed of those money market securities with an original maturity of less than one year.
Short
•a commitment to sell the commodity on the delivery date.
calendar spread
•a long position in a futures contract of one maturity and a short position in a contract on the same commodity, but with a different maturity.
Money market mutual funds
•are an alternative to interest-bearing deposits at commercial banks •Both are safe and short term •Interest-bearing deposits (below $250,000) are fully insured by the FDIC but, but because of bank regulatory costs (such as reserve requirements, capital adequacy requirements, and deposit insurance premiums), generally offer lower returns than noninsured MMMFs.
Intercommodity spread
•buy a contract on one commodity and sell a contract on a different commodity.
Maintenance margin
•level at which the account must be replenished or position reduced
Margin call
•when the maintenance margin is reached, broker will ask for additional margin funds