Financial System Functions
ANSWER
• Allowing entities to borrow, save, issue equity, manage risk, exchange assets, utilize info
• Determine the returns that equate savings and borrowing across the economy
• Allocate capital efficiently (to the highest valued uses)
Classification of Assets
ANSWER
• Financial vs real assets
• Debt vs equity securities
• Public vs private securities
• Physical derivatives vs financial derivatives
• Spot markets (immediate delivery) vs future markets
• Primary markets vs secondary markets
• Call vs continuous markets
• Money markets vs capital markets
• Traditional markets vs alternative investment markets
Type Of Assets
ANSWER
• Securities
• Currencies
• Contracts
1
,• Commodities
• Real assets
Securities
ANSWER
• Equity
• Fixed Income
• Pooled Investments
- Mutual Funds
- ETFs
- Asset backed securities
- Hedge funds
Fixed Income Securities
ANSWER
Typically refer to debt securities that are promises to repay borrowed money in the future.
Equity Securities
ANSWER
Represent ownership in a firm and include common stock, preferred stock, and warrants.
Warrants
ANSWER
Similar to options in that they give the holder the right to buy a firm's equity shares (usually
common stock) at a fixed exercise price prior to the warrant's expiration.
A Call Option
ANSWER
2
, Gives the option buyer the right (but not the obligation) to buy an asset
A Put Option
ANSWER
Gives the option buyer the right (but not an obligation) to sell an asset
Sellers, or writers, of call (put) options
ANSWER
Receive a payment, referred to as the option premium, when they sell the options but incur
the obligation to sell (buy) the asset at the specified price if the option owner chooses to ex-
ercise it
Financial Intermediary Roles
ANSWER
• Brokers, Exchanges: Connect buyers, sellers of same security at same location and time
• Dealers: Match buyers, sellers of same security at different points in time
• Arbitrageurs: Transact with buyers, sellers of same security at same time but in different
markets
• Securitizers, depository institutions: Sell interests in a diversified pool of assets
• Insurance companies: Manage a diversified pool of risks
• Clearinghouses: Reduce counterparty risk and promote market integrity
Investor Positions
ANSWER
• Long position: Gains when asset values increase (purchase stock or calls, sell puts, take
long futures or forward positions)
• Short Position: Can result from borrowing an asset and selling it, with the obligation to re-
place the asset in the future (a short sale)- Gain when asset values decrease (sell short,
sell/write calls, purchase puts, take short positions in futures and forwards)
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ANSWER
• Allowing entities to borrow, save, issue equity, manage risk, exchange assets, utilize info
• Determine the returns that equate savings and borrowing across the economy
• Allocate capital efficiently (to the highest valued uses)
Classification of Assets
ANSWER
• Financial vs real assets
• Debt vs equity securities
• Public vs private securities
• Physical derivatives vs financial derivatives
• Spot markets (immediate delivery) vs future markets
• Primary markets vs secondary markets
• Call vs continuous markets
• Money markets vs capital markets
• Traditional markets vs alternative investment markets
Type Of Assets
ANSWER
• Securities
• Currencies
• Contracts
1
,• Commodities
• Real assets
Securities
ANSWER
• Equity
• Fixed Income
• Pooled Investments
- Mutual Funds
- ETFs
- Asset backed securities
- Hedge funds
Fixed Income Securities
ANSWER
Typically refer to debt securities that are promises to repay borrowed money in the future.
Equity Securities
ANSWER
Represent ownership in a firm and include common stock, preferred stock, and warrants.
Warrants
ANSWER
Similar to options in that they give the holder the right to buy a firm's equity shares (usually
common stock) at a fixed exercise price prior to the warrant's expiration.
A Call Option
ANSWER
2
, Gives the option buyer the right (but not the obligation) to buy an asset
A Put Option
ANSWER
Gives the option buyer the right (but not an obligation) to sell an asset
Sellers, or writers, of call (put) options
ANSWER
Receive a payment, referred to as the option premium, when they sell the options but incur
the obligation to sell (buy) the asset at the specified price if the option owner chooses to ex-
ercise it
Financial Intermediary Roles
ANSWER
• Brokers, Exchanges: Connect buyers, sellers of same security at same location and time
• Dealers: Match buyers, sellers of same security at different points in time
• Arbitrageurs: Transact with buyers, sellers of same security at same time but in different
markets
• Securitizers, depository institutions: Sell interests in a diversified pool of assets
• Insurance companies: Manage a diversified pool of risks
• Clearinghouses: Reduce counterparty risk and promote market integrity
Investor Positions
ANSWER
• Long position: Gains when asset values increase (purchase stock or calls, sell puts, take
long futures or forward positions)
• Short Position: Can result from borrowing an asset and selling it, with the obligation to re-
place the asset in the future (a short sale)- Gain when asset values decrease (sell short,
sell/write calls, purchase puts, take short positions in futures and forwards)
3
