Category: Uncategorized

SWAP CONTRACTS, CONVERTIBLE SECURITIES, AND OTHER EMBEDDED DERIVATIVES 1,951

SWAP CONTRACTS, CONVERTIBLE SECURITIES, AND OTHER EMBEDDED DERIVATIVES

1. CFA Examination III (1994) l(a). An interest rate swap is a customized risk management vehicle. In a pension portfolio (i.e., investment) context, an interest rate swap would be represented by an agreement between two parties to exchange a series of interest money cash flows for a certain period of...

OPTION CONTRACTS 853

OPTION CONTRACTS

1. A long straddle consists of a long call and a long put on the same stock and profits from dramatic price movement by the stock. A short straddle involves the sale of a call and a put on the same stock and profits from little or no stock price...

FORWARD AND FUTURES CONTRACTS 2,274

FORWARD AND FUTURES CONTRACTS

1. There are many different reasons some futures contracts succeed and some fail, but the most important is demand. If people need a particular contract to expose themselves to or hedge a price risk, then the contract will succeed. Most people use Treasury bond futures to gain exposure to or...

AN INTRODUCTION TO DERIVATIVE MARKETS AND SECURITIES 535

AN INTRODUCTION TO DERIVATIVE MARKETS AND SECURITIES

1. Since call values are positively related to stock prices while put values are negatively related, any action that causes a decline in stock price (e.g., a dividend) will have a differential impact on calls and puts. Specifically, an impending dividend will boost put values and depress call values. Another...

BOND PORTFOLIO MANAGEMENT STRATEGIES 1,676

BOND PORTFOLIO MANAGEMENT STRATEGIES

1. An indexing portfolio strategy is one in which the investor selects a bond portfolio that matches the performance of some bond-market index. The basic justification for this strategy is that many empirical studies have shown that portfolio managers on average can’t match the risk-return performance in the bond market...

THE ANALYSIS AND VALUATION OF BONDS 596

THE ANALYSIS AND VALUATION OF BONDS

1. The present value equation is more useful for the bond investor largely because the bond investor has fewer uncertainties regarding future cash flows than does the common stock investor. By investing in bonds with relatively no default risk (i.e., government securities) the investor can value a bond based primarily...

BOND FUNDAMENTALS 1,026

BOND FUNDAMENTALS

1. A bond is said to be “called” when the issuer, at its own discretion, “calls” in the bond, and purchases it from the holder at a price stipulated in the bond indenture. When a bond is “refunded,” it is called, but the firm reissues bonds for the same amount...

EQUITY PORTFOLIO MANAGEMENT STRATEGIES 1,064

EQUITY PORTFOLIO MANAGEMENT STRATEGIES

1. Passive portfolio management strategies have grown in popularity because investors are recognizing that the stock market is fairly efficient and that the costs of an actively managed portfolio are substantial. 2. Numerous studies have shown that the majority of portfolio managers have been unable to match the risk-return performance...

TECHNICAL ANALYSIS 693

TECHNICAL ANALYSIS

1. The principal contention of technicians is that stock prices move in trends that persist for long periods of time. Because these trends persist they can be detected by analyzing past prices. 2. Technicians expect trends in stock price behavior because they believe that new information that causes a change...

COMPANY ANALYSIS AND STOCK VALUATION 1,246

COMPANY ANALYSIS AND STOCK VALUATION

1. Examples of growth companies would include technology firms such as Intel and Microsoft. These firms have experienced very high rates of return on total assets and returns on equity when compared to market values. They retain high percentages of earnings to fund superior investment projects. Stock issues of Intel...