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CFA I Reading 36

This is a mind map about CFA I Reading 36. It is very convenient to recite and check at ordinary times. They are all compiled based on personal understanding of the teaching materials. You can add or delete them according to your own review situation. I hope it can help you clarify your knowledge and improve your learning efficiency. I wish you all good luck in the exam~

Edited at 2021-04-04 14:56:06

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CFA I Reading 36

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Outline

CFA Level 2 R21 Dividend and Repurchase Analysis
- 21
- 1
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market organization and structure

financial market

functions

primary functions: transfer risks and assets

hedgers (manage risks), borrowers (obtain fund), investors (receive fair return), traders (obtain currencies, commodities, securities)

saving

borrowing

rate of return

if the rate of the return is too high, people tend to save and borrow less

if the rate of the return is too low, people tend to borrow rather than save

the total savings = total borrowing in an economy, the rate of equilibrium

risk management

insurance company (insurance contracts)

issuing equity

investment banking

exchange assets

swap contracts

utilizing information

assets

financial assets

securities

owernship

equity securities

represent ownership positions

common stock

preferred stock

will receive the dividends earlier than the common stock

warranties

gives a right to purchase the securities at a certain price

debt securities

the borrowed will be refunded

public vs. private

public traded securities

private traded securities

contracts

swap contract

exchange interests rates, currencies, securities in the contract

forward and future contract

sell an asset in the future at a certain price

future contract is a standardized contract with fixed price, characteristics, delivery time, etc.

option contract

gives the owner a right to buy or sell an asset

call option

gives the owner to buy an asset

put option

gives the owner to sell an asset

insurance contract

credit default swaps

an insurance contract in case the issuer defaults on its dividends payments

derivatives

currencies

issued by the central government

traded in the spot market with immediate delivery

real assets

physical assets

real estates

commodities

equipments

inventories

how to trade real assets

direct trade on physical assets relevant to a lot of management costs

indirect ownership methods

real estate investment trust (REIT), master limited partnership

buy the stock of the firm owning real estates

markets

sell different types of securities

primary market

newly issued securities, IPOs

investment banking services

indication of interests

indication of interests, the investment banks to navigate the willingness of investors to invest

book builder, the collectors of indications of interests

indication of interests influence the offering price

more willingness to buy, the prices up

as a result

underwritten offering, the investment bank agrees to buy whole shares of securities

best effort basis

not promise to take all

private placement

it's always a trap

low issuance cost and offer price compared with the public market

only qualified investors have access to it

problems: information transparency is low

dividend reinvestment plan (DRP)

use the dividends to reinvest / buy new shares with lower discount

secondary market

trade the already issued securities, London exchange

quote-driven market

the dealers maintain an inventory of securities

order-driven market

orders are executed by using trading rules

trade priority rules

pricing priority

the trade is given to the highest bid and lowest ask

secondary precedence rule

the trade is given to the non-hidden orders and the earlies requesting

pricing rules

uniform pricing rules

given uniform/same price

discriminatory pricing rules

limit price orders according to the arrival time

brokered market

brokers need to find a counterpart to execute the order

e.g. art work., real estate, etc.

traditional or not

traditional investment market

alternative market

time

spot market

immediate delivery

future, forwards, options

owns a right to trade at a certain price

maturity

money market

the maturity is less than one year

capital market

the maturity is more than one year

financial intermediates

brokers, dealers, securitizers, depository institutions, insurance companies, arbitrageurs, clearing houses

brokers vs. dealers

dealers own the assets, buy or sell from its own inventories

brokers

investment banks

help sell equity securities (stock, preferred stock, warranties) and debt securities to investors

give advise on mergers and acquisitions

exchange

London exchange

alternative trading system, electronic communication network, multilateral trading facilities.

primary dealer:

trade with the central bank that may influence the economy's money supply

securitizers

A mixed bag

securitizing a pool of assets and selling interests in the pool to the investors

decrease the funding costs for the assets

insurance companies

Probability of shorting, time value of money (inflation)

arbitrageurs

buy the assets from one market and sell them in another market

market regulation

if not

fraud and theft

inside trading

costly information

defaults on return to the investors

result in

low liquidity in the financial market

unfunded new/innovative ideas

economic declines

information

informational efficiency

this is where consulting/advisory services provide

the prices changes quickly in response to the new information, the estimates of the value of the securities

operational efficiency

capital can be allocated to the most productive use

where consulting firm works on

order execution and validity

dealer

bid price, ask price, and bid-ask spread

bid price: the price where the dealer buys, the ask price where the dealer sells, and the bid-ask spread is the compensation that the dealer receives

execution instructions

how to tade

market orders

trade immediately but not the best price

limit orders

limit the price in a range

marketable or aggressive limit orders

make a new market, inside the market

behind the market

far behind the market

validity orders

when to place the order

day orders, good til canceled orders, immediate or canceled orders, good-on-close orders, stop orders

stop sell orders, stop buy orders

clearing instruction

standardized instructions by clearing house or custodians

leveraged position

buy on a margin

borrow some capital from the broker to trade based on certain percentage of the equity

there is an initial margin requirement, and when the price reduces there is a maintenance margin requirement (minimum requirement of the equity percentage)

margin call

if the percentage of the equity blows the maintenance margin requirement

margin call price

= original price * (1-initial margin)/(1-maintainence margin requirement)