Term
Efficient Market Hypothesis
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Definition
| The price of stocks is going to be equal to the value of the stock, and any movement in the stock price is going to be an unpredictable movement. All available information is included in the stock price. |
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Term
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Definition
| Securities with values/payoffs tied to the prices of other assets or securities |
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Term
1. Futures Contract
2. Options
3. Credit-default Swaps |
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Definition
| List the 3 main types of derivatives |
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Term
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Definition
| Agreement to trade an asset for a certain price at a future point in time. Been around for centuries, initially tied to agricultural commodities. In the 1970s, it took off with securities. |
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Term
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Definition
| The right to trade a security at a certain price any time before an expiration date. |
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Term
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Definition
| Derivatives with payouts triggered by defaults on certain debt securities. |
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Term
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Definition
| The price at which a specific derivative contract can be exercised. |
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Term
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Definition
| An option to buy a security. |
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Term
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Definition
| An option to sell a security |
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Term
Loss: Limited to the $5 fee
Gain: Potentially unlimited |
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Definition
Example:
Fee: $5
Strike Price: $50
Potential Gains (Call)
List the potential gains and losses for the owner of the option. |
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Term
Loss: Potentially unlimited
Gain: Limited to the $5 fee |
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Definition
Example:
Fee: $5
Strike Price: $50
Potential Gains (Call)
List the potential gains and losses for the writer of the option. |
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Term
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Definition
| The process in which a financial institution buys a large number of bank loans (or other previously non-tradable debt) then issues securities entitling the holders to shares of payments on the loans. |
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Term
| Mortgage-backed Securities (MBS) |
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Definition
| Securities that entitle an owner to a share of payments on a pool of mortgage loans |
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Term
AIG
American International Group |
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Definition
| The name of the insurance company who sold credit default swaps to people who didn't actually own the mortgage-backed securities. |
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Term
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Definition
| Derivatives exist to help hedge (share) ___ |
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Term
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Definition
| In Foreign Exchange Rate markets, the minimum trade is usually $_____ |
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Term
London
New York
Tokyo
London is most important because it is geographically centered between New York and Tokyo |
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Definition
| List the 3 biggest financial centers of the world, most important first (and why is it most important) |
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Term
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Definition
In £/$
When the value of £ goes up, the currency has ___
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Term
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Definition
In £/$
When the value of £ goes down, the currency has ___ |
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Term
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Definition
| It is difficult to hedge foreign exchange rates for longer than ____ |
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Term
| Nominal Exchange Rate (e) |
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Definition
| The price of one unit of a currency in terms of another currency. |
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Term
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Definition
The measure of the relative prices of domestic and foreign goods.
ε = eP/P* |
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Term
| Trade-Weighted Exchange Rate |
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Definition
| Weighted average of a country's real exchange rates, with weights proportional to the levels of trade. |
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Term
| Purchasing Power Parity (PPP) |
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Definition
| Theory of exchange rates based on the idea that a currency purchases the same quantities of goods and services in different countries; implies that real exchange rates are constant over time. |
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Term
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Definition
| The name of the first company that best tackled Purchasing Power Parity and became an international company. |
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Term
Nominal Rate
Domestic Price Level
Foreign Price Level |
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Definition
| Three factors that affect exchange rates |
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Term
| (REMEMBER TO GO BACK TO THE PURCHASING POWER SECTION, THERE ARE SOME UNHIGHLIGHTED PARTS TO MAKE FLASH CARDS FOR) |
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Definition
| (REMEMBER TO GO BACK TO THE PURCHASING POWER SECTION, THERE ARE SOME UNHIGHLIGHTED PARTS TO MAKE FLASH CARDS FOR) |
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Term
Imports + Capital Outflows
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Definition
Formula for Supply of Money on the Forex Market
Supply = ______ + ______ |
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Term
| Exports + Capital Inflows |
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Definition
Formula for Demand for Money on the Forex Market
Demand = ______ + ______ |
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Term
Exports - Imports = Capital Outflows - Capital Inflows
-or-
Net Exports = Net Capital Outflows |
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Definition
Formula for Equilibrium of Money Supply and Demand
___ - ___ = ___ - ___
-or-
____ = ____ |
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Term
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Definition
| If Net Capital Outflows decreases, it will cause the real exchange rate to ___ |
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Term
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Definition
| If Net Capital Outflows increases, the supply of dollars increases at a rate faster than the demand for dollars on the For-Ex market. This will cause the real exchange rate to ___ |
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Term
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Definition
NO ASTRICK = ___
ASTRICK = ___ |
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Term
1. Change in Domestic Interest Rate
2. Change in Foreign Interest Rate
3. Change in Confidence
4. Change in expected future exchange rate |
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Definition
| List 4 factors that affect the exchange rate |
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Term
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Definition
| If the Domestic Interest Rate INCREASES, you have __ capital outflows, __ of the dollar. |
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Term
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Definition
| If the Domestic Interest Rate DECREASES, you have __ capital outflows, __ of the dollar. |
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Term
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Definition
| If the Foreign Interest Rate increases, you have ___ capital outflows, ___ of the dollar. |
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Term
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Definition
| If the foreign interest rate DECREASES, you have __ capital outflows, __ of the dollar. |
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Term
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Definition
| If confidence increases, you have __ capital outflows, exchange rate ___ |
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Term
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Definition
| If Confidence decreases, you have __ capital outflows, __ of the exchange rate. |
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Term
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Definition
| A sudden decrease in net capital inflows that occurs when foreign savers lose confidence in an economy |
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Term
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Definition
| If you hold MORE dollar-denominated assets, net capital outflows goes ___, dollar ___ |
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Term
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Definition
| If you hold LESS dollar-denominated assets, net capital outflows goes __, dollar __. |
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Term
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Definition
| A decrease in net exports causes ___ of the dollar. |
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Term
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Definition
| An increase in net exports causes __ of the dollar. |
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Term
1. Relative Strength of Economies
2. Commodity Prices |
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Definition
| Two factors that affect net exports |
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Term
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Definition
| If you have a foreign recession, Net Exports ___, causes __ of the dollar |
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Term
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Definition
| If you have foreign expansion, Net Exports ___, causes __ of the dollar |
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Term
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Definition
| If commodity prices decrease, net exports ___, causes __ of the dollar. |
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Term
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Definition
| If commodity prices increase, net exports ___, causes ___ of the dollar. |
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Term
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Definition
| A useful way of forecasting rates that looks at the buy and sell orders that come to market. |
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Term
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Definition
| Chile's primary export is ___, so their exchange rate is closely tied to the level of trading it. |
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Term
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Definition
| The problem that the people or firms that are most eager to make a transaction are the least desirable to parties on the other side of the transaction. |
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Term
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Definition
A situation in which one participantin an economic transaction has more information than the other participant.
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Term
| (Promised Payment) * (Probility of Project Success) |
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Definition
| Expected Payment from Bond = (__) * (__) |
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Term
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Definition
| The risk that one party to a transaction will act in a way that harms the other party |
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Term
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Definition
| Moral hazard that arises when the action of one party (the agent) affects another party (the principal) that does not observe the action |
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Term
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Definition
| People can benefit from a good without paying for it, leading to underproduction of the good |
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Term
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Definition
| In financial markets, savers are free riders when ___ is gathered, because the benefit for savers to gather ___ is low. |
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Term
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Definition
| Legislation introduced that requires public companies to have a non-binding vote for shareholders to approve executive pay levels at least every 3 years. |
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Term
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Definition
| A firm that buys out entire companies purely to increase profits |
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Term
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Definition
| Firms that invest heavily in brand new companies to give them initial working capital so the company can develop. |
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Term
Berkshire-Hathaway
Warren Buffett |
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Definition
| The largest venture capital firm in the US is called _______, owned by ______. |
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Term
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Definition
| Legislation introduced in 2002, purpose was to strengthen requirements on financial reporting accuracy. Passed in response to the Enron scandal after auditing firms turned a blind eye. Says that firms must release their financial statements in their annual reports. |
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Term
| Accounting Oversight Board |
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Definition
| The _____ of the SEC exists to oversee auditing firms. |
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Term
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Definition
| Illegally profiting from the sale of securities based on information that is not publically available. The ban is enforced by the SEC. |
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Term
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Definition
The type of banking where a bank makes its money from taking in money from customer deposits (checking accounts, CDs, etc.) and making loans with depositor funds.
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Term
Commercial Banks
Thrift Institutions |
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Definition
| List the two Categories of Banks |
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Term
Money-Centered Bank
Regional Bank
Super-Regional Bank
Community Bank |
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Definition
| List the 4 types of Commercial Banks |
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Term
Savings Institutions (i.e. Mutual Savings Banks)
Credit Unions |
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Definition
| List the 2 main types of thrift institutions |
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Term
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Definition
___ - a type of commercial bank that traditionally raises funds by borrowing from other banks, and by issuing bonds.
The only type of bank whose primary source of money is not depositors. |
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Term
JP Morgan Chase Bank
Citi Bank |
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Definition
| List the names of the two largest money-centered banks |
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Term
Regional Bank
Over $1 billion
Ex. Regions Bank |
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Definition
A type of commercial bank that operates in a specific geographic area. Total assets are generally over $1 billion.
Ex:____ |
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Term
Super-Regional Bank
Ex. Bank of America |
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Definition
A type of commercial bank that has assets generally over $1 billion, with branches across the country.
Ex: ___ |
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Term
Community Banks
Community First, American Century Bank
90% of the 7,000 |
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Definition
A type of commercial bank with assets generally less than $1 billion, and operate in a much smaller geographic area. Ex. ____, ____
Approximately __% of the __ commercial banks are this type. |
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Term
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Definition
| The assets of Bank of America are larger than all of the assets of all ____ in America combined. |
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Term
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Definition
| Approximately __ banks in the United States are classified as Regional or Super-Regional |
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Term
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Definition
| A type of bank created to accept savings deposits and make loans for home mortgages |
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Term
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Definition
| A not-for-profit bank owned by its depositor members, who are drawn from a group of people with something in common. |
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Term
1. They are tax exempt
2. They are formed around a common group (i.e. you must have something in common with the CU to join it, like Lafayette Parish School Board Credit Union)
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Definition
| What are the two unique characteristics of credit unions? |
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Term
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Definition
| The only type of bank that did not get into major trouble during the recent financial crisis. Because of how they're structured, and because the by-laws state that they will NOT take part in risky banking practices. |
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Term
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Definition
| In a credit union, the checking accounts are not called checking accounts. They are called _____ |
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Term
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Definition
| There are approximately ___ credit unions in the US. The total combined assets for all US credit unions = $____ |
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Term
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Definition
A non-bank financial institution that makes loans but does not accept deposits.
Usually specialize in a particular type of loan. Can be subsidiaries of other companies (ex. GMAC, Ford Motor Credit, etc.) |
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Term
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Definition
The country with the most unique banking system structure in the world is in ______ because of the way in which it was developed
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Term
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Definition
| The first National/Centralized bank was charted in the United States in the year ___ |
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Term
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Definition
| The second National/Centralized bank is charted in the US in the year ___ |
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Term
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Definition
The National Banking Act is passed in the year ___
President during this time: _____ |
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Term
1. Allowed banks to be chartered either by national or state government.
2. Created the Office of Controlled Currency
3. Stated that only national banks could issue currency. |
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Definition
| List the three main accomplishments of the National Banking Act of 1863 |
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Term
| The true goal of the National Banking Act of 1863 was to put state banks out of business by preventing them from issuing their own currency. |
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Definition
| What was the "true" goal of the National Banking Act of 1863? |
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Term
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Definition
| State banks responded to the National Banking Act of 1863 by working with local businesses and convincing them to start accepting ___ as a form of payment. |
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Term
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Definition
| Legislation that restricted banks from branching across state lines. Regardless of how a bank was chartered, they could only operate branches in one state. |
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Term
| Glass-Steagall Act of 1933 |
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Definition
| Legislation passed that created the FDIC, and created a wall between banking and non-banking activities (i.e. banking instutions cannot conduct non-banking activities such as underwriting securities, and vice versa for non-bank institutions) |
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Term
They were involved in too many activities
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Definition
| The reason that so many banks were failing in the early 1930s was because: __________ |
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Term
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Definition
| A trend of massive banking regulation started after the __'s. |
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Term
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Definition
| Starting in the __'s, there is a trend towards de-regulation as banks start underwriting "safe" securities (i.e. commercial paper) |
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Term
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Definition
| A short-term loan to a corporation |
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Term
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Definition
| In 1987, the fed started to allow banks to generate some revenue from ___ |
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Term
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Definition
| A company's leaders (Board of Directors) are supposed to help reduce moral hazard by monitoring the ___ of the company. |
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Term
Riegle-Neal Act of 1994
Texas |
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Definition
| Legislation passed that overturned the McFadden Act. Said that states could opt out of they didn't want other states to have branches in their state. (Only one state, ___, opted out for about 10 years) |
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Term
| Gramm-Leach-Bliley Act of 1999 |
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Definition
| Legislation that overturned the Glass-Steagall Act. Opened the flood gates for banks to underwrite different types of securities, not just "safe" securities. |
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Term
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Definition
| Legislation passed prohibiting banks from underwriting hedge funds because they are considered very risky. |
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Term
1. Economies of Scale/Economies of Scope
-Scale: the cost of operating the bank decreases as you consolidate
-Scope: The firm can jointly produce two separate products cheaper than producing them separately
2. Diversification
3. Empire Building |
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Definition
| 3 motives for merging 2 or more banks |
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Term
Riegle-Neal Act of 1994
10%
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Definition
| To prevent a bank from growing "too big to fail", a provision in the ___ Act of 1994 forbids bank mergers if it would give the bank more than ___% of all commercial bank deposits. |
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Term
| Bank of America during the recent financial crisis. |
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Definition
| The only exception to the Riegle-Neal Act regarding the 10% bank merger limit was: ______ |
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Term
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Definition
| Firms who lend to people who normally would not qualify for loans because they carry too much risk of default. |
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Term
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Definition
| The __ rate is the interest rate a bank will charge its "best" customers |
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Term
1. Finance Companies
2. Payday Lenders
3. Pawn Shops
4. Illegal Loan Sharks |
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Definition
| Four main types of sub-prime lenders |
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Term
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Definition
| A type of sub-prime lender that is not a bank, so they aren't regulated as heavily as banks. Tend to take on more risk. Rely heavily on an absolute minimum credit score, much lower than that required by normal banks. Charge higher interest rates to make up for the risk taking. |
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Term
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Definition
| A sub-prime lender that lets you borrow an advance of your next paycheck. Normally the only requirement is that you have a job and are getting a paycheck. Small loans, $100-200. You write them a post-dated check for the amount of the loan plus interest. |
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Term
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Definition
| A subprime lender where you give them an item and they pay you 30-50% less than what the item is worth in cash. They hold it for a certain amount of time if you want to repurchase it at a higher price. If you don't show up, they sell the item. |
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Term
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Definition
| Legal Lending between "friends" becomes illegal when you violate usury laws (e.g. threatening physical injury for repayment, etc.) This is known as _____ |
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Term
| Payday Lenders and Pawn Shops |
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Definition
| The number of loans sharks has decreased with the rise of ___ and ___ |
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Term
Assets. Liabilities
1. Cash Items (Reserves + 1. Checking Deposits
a banks deposits at other banks) 2. Non-Transact. Deposits (CDs,
2. Securities Savings, etc. No reserve requirmt)
3. Loans Receivable 3. Loans Payable
4. Other Assets (Buildings, equip, 4.Other Liabilities (Salaries, Utilities,
etc) etc.)
5. Net Worth |
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Definition
Basic Balance Sheet for a Bank
Assets Liabilities
1. ________ 1. ________
2. ________ 2. ________
3. ________ 3. ________
4. ________ 4. ________
5. ________
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Term
Lines of Credit
Letter of Credit |
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Definition
| List the two Off-Balance-Sheet Activities for banks |
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Term
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Definition
| A service offered by a bank where, for a fee, they will back a firm making a loan so that if the firm who makes the loan defaults, the bank will guarantee the loan. Similar to insurance. |
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Term
1. Liquidity Risk
2. Credit Risk
3. Interest Rate Risk
4. Market Risk
5. Economic Risk |
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Definition
Managing Risk
List the 5 risks bank managers must consider when managing a bank. |
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Term
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Definition
| ___ - The risk that withdrawals from a bank will exceed its liquid assets. |
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Term
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Definition
| ___ - the risk of a loan not being repaid |
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Term
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Definition
| ___ - the risk of instability in bank profits caused by fluctuations in short-term interest rates. |
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Term
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Definition
| __ - the risk a bank faces arising from fluctuation of asset prices |
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Term
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Definition
| ___ - the risk arising from fluctuations in the economy's aggregate output |
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Term
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Definition
| A group of banks experiencing a wave of bank runs is called a ___ |
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Term
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Definition
| A "license" given by the government that banks need to operate |
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Term
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Definition
| Adopted by over 100 countries, it says that banks have to hold capital equal to 8% (or more in some countries) of its risk adjusted assets. |
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