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CISI Course - Chapter 3


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What are the 4 main classes of asset?
1. Cash
2. Bonds
3. Equities
4. Property

How is a diversified portfolio created? (1)
1. By spreading the risk across a mixture of all 4 classes of asset.
In terms of the market, what can \'cash\' mean?
Short-dated negotiable instruments (ie something that is instantly accessible)
When a retail customer is saving, what is subject to interest?
The interest payable on their deposit.
How is the amount of tax payable determined? (3)
Upon whether the depositor is a:
1. Basic rate tax payer (20%)
2. Higher rate tax payer (40%)
3. Additional rate tax (50%)

What is a depositor is not a taxpayer? (1)
Then the relevant form can be submitted (R85)
What function does the bank or building society perform for the government? (2)

1. Tax collector that deducts base rate tax from deposits.
2. Higher and additional rate tax payers are therefore required to declare the remaining 20% / 30% themselves.
What are the three types of money markets?
1. Treasury Bills (T-Bills)
2. Certificates of Deposit (CDs)
3. Commercial Paper (CP)

What are money market traded instruments? (3)
1. Short term negotiable instruments that are issued by companies and other institutions to meet short term borrowing needs
2. Redeemable by \'bearer\'
3. Avoids keeping a register

Describe Treasury Bills (6)
1. Issued by govt on a weekly basis
2. Redeemable after 3 months
3. Do not pay interest
4. Issued at £98.50
5. Bought back for £100.00
6. £1.50 profit in 3 months

Describe Certificated of Deposit (3)
1. Customers that have a large amount of money deposited
2. Customer may need to realise money before can access
3. Bank issues a trade-able CD

Describe Commercial Paper (3)
1. Issued by companies to cover short term borrowing
2. Issued at a discount
3. Redeemable for more (like T-Bills)

Describe bonds (3)
1. Issued by Governments, Local Authorities, International Agencies
2. Sum taken that is promised to be repaid (capital)
3. Borrower promises to pay specified rate of interest (coupon)

What are equities? (6)
1. Also described as shares
2. Are evidence of a share in the ownership of the company
3. Acquire voting rights
4. Share of profits made
5. Move up and down - perceived profitability
6. Capital gain & dividends

Is property a liquid asset?
How would one describe the liquidity of property (4)
1.It would be described as illiquid, in that it takes:
2. time;
3. effort; and
4. legal costs
to get in and out of the investment

What are the disadvantages of investing in property? (4)
1. Illiquid asset
2. Very expensive to acquire
3. Can use institutional investors
4. By buying into those funds a retail investor can gain exposure to the property market.

What property do institutional investors tend to focus on and how profitable is investing in property? (2)
1. Tend to focus on commercial property
2. Despite short term reversals in value, long term investing in property is very profitable.
What are the updates to Money Market instruments? (2)
1. used to raise short-term rather than long/medium term capital
2. Instruments are settled through CREST, usually settle on the day of trading or T + 1 (+ 1 day)
What are the top three FX trading centres in the world?
1. London
2. New York
3. Tokyo

Describe FX trading (2) and its participants (1)
1. Always over the counter
2. Trade directly with one another verbally or electronically.
3. Participants - banks involved in wholesale activities regarding foreign transactions & central banks for govts.

What are the four most common FX transactions?
1. Spot trades
2. Forward trades
3. Currency futures
4. Currency swaps

Describe spot trades? (2)
1. Occur 2 days after the contract has been made (T+2)
2. E.g. One receives its dollars and pays out its sterling
Describe forward trades (2)
1. Parties specify an exchange rate and settlement date at some point in the future.
2. Allows customers to plan their cash flow for foreign transactions
Describe currency futures (2)
1. Formal parcels of currencies (e.g. £1,000,000.00) that will settle on a specified contractual date.
2. Note, this is traded on a formal derivatives exchange (not over the counter)
Describe currency swaps (2)
1. Forward trade
2. Parties swap currencies at an agreed rate and agree to swap back at an agreed rate in the future.
Why are derivatives called derivatives?
Because they are derived from some other asset.
What are hard commodities?
E.g. metals such as copper
What are soft commodities (2)
Cocoa or coffee beans
Provide further examples of derivatives available? (5)
1.No longer just based on commodities but also:
2. equity
3. bond
4. currency
5. index derivatives

What are the major global derivative markets? (6)
1. Chicago Board of Trade
2. Chicago Mercantile Exchange
3. Eurex
4. NYSE Liffe
5. IntercontinentalExchange (ICE) and ICE futures
6. London Metal Exchange

Describe the Chicago Board and Trade (CBOT) (4)
1. World\'s oldest derivatives market
2. Based on an open outcry system
3. Gather on the floor and make verbal contracts
4. Main business - commodity products

Describe the Chicago Mercantile Exchange (CME or the merc)(3)
1. Open outcry
2. Now, some trades are made electronically via its Globex system
3. More diverse range of products - equity, currency and index derivatives

Describe Eurex (3)
1. Joint venture between German and Swiss exchanges
2. Mainly to trade bond derivatives
3. Also trades index based products via Eurex (pc system)

Describe NYSE LIFFE (4)
1. European network of exchanges
2. Acquired London Int Financial Fut & Opt Exchange in 2001
3. Open outcry
4. Now electronic trading system is Liffe CONNECT

Describe IntercontinentalExchange (ICE) and ICE futures (3)
1. Responsible for the global trading of contracts relating to energy
2. Enegy futures and options
3. Includes gas, crude and refined oils and electronic power.

Describe the London Metal Exchange (LME)(2)
1. Largely open outcry trading derivatives
2. Trades in metals, e.g. aluminium, copper and zinc
Describe the London Stock Exchange (LSE)(3)
1. Was open outcry, now largely screen and electronically based.
2. Highly liquid shares
3. Traded by a system called Sets - automatic order matching system

Describe the LSE\'s not so liquid system
1. Called Seaq
2. MM input best selling and buying price

Who trades on the LSE? (3)
1. Members of the exchange
2. Vast majority of members of members are now companies rather than individuals
3. Most firms now act as brokers and market makers

What types of securities are traded on the LSE? (4)
1. Equities (shares)
2. Corporate bonds
3. Gilts
4. Other debt instruments

How strict is the LSE? (2)
Strict rules concerning: the 1. type of securities
2. relating to the company once listed.
Describe the initial listing of a company. (3)
1. Usually have an initial public offering
2. Involve preparation of a prospectus
3. Prospectus must be approved by the FSA

Does the UK have other exhanges? (4)
1. Leeds;
2. Manchester;
3. Edinburgh

4. Volume of trading by that of the LSE.

Describe the distinction between the primary and secondary market. (2)
1. Initial buyers buying directly from the company are primary market
2. Once the securities are traded on an exchange this will form the secondary market.
Describe the New York Stock Exchange (NYSE)(3)
1. Largest in the world for value
2. Traditional established US companies
3. Other major international companies will be listed

Describe the NASDAQ (4)
1. Stated as an OTC market
2. Relatively small start-up companies
3. Involved in the tech boom of the 1980s
4. Companies\' success; volume of trading is huge (loyal)

Describe NYSE LIFFE (2)
1. Conglomerate of smaller exchanges (Paris, Brussels, Amsterdam)
2. Grouped together to compete with other exchanges

Describe the Tokyo Stock Exchange (3)
1. Japan - third largest global economy
2. Prefer to raise capital through share issues as opposed to debt.
3. Largest equity market in the world

Describe the Deutsche Börse (3)
1. Largest of Germany\'s 7 stock exchanges
2. Focus on raising capital by debt vs equity
3. Deutsche Bourse now owns Clearstream

How do you calculate market capitalisation (2)
1. Number of shares x
2. Value of each share =

What is the FTSE 100
UK\'s top 100 companies by market capitalisation
What is the FTSE 250
The NEXT 250 largest companies by MC after the FTSE 100
What is the FTSE 350?
Combined FTSE 100 & 250
What is the FTSE All Share? (2)
1. Much broader index
2. Comprised approximately 800 share prices
Describe the Dow Jones Industrial Average (DJIA 30 or the dow)
Largest 30 companies by MC on the NYSE
Describe Standard and Poor\'s 500 (S&P 500)
Top 500 shares traded on all US markets
Describe the NASDAQ composite?
All shares quoted on the NASDAP
Describe the Nikkei Dow 225
Top 225 companies on the Tokyo Stock Exchange
Describe the CAC 40
Top 40 shares on the Paris Bourse
Xetra Dax
Top 30 shares trading in Frankfurt, Germany

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