Financial Economics: Class 2

Short selling is to borrow a financial asset in order to sell it; the objective is to repurchase it later at a low price

• True

• False

An arbitrageur is an individual who deals with investment banks or investment funds and sets the level of return

• True

• False

The basic function of primary markets is:

• To provide liquidity

• To provide access to securities not available on standard exchanges

• To allow firms raise funds

The basic function of secondary markets is:

• To provide liquidity

• To provide access to securities not available on standard exchanges

• To allow firms raise funds

Mark the correct answer.

• Institutional investors only trade in secondary markets.

• Primary markets are not regulated.

• Minor investors only trade in primary markets.

• Companies must meet requirements by exchanges and the SEC to hold an IPO.

Generally speaking, financial assets can be classified in three groups,

• Equity, debt and derivatives.

• Commodities, debt and derivatives.

• Equity, interest rates and Exchange rates.

• Stocks, preferred stocks and debt.

If you short sell a stock, you are expecting that its price,

• It will decrease.

• It will increase.

• It will keep constant.

• The price is indifferent, because we have to return the borrowed asset.

The market value of a share is the price of the share in the primary market.

• True

• False

Arbitrage opportunities arise when an investor can obtain:

• Risky benefit without the requirement of an initial investment

• Risky benefit with the requirement of an initial investment

• Riskless benefit without the requirement of an initial investment

• Riskless benefit with the requirement of an initial investment

In the OTC markets:

• Liquidity is high

• Each operation is unique (no standardized)

• The level of regulation is high

• The financial contracts are standardized