Perry Mehrling - Dealer Capital

The video tutorial explores two types of capital dealers: a 100% capital dealer and a 0% capital dealer. The 100% capital dealer buys securities when prices are low and sells when prices are high, similar to Warren Buffett's strategy. The 0% capital dealer facilitates a two-way market, allowing for quick buying and selling without affecting prices, by holding both long and short positions to hedge risks. The tutorial explains the concepts of outside and inside spreads, liquidity, and the role of the repo market in financing securities positions. It concludes by discussing the importance of risk management and determining the necessary capital for imperfect hedges.

What is the primary strategy of a 100% capital dealer?

• Buying securities when prices are low and selling when prices are high

• Buying high and selling low

• Avoiding the market entirely

• Holding securities indefinitely

What does the term 'outside spread' refer to?

• The cost of trading securities

• The spread between buying and selling prices in a single transaction

• The time taken to execute a trade

• The difference between the highest and lowest prices

How does a zero percent capital dealer manage risk?

• By maintaining both long and short positions

• By investing in real estate

• By holding only long positions

• By avoiding any market transactions

What is the role of repo borrowing in the operations of a zero percent capital dealer?

• To avoid market fluctuations

• To invest in foreign markets

• To finance long securities positions

• To increase the dealer's capital

Why is some capital needed even if a hedge is perfect?

• To pay for transaction fees

• To cover operational costs

• To invest in new securities

• Because no hedge is truly perfect