Financial Market

Hedge Fund: A private investment fund that does not need to conform to the rules for publicly available mutual funds. High leverage enhance pot.returns and risks Little/no regulation high min. investment LT Commitment of funds is required  high fee, 1-2%assetss + 10-20% of profits Not generally open to public Benefits:1)Low correlation with trad asset class 2) σ minimization 3) Absolute return 4)pot. Lower volatility with higher return Risk: 1)light regulatory oversight 2) Manager and market risk 3) Complex investment strategies 4) Liquidity constraints 5) Incentive fees 6)Tax implications 7) Short selling & Leverage 8) Business Risk

Derivatives: A financial asset that is derived from an existing traded asset rather than issued by a business or government to raise capital. Speculators use to take risk exposure for profit. Hedgers use to reduce exposure. Losses come from Outright speculation PPL not know wt they r doing Why trade? Cheaply lock in future price Leverage or magnify returns Hedge a position

Hedging: Practice of neutralizing the effects of uncertain outcome by taking a position that offsets the operational exposure.  Make CF easier to predict thus ↓uncertainty associated with project

Long (Short) Exposure: Profit from a price increase(decrease) and lose if it decrease(increase).

Forward & Future contract: Contract that obligates two parties to exchange a predetermined quantity of something at a fixed price something in the future.

Option: Gives the buyer the right but not the obligation to buy&sell a fixed quantity at a predetermined price sometime in the future. Strike (exercise) price: price at which option can be converted *buying options to protect against possi. downside looses is how insurance companies construct the portfolios linked to PPNs

Forwards(trade in OTC)largely a bank instruct flexible terms & amounts (closed out with offsetting contract if funds don't materialize or come earlier) settle on maturity dateBank fees come in spreads charged to bid & ask prices  counterparty risk (Bus. Partners may default)

Future(Trade in exchanges)  Standardized contracts(settle date, std. amount/commodity)  Guaranteed by Clearing corp(CDCC), no counterparty σ Daily marked to market to reduce σ of non-fulfillment(initial and maintenance margin)Fees to buy

The listing process ADVPrestige & Goodwill established vale in mergers and acquisitions  excellent market visibility  more available information DIS↑control on mgt ↑costs to company  mkt indifference addition disclosures

ROE: is a financial ratio of particular importance to share holders of a company because it measures the profitability of the business relative to the equity investment in that business. ROE = net earn before extraordinary items/total equity

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