SECOND 10 from study guide FIN exam

When stocks are sold short, how does the seller sell a stock they do not own?

investor borrows stock, returns to investor they bought it from

What factors contribute to the size of the spread (difference between ask price and bid price) experienced by market makers of stocks?

Order processing/ inventory costs, competition, trading volume, risk

How do high-frequency traders create revenue from their operations?

use fast computers to buy/sell quickly, make profits from small price differences from repeated trading

Who regulates stock trading in the United States?

SEC, protect investors, prevent fraud, ensure fair stock trading

What is the primary difference between a financial futures contract and an option contract?

Futures require both parties to trade, while options give the buyer a choice to trade.

For what purposes do financial institutions use financial futures?

use futures to protect against changes in interest rates and stock prices.

What is the most important difference between standardized financial futures contracts entered into on an exchange and custom contract entered into in an over-the-counter transaction?

Standardized = Fixed rules on trading

OTC = Flexible rules, can negotiate

When a financial institution uses interest rate futures to hedge, what does “hedging net exposure” mean?

to protect difference between assets/liabilities, reduce trading costs.

Why do some financial institutions use stock index futures to accomplish dynamic asset allocation?

Institutions manage investment risk w/out buying/ selling actual stocks.

What are the three major influences on stock option premiums?

market price: current

volatility:higher stock price

time to maturity: longer the time to expiration, higher option premium