FINA 200 Lecture Notes - Lecture 9: Foreign Exchange Risk, Interest Rate Risk, Market Risk

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14 Apr 2018

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Pooled investment: investment vehicle that pools together money from many investors and invests that money in a variety of stocks, bonds, or indexes of stocks and/ or bonds. Many different types of pooled investments: mutual funds, etf, segregated funds. Marketability: ease at which an investor can convert investment to cash. Equity mutual funds: sell units, or shares, to individuals and use this money to invest in stocks. Bond mutual funds: sell units, or shares, to individuals and use this money to invest in bonds. Balanced mutual funds: sell units, or shares, to individuals and use this money to invest in a combination of stocks and bonds. Money market mutual funds: sell units, or shares, to individuals and use this money to invest in cash and investments that can be converted to cash quickly (very liquid investments) The initial investment in a mutual fund is anywhere between 500 and 5000 $ depending on the fund.

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After getting acquaint with the financial markets products and services, CelestilaMoonn, an UMB Global Affairs major student, decided to invest in mutual funds and hedge funds; however, she sent an e-mail to an advisor in order to find out how hedge funds differ from mutual funds. Advisor tells the following about both products:

"Hedge funds are investment pools that invest funds for (wealthy) individuals and other investors (e.g., commercial banks). They are similar to mutual funds in that they are pooled investment vehicles that accept investorsâ money and generally invest it on a collective basis. Hedge funds, however, are not subject to the numerous regulations that apply to mutual funds for the protection of individuals, such as regulations requiring a certain degree of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations to ensure fairness in the pricing of funds shares, disclosure regulations, and regulations limiting the use of leverage. Unlike mutual funds, the average performance fee on hedge funds is lower than the average mutual funds."

Briefly discuss should Moonn make her investment decision based on her advisorâs above clarifications.

After getting acquaint with the financial markets products and services, Celestila Moonn, an Global Affairs major student, decided to invest in mutual funds and hedge funds; however, she sent an e-mail to an advisor in order to find out how hedge funds differ from mutual funds. Advisor tells the following about both products: "Hedge funds are investment pools that invest funds for (wealthy) individuals and other investors (e.g., commercial banks). They are similar to mutual funds in that they are pooled investment vehicles that accept investorsâ money and generally invest it on a collective basis. Hedge funds, however, are not subject to the numerous regulations that apply to mutual funds for the protection of individuals, such as regulations requiring a certain degree of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations to ensure fairness in the pricing of funds shares, disclosure regulations, and regulations limiting the use of leverage. Unlike mutual funds, the average performance fee on hedge funds is lower than the average mutual funds." Briefly discuss should Moonn make her investment decision based on her advisorâs above clarifications.

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Many businesses find it generally more efficient to enlist the services of a financial institution when it comes time to raise capital: IE. Investment Banks: An organization that underwrites and distributes new investment securities and helps business obtain financing. Commercial Banks: The traditional department store type of financing serving a variety of savers and borrowers. Financial Service Corporations: A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking. Credit Unions: Cooperative association whose members have a common bond such as employees of the same firm. Pension Funds: Retirement plans funded by corporations or government agencies. Life Insurance Companies: Take annual premium payments and invest these funds in stocks, bonds, or real estate and make payments to beneficiaries of the insured parties. Mutual Funds: Corporations that accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt issued by business or government. They typically pool funds to reduce risk by diversification. Exchange Traded Funds (ETFs): Buy a portfolio of stocks of a certain type of business sector. IE. media companies, oil companies, Chinese companies, etc. and then sell their own shares to the public. Hedge Funds: Not regulated by the Securities and Exchange Commission (SEC). Typically have large minimum investments of over $1 million and marketed to individuals an institutions with high net worth. Private Equity Companies: Target, buy, and then manage entire firms. Most of the money used to buy these companies is borrowed. Why are the various financial instruments considered claims against a company's future cash flows ?

FINA 200 Lecture Notes - Lecture 9: Foreign Exchange Risk, Interest Rate Risk, Market Risk

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