CISI Financial Markets cheat sheet

Primary market: issuer raises new capital via IPOs, rights issues, or bond issues; secondary market: investors trade existing securities among themselves.

Market makers quote a two-way price (bid and offer); the bid-ask spread is their compensation for providing liquidity and bearing inventory risk.

Order types: market order executes immediately at best available price; limit order executes only at a specified price or better; stop order becomes a market order once a trigger price is hit.

Clearing and settlement: clearing novates trades to a central counterparty; settlement transfers cash against securities, historically T+2 in most developed equity markets.

Price indices (e.g., CPI, RPI) measure inflation; central banks raise policy rates to curb inflation and cut them to stimulate demand.

A yield curve plots yield against maturity; normal (upward-sloping) implies growth expectations, inverted signals tighter policy or recession expectations.

Gross Domestic Product measures total output; a recession is commonly defined as two consecutive quarters of negative GDP growth.

Liquidity measures how quickly an asset converts to cash without moving price; bid-ask spread and trading volume are common proxies.

Bond price and yield move inversely; a rise in required yield lowers the present value of fixed coupons and redemption.

Duration approximates percentage price change for a 1% yield change; modified duration = Macaulay duration / (1 + yield per period).

Equity valuation: P/E = price per share / earnings per share; a higher P/E implies higher expected growth or higher risk.

Dividend discount model: value = D1 / (r - g), where D1 is next dividend, r required return, g constant growth; requires r > g.

Collective investment schemes pool investor money; open-ended funds issue and redeem at NAV, closed-ended funds trade on exchange at market price.

Diversification reduces unsystematic (company-specific) risk; systematic (market) risk remains and is measured by beta.

Beta >1 means the security is more volatile than the market; beta <1 means less volatile; beta = 1 moves with the market.

Money market instruments (T-bills, commercial paper) mature within one year and are discount instruments; capital market instruments have longer maturities.

A forward is a bespoke OTC contract to trade an asset at a set future date and price; it carries counterparty credit risk and no upfront premium.

A futures contract is exchange-traded and standardised, marked to market daily, and cleared through a central counterparty, removing counterparty risk.

An option buyer pays a premium and has a right, not an obligation; a call gives the right to buy, a put the right to sell the underlying.

Intrinsic value: call = max(S - K, 0); put = max(K - S, 0); option premium = intrinsic value + time value.

A swap exchanges cash flow streams; in a plain vanilla interest rate swap one party pays fixed and receives floating (or vice versa) on a notional principal.

Hedging uses derivatives to offset exposure; speculation takes directional risk; arbitrage exploits price differences for riskless profit.

Leverage: derivative exposure requires only a fraction of the underlying's value as margin, magnifying both gains and losses.

Put-call parity (European, no dividends): C - P = S - K/(1+r)^T; deviations imply arbitrage opportunities.

An exchange rate is the price of one currency in terms of another; a direct quote gives domestic currency per unit of foreign currency.

Appreciation of a currency makes exports dearer and imports cheaper; depreciation does the reverse.

Bid is the rate at which the dealer buys the base currency; offer (ask) is the rate at which the dealer sells it; the spread is the dealer's margin.

Cross rates derive a third currency pair from two quoted pairs, e.g., EUR/GBP from EUR/USD and GBP/USD.

Purchasing power parity links exchange rates to relative price levels: a higher domestic inflation rate tends to depreciate the currency over time.

Interest rate parity: forward premium or discount reflects the interest rate differential between the two currencies.

Spot transactions settle typically T+2; forward FX contracts fix a rate for a future date and hedge currency exposure.

A currency carry trade borrows in a low-yield currency to invest in a higher-yield currency, profiting from the interest differential but exposed to exchange rate moves.

Regulators pursue objectives including market integrity, investor protection, and financial stability; conduct rules govern how firms treat clients.

Insider dealing: trading on unpublished price-sensitive information is prohibited; the offence concerns the misuse of inside information, not the information itself.

Market abuse includes insider dealing, market manipulation, and unlawful disclosure of inside information.

Know Your Customer (KYC) and anti-money laundering (AML) rules require firms to verify client identity and monitor transactions for suspicious activity.

Best execution obliges firms to take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, and likelihood of execution.

Conflicts of interest must be identified, managed, or disclosed; inducements and commissions must not impair the duty to act in the client's best interests.

Suitability: firms must assess a client's knowledge, experience, and objectives before recommending or selling a product.

Chinese walls and information barriers separate advisory and trading functions to prevent the misuse of confidential information.