jawz

Which of the following CORRECTLY describes a repurchase agreement?

A) The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.

B) The sale of a security with a commitment to repurchase the same security at a future date left unspecified, at a designated price.

C) The purchase of a security with a commitment to purchase more of the same security at a specified future date.

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A repurchase agreement is an agreement whereby the seller of a security agrees to “repurchase” it from the buyer on an agreed upon date at an agreed upon price. Repos are typically used by securities dealers as a means for obtaining funds to purchase securities.

jawz

Which of the following best characterizes leveraging? Leveraging involves:

A) exploiting mispricings in the market.

B) borrowing funds to implement a trade.

C) writing options.

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Leverage refers to the use of borrowed funds to purchase a portion of the securities in a portfolio. A leverage-based strategy is used with the objective of earning a return over and above the cost of borrowed funds.

jawz

Which of the following is an advantage of leverage? Leverage:

A) decreases the risk for a given return potential.

B) magnifies the return from a security for a given price change.

C) increases the return potential without incurring larger risk.

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Leveraging increases the return potential but also increases the risk, resulting in a wider range of possible outcomes.