Investment banks, hedge funds, and the like {shadow banking system} perform banking functions. Instruments include auction-rate securities, structured investment vehicles, tender option bonds, variable-rate demand notes, and asset-backed commercial paper.
People can long-term lend {auction-rate security} to institutions, which weekly auction right to replace current lenders, to set interest rate, which holds until next auction. If no auction transaction happens, interest rate goes higher. Institution can have long-term financing, and investors can get in and out.
Mortgage pools {collateralized debt obligation} (CDO) haves shares, some with priority {senior share}.
Funds {hedge fund} can buy short and buy long.
long
Buying long means to buy now and wait for asset to rise in price.
short
Buying short means to borrow stock from owner, by using small down payment. Then sell stock at current price to someone else to get difference of price and down payment. Then buy stock from someone on or before due date. Then sell back to owner at specified price on specified date. Buying short expects price to fall, so future price is lower than current price. However, short sellers that have big losses can be unable to buy back stock.
Creditors can demand payment from borrowers {margin call}, typically when borrower's asset value or collateral value decreases, worrying creditors. Borrowers must then pay more down payment or sell asset to pay creditors. Selling makes asset values decrease and so can affect other creditors' confidence.
6-Economics-Microeconomics-Banking
Outline of Knowledge Database Home Page
Description of Outline of Knowledge Database
Date Modified: 2022.0225