Professional Documents
Culture Documents
over-the counter market is an important alternative to exchanges It is a telephone and computer-linked network of dealers who do not physically meet Trades are usually between financial institutions, corporate treasurers, and fund managers
Classification of Derivatives
Derivatives
Forward commitments
Exchange-traded
OTC traded
by two indicators: Market value = the economic worth of the derivative Notional Principal = the amount of the underlying on which the derivative is based
price discovery facilitate risk management make markets more efficient lower transaction costs Critics to derivatives: excessively dangerous for unknowledgeable investors linked to gambling.
Terminology
BULL
MARKET
A bull market is a market in which prices are rising. When someone is referred to as being bullish, that person has an optimistic outlook that prices will be rising.
Terminology (Cont.)
BEAR
MARKET
A bear market is one in which prices are falling. Therefore, a bearish view is pessimistic, and that person would believe that prices are heading downward
Terminology (Cont.)
SPOT
MARKET =A commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective. =The spot market is also called the "cash market" or "physical market", because prices are settled in cash on the spot at current market prices, as opposed to forward prices.
Terminology (Cont.)
GOING LONG
The party who owns an asset has what is termed a long position. Someone who is long in the market expects prices to rise. They expect to make money by later selling the contracts at a higher price than they originally paid for them.
Long position investment philosophy :
Terminology (Cont.)
GOING
SHORT
The party who owes an asset has what is termed a short position The short seller believes that prices are heading downward, so he sells contracts that he thinks will be less valuable sometime in the future.
Short position philosophy : SELL HIGH, BUY LOW
are investments that derive their value from some underlying quantity (usually a stock, bond or commodity price)
Forward contractobligates the buyer to purchase the underlying security on a given date for a specified price
Arrangements
Futures contractobligates the buyer to purchase a specified quantity of the underlying security on a given date at a specified price
Actively
traded on futures exchanges until delivery date Can earn gains/losses from simply trading the contract itself, without every taking delivery of underlying goods
buyer has right (but not obligation) to buy (call) or sell (put) underlying security at the predetermined exercise price on a specified date If option is exercised, option writer must follow through Many options expire unexercised Options actively traded at options exchanges and OTC markets