CHAPTER 4.

1:
FINANCIAL INSTRUMENTS AND
FINANCIAL MARKETS
Sources:
• Bodie, Z, & Merton, R. (2000), Finance, Prentice Hall Inc.
• Timothy J.G (2013), Financial Management: Principle and
practices, 6th ed, Freeload Press Publishers. [chapter 2]
• Mishkin, F.S. (2010), The Economics of Money, Banking and
Financial markets, 9th ed, The Addison – Wesley Series in
Economics
• Mandura, J.(2011), Financial Markets and Institutions, 10th ed,
South-Western

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 CONTENT

OVERVIEW OF FINANCIAL SYSTEM

FLOW OF FUNDS

FINANCIAL INSTRUMENTS/ SECURITIES

FINANCIAL MARKETS

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 FINANCIAL SYSTEM

The flows of funds through the financial system 3

 Financial system
• Financial system (FS) – a framework for
describing set of markets, organisations, and
individuals that engage in the transaction of
financial instruments (securities), as well as
regulatory institutions.

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 Financial system
• The basic function of FS is essentially channelling of funds
within the different units of the economy – from surplus
units to deficit units for productive purposes.
– Surplus economic units have funds left over after spending all they
wish to spend
– Deficit economic units need to acquire additional funds to sustain
their operations
• To enable funds to move through the financial system, funds
are exchanged for securities.
– Securities are documents that represents the right to receive funds
in the future.
• Securities are traded in financial markets.
• Financial intermediaries often help to facilitate this process
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 THE FLOW OF FUNDS
• There are interactions among the various
players in the financial system.
• Funds flow through the financial system
from the entities that have a surplus of
funds to those that have a deficit of
funds:
– Directly
– Through markets
– Through intermediaries

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 The flow of funds
Markets

Surplus unit Deficit unit

Intermediaries

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 Fund flows via Market
Markets

Surplus unit Deficit unit

Intermediaries

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 Fund flows via Intermediaries
Markets

Surplus unit Deficit unit

Intermediaries

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 Fund flows via Intermediaries and
Markets
Markets

Surplus unit Deficit unit

Intermediaries

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 Fund flows via Market and
Intermediaries
Markets

Surplus unit Deficit unit

Intermediaries

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 Fund flows: disintermediation
Markets

Surplus unit Deficit unit

Intermediaries

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Funds Flow: Secured Credit

Markets

Poor Credit Risk

Surplus Units Deficit Units

Intermediaries

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 Financial Assets
• Asset: Anything of value owned by a person or
a firm.
• Financial asset: An asset that represents a
claim on someone else for a payment.
• Security: A financial asset that can be bought
and sold in a financial market.

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 Financial Assets
Five key categories of assets:
1. Money
2. Stocks
3. Bonds
4. Foreign exchange
5. Securitized loans

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 Financial Assets
NON-MARKETABLE

• Characteristics of non-marketable financial

assets:
– Cannot be traded between or among investors
– May be redeemable (a reverse transaction between
the borrower and the lender)
• Examples:
– Savings accounts
– Term Deposits
– Certificates of Deposits

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 SECURITIES
MARKETABLE

• Characteristics of Marketable securities

– Can be traded between or among investors after their
original issue in public markets and before they mature or
expire
• Market Capitalization
– Is an important term in finance
– It is the total market value of a company
– It is found by multiplying the number of shares
outstanding by the market price per share
Market Capitalization = Number of shares  Price per share

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 SECURITIES
SHORT-TERM

• Short-term securities:
– Maturity of less than 1 year
• Least price fluctuation and least risky
investments
• Common short-term securities:
– Treasury bills
– Negotiable Bank Certificates of Deposit
– Commercial paper
– Bankers’ acceptance
– Eurodollars
– Repurchase Agreement
– Federal (Fed) funds/ Overnight funds

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 Treasury bill
• Treasury Bills (T-bill): short‐term securities
issued by the treasury to finance the
government
– bought at a discount and at maturity the
investor receives the full face value
– after initial sale they have an active secondary
market
– the most liquid and the safest of all the money
market instruments
– mainly held by banks, small amounts are held by
household, corporations and other financial
intermediaries.
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 Certificate of Deposits
• Certificate of Deposits (CDs): a debt instrument
sold by a bank to depositors that pay annual
interest of a given amount and at maturity pays
back the original purchase price
– usually have maturities from one day to five years
– Small-denomination CDs are very safe investment and
they tend to have low interest
• Negotiable Bank Certificates of Deposits (NCDs):
CDs that can be traded in secondary markets
– have maturities of two weeks to a year
– NCDs usually have large-denomination, higher face value
and shorter term than CDs

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 Commercial Paper
• Commercial Paper: a short-term debt
instrument issued by large banks and well-
known corporations with a typical maturity
of 30 days
– It is similar to an IOU
– It is unsecured
– It is issued by large corporations with good
credit ratings
– Companies issue commercial paper to raise cash
for current transactions, and many find it costs
less than bank loans
– Mots buyers are large institutions
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 Banker’s acceptance
• A banker’s acceptance: a short-term debt
instrument that is guaranteed for payment
by a commercial bank (the bank “accepts”
the responsibility to pay)
– allow businesses to avoid problems associated
with collecting payment from reluctant debtors
– used to facilitate international transactions

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 Eurodollars
• Eurodollars: dollar denominated deposits
located in non-US banks
– Originally, dollar-denominated deposits not
subject to U.S. banking regulations were held
almost exclusively in Europe; hence the name
eurodollars
– These deposits are still mostly held in Europe,
but they're also held in many other countries
– Buyers and sellers are large institutions

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 Repurchase agreement (repos)
• Repurchase Agreement (repos): an
agreement in which the borrower agree to
sell an amount of government securities
(usually T-bills) to the lender and commit to
repurchase them in a near future with a
specified price
– REPOs are effectively short-term loans (usually
with a maturity of less than 2 weeks).
– T-bills in REPOs serve as collateral, an asset that
the lender receives if the borrower does not pay
back the loan.

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 Overnight funds
• These are typically overnight loans by banks
to other banks.
• One reason why a bank might borrow in the
overnight funds market is that it might find it
does not have enough settlement deposits at
the central bank. It can then borrow these
balances from another bank with excess
settlement balances.
• Overnight interest rate is mostly watched.

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 SECURITIES
LONG-TERM

• Long-term securities:
– Maturity from 1 year over
• Common long-term securities:
– Bonds
– Stocks
– Mortgages
– Consumer and Bank Commercial Loans

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 Bonds
• Bonds: long-term debt securities issued by
borrowers and sold to investors
– “IOUs” issued by the borrower and sold to investors
– Borrowers (issuers) are the Treasury, government
agencies and corporations to finance their operations.
– The issuer promises to repay the face amount on the
maturity date and to pay interest on a periodic time in
the amount of the coupon rate times the face value
– The amount and timing of interest and principal
payments to investors who purchase bonds are specified
on the bonds.
– Bonds could be traded on secondary market and its price
could change over time.
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 Bonds
• Features of bonds:
– Face value: the amount that the bond promises
to pay its owner at some date in the future (also
called par value, or principal)
– Maturity date: the date on which the issuer is
obligated to pay the bondholder the bond’s face
value
– Coupon interest: the interest payments made to
the bond owner during the life of the bond.
Some bonds pay coupon interest once a year,
many pay it twice a year. Some bonds don’t pay
any interest at all.
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 Bonds
• There are different kinds of bonds from
different issuers with different level of credit:
– Treasury bonds: issued by the government
– Municipal bonds: issued by state and local gov’ts
– Corporate bonds: issued by corporations

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 Bonds
• Government bonds: long-term instruments
issued by the Treasury to finance the deficits
of the government.
• Ex: in US
– T-notes: maturities from 2,3 or 10 years
– T-bonds: maturities greater than 10 years
• They normally are the most widely traded
bonds and the most liquid security traded in
the capital market.
• They are held by banks, households and
foreigners.
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 Bonds
• Municipal Bonds: issued by state and local
governments, also called “munis”.
– Many investors like municipal bonds because their
coupon interest payments are free of federal income
tax.
• Municipal bonds come in two types. They differ
in where the money comes from to pay them
off:
– general obligation bonds (GOs) : paid off from a
variety of different tax revenue sources.
– revenue bonds: paid off with money generated by
the project the bonds were issued to finance – such
as using toll bridge fees to pay off the bonds to
finance the toll bridge.
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 Bonds
• Corporate bonds: issued by corporations to
raise funds
– The amount of corporate bonds for any given
corporation is small
– They are not as liquid as other securities such as
government bonds.

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 Bonds
• Some special types of corporate bonds:
– Zero-coupon bonds: no interest, but the bond is
issued at a deep discount and bought back at full
par value.
– Convertible bonds: have the additional feature
of allowing the holder to convert them into a
specified number of stocks at any time up to the
maturity date.
– Consol bonds: bonds with no maturity date.
Perpetual bonds are not redeemable but pay a
steady stream of interest forever.
– ….
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 Bonds
• Some issue to clarify related to bonds:
– Valuing bonds
– Interest rate vs coupon rate
– Face value (par value) and market value
– Yield to maturity

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 Stocks
• Stocks (also referred as equity securities) are equity
claims on the net income and assets of a corporation.
– have no maturity
– represent partial ownership in the corporations that issued
them
• Investors in stocks can have income from two sources:
– Dividend (a portion of the company’s earnings)
– Capital gain (from selling the stock for a higher price than
they paid for it)
• Stockholders are not guaranteed any return on their
investment.
• Stockholders are residual claim on the firm.
• 2 types: common stocks and preferred stocks
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 Stocks
• Stocks (also referred
Some corporations
as equity securities) are equity
As equity securities
claims on the net income
provide income to their and assets of a corporation.
represent partial
– stockholders
have no maturity
by ownership, when a
– distributing
representapartial
portionownership
of in the corporations that issued
corporation grow
their
them.earnings in the form and increase in
of dividends.
• Investors in stocks can have income
value, the value
from two ofsources:
the stock increase.
– Dividend (a portion of the company’s Thusearnings)
investors
– Capital gain (from selling the stock could
for a earn
higher price than
another
they paid for it) source of return
• Stockholders are not guaranteedfrom anystock through
return on their
investment. capital gain when
they sell stock.
• Stockholders are residual claim on the firm.
• 2 types: common stocks and preferred stocks.
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 Common stocks
• Common stockholders own a portion of the
company and can vote on major decisions.
• They receive a return on their investment in
the form of dividends and capital gains.

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 Preferred stocks
• Preferred stockholders do not generally have
voting rights, but have priority in receiving
dividends.
• They are paid dividends at a pre‐set rate,
usually stated as a percentage of face or par
value.

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Common stocks vs Preferred stocks

Common stock Preferred stock

Dividend Decided by the Fixed
BODs
Voting right Yes No
Owners Yes No/Yes
Earning Last After bond and before
payment order common stock

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 Stocks
• Some issue to clarify related to stocks:
– Valuing stocks
– Growth stocks vs. Income stocks
– Voting Rights, Calling and Convertibility

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 Mortgages
• Mortgages: long-term debt obligations
created to finance the purchase of real
estate
• Households or firms could borrow in form of
mortgages to purchase housing, land, or
other real structures, where the structure or
land itself serves as collateral for the loans.

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 Mortgages
• There are two types of mortgages based on
the creditworthy of borrowers:
– Prime mortgage
– Sub-prime mortgage
• Lenders offer prime mortgages to borrowers
who qualify their various criteria
• They also offer subprime mortgages to some
borrowers who do not have sufficient
income to qualify for prime mortgages or are
unable to make a down payment.
• Subprime mortgages have higher risk of
default.
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 Mortgages
• Mortgage-backed securities are debt
obligations representing claims on a package
of mortgages.

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 Other loans
• Consumer and Bank commercial loans:
these loans to consumers and businesses are
made principally by banks, but in the case of
consumer loans, also by finance companies.

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 Securitized loans
• Securitization: The process of converting
loans and other financial assets that are not
tradable into securities.

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 SECURITIES
DEBT
• Debt instrument/Debt security
– is contractual agreement by the borrowers to pay the
holder of the instrument fixed income at regular
intervals (interest and principal payments) until a
specified date (the maturity date) when a final
payment is made.
• Major debt instruments
– Commercial paper
– Bankers’ acceptances
– Treasury bills
– Mortgage loans
– Bonds
– Debentures

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 Debt securities
• Deficit units that issue the debt securities
are borrowers. Surplus units that purchase
debt securities are creditors.
• The maturity of debt instrument is the
number of years until that instrument’s
expiration date. A debt instrument is:
– Short-term if its maturity is less than 1 year.
– Long-term if its maturity is 10 years or longer
(in the US).
– Intermediate-term if its maturity is between 1
and 10 years.
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 Debt securities
• Features of debt securities:
– Par value
– Interest rate
– Price
– Coupon
– Maturity

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 SECURITIES
EQUITY

• Equity (also called stock)

– is the claim of the owners of a firm, i.e. claim to
share in the net income (income after expenses
and taxes) and the assets of the firm.
• Equity Instruments
– Common stock
– Preferred stock

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 Equity
• If you own one share of common stock in a
company that has issued one million shares, you are
entitled to one-millionth of the firm’s net income
and one-millionth of the firm’s assets.
• Equities often make periodic payments (dividends)
to their holders and are considered long-term
securities because they have no maturity date.
• In addition, owning stock means that you own a
portion of the firm and thus have the right to vote
on issues important to the firm and to elect its
directors.

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 Equity
• Residual claim on assets. Limited liability
• There are 2 types of stocks:
– Common stocks
– Preferred stocks

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 SECURITIES
OTHERS

• Hybrid form
• Derivatives

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 Derivatives
• Derivative securities: are financial contracts
whose value are derived from the values of
underlying assets (such as debt securities or
equity securities, foreign currency,
commodities, even interest rates or some
combination thereof).
• Some most common derivative securities:
– Forward
– Futures
– Options: Call options and put options
– Swap
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 Derivatives
• Purposes of investors engaging derivatives:
– Speculation: derivative securities allow an
investor to speculate on movements (whether
increase or decrease) in the value of underlying
assets without having to purchase those assets.
– Risk management (hedging): derivative
securities can be used in a manner that will
generate gain if the value of underlying assets
decline; consequently, investors can adjust
(reduce) the risk of their existing investment in
securities; the loss on underlying asset can be
offset by the gains on derivative securities.

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 Forward
• Forward contract (or forward) is a
customized contract between two parties to
buy or sell a specified asset for a price agreed
upon today (the forward price) with delivery
and payment occurring at a specified future
date, the delivery date.
• A forward contract is in contrast to a spot
contract, where the price is determined today
and the delivery also occurs today.

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 Forward
Example 4.1:
• Let's assume that you want to buy a sailboat in 12 months.
Your friend, John, owns a sailboat but expects to upgrade to
a newer, larger model in 12 months.
• You and John could enter into a forward contract in which
you agree to buy John's boat for $150,000 and he agrees to
sell it to you in 12 months for that price.
• In this scenario, as the buyer, you have entered a long
forward contract. Conversely, John, the seller will have the
short forward contract.
• At the end of 1 year, you find that the current market
valuation of John's sailboat is $165,000. Because John is
obliged to sell his boat to you for only $150,000, you will
have effectively made a profit of $15,000. (You can buy the
boat from John for $150,000 and immediately sell it for
$165,000.) John, unfortunately, has lost $15,000 in potential
proceeds from the transaction. 56
 Futures
• Futures contract (or futures) is a standardized
contract between two parties to buy or sell a
specified asset of standardized quantity and
quality for a price agreed upon today
(the futures price) with delivery and payment
occurring at a specified future date,
the delivery date.
• A future contract is also in contrast to a spot
contract.

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 Futures
• Example 4.2:
• If you plan to grow 500 bushels of wheat next year,
you could either grow the wheat and then sell it for
whatever the price is when you harvest, or you
could lock in a price now by selling a futures
contract that obligates you to sell 500 bushels of
wheat after the harvest for a fixed price.
• By locking the price now, you eliminate the risk of
falling wheat prices.
• On the other hand, if the season is terrible and the
supply of wheat falls, prices will probably rise later –
but you will get only what your contract entitled you
to.
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 Options
• An option is an instrument that provides its holder with an
opportunity to purchase or sell a specified asset at a stated
price on or before a set expiration date.
• Three basic forms of options are rights, warrants, and calls
and puts
– Call option: An option to purchase a specified number of shares of a
stock (typically 100) on or before a specified future date at a stated
price.
– Put option: An option to sell a specified number of shares of a stock
(typically 100) on or before a specified future date at a stated price.
– Rights: allow stockholders to purchase additional shares at a price
below the market price, in direct proportion to their number of
owned shares.
– Warrants: instruments that give their holders the right to purchase a
certain number of shares of the issuer’s common stock at a specified
price over a certain period of time.
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 Options
• Example 4.3:
• In a simple call options contract, a trader may expect
Company XYZ’s stock price to go up to $90 in the next month.
• The trader sees that he can buy an options contract of
Company XYZ at $4.50 with a strike price of $75 per share.
The trader must pay the cost of the option ($4.50*100
shares=$450).
• The stock price begins to rise as expected and stabilizes at
$100.
• Prior to the expiry date on the options contract, the trader
executes the call option and buys the 100 shares of Company
XYZ at $75, the strike price on his options contract. He pays
$7,500 for the stock.
• The trader can then sell his new stock on the market for
$10,000, making a $2,050 profit ($2,500 minus $450 for the
options contract).
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 Forward/Future vs. Options
Forward/Futures Options
Obligation Are obligations on Are only binding on the
both the buyers sellers; buyers have the
and the sellers right, but not the
obligation, to take a
position in the
underlying asset
Fee No premium Have premium for the
right

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 Swap
• A swap is an arrangement by two
counterparties to exchange one stream of
cash flows for another (exchange cash flows
in the future according to a predetermined
formula).
• Typically, one party pays a fixed to the other
party in exchange for a market determined
floating price.
• Like the forward contracts, swaps are traded
outside of organized exchanges by financial
institutions and their corporate clients.
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 Swap
• Example 4.4:
• This is an example of a plain vanilla swap, which is simply an
interest rate swap in which one party pays a fixed interest rate and
the other pays a floating interest rate.
• Company XYZ issues $10 million in 15-year corporate bonds with a
variable interest rate of LIBOR+150 basis points. LIBOR is currently
3%, so Company XYZ pays bondholders 4.5%.
• After selling the bonds, an analyst at Company XYZ decides there’s
reason to believe LIBOR will increase in the near term. Company
XYZ doesn’t want to be exposed to an increase in LIBOR, so it
enters into a swap agreement with investor ABC.
• Company XYZ agrees to pay Investor ABC 4.58% on $10,000,000
each year for 15 years. Investor ABC agrees to pay Company XYZ
LIBOR+1.5% on $10,000,000 per year for 15 years. Note that the
floating rate payments that XYZ receives from ABC will always
match the payments they need to make to their bondholders.
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 FINANCIAL MARKETS

• A financial market is a market in which

financial assets (securities) such as stocks
and bonds can be purchased or sold.

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65
 Functions of financial market
• The basic function of financial market is
to transfer funds from those who have
excess funds (surplus units) to those who
need funds (deficit units).
– Financial markets facilitate the flow of funds:
funds transferred when one party purchases
financial assets which are previously held by
another party.

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Functions of financial market

67
 Structure of financial markets
• Money versus Capital market
• Debt versus Equity market
• Primary versus Secondary market
• Exchanges and Over-The-Counter market

68
 MONEY MARKET VS. CAPITAL
MARKET

• Classified according to the maturity of the

securities traded in each market:
– Money market
– Capital market

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 Money market
• Money market: trade short-term (1 year
or less) debt instruments
• Securities traded in this market are
referred to as money market securities.
• Major money centers in Tokyo, London
and New York

70
 Money market instruments
• Common money market instruments:
– Treasury bills
– Negotiable bank Certificates of Deposit
– Commercial paper
– Bankers’ acceptance
– Eurodollars
– Repurchase agreement
– Overnight funds

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 Money market instruments
• Maturity less than 1 year
• All are debt instrument
• Low risk
• High liquid
• Low return

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Table 1 Principal Money Market Instruments

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 Group work
Financial news:
• Money Rates on US/Canada/VN market:
• Daily published listing of interest rates on
many different financial instruments.

74
 Capital market
• Capital market: trade long-term securities.
• Securities traded in this market are
referred to as capital market securities,
which are commonly issued to finance the
purchase of capital assets, such as
buildings, equipment or machinery.

75
 Capital market instruments
• Common capital market instruments:
– Bonds
– Stocks
– Mortgages
– Consumer and Bank Commercial Loans

76
 Capital market instruments
• More than 1 year maturity
• Can be debt security or equity
• Higher risk
• Lower liquidity
• Higher return

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Table 2 Principal Capital Market Instruments

78
 Sum-up: Money market vs. Capital
market
• What are the kinds of securities traded in
financial markets?
• Money Market Instruments
– Because of short term to maturity, debt instruments
traded in the money market do not have much
fluctuation in their prices, and hence are the least
risky
• Capital Market Instruments
– Debt and equity instruments with maturities greater
than a year; these have much greater fluctuations in
their prices (compared to money market instruments)
and as such are considered more risky

79
DEBT MARKET VS. EQUITY MARKET
• A firm or an individual can obtain funds in
a financial market in two ways: issue debt
or issue equity.
– Debt market
– Equity market

80
 Debt market
• Debt market: also called fixed-income
market, is the market where debt
securities are traded.
• Types of debt securities:
– Bond
– Mortgage
– Loan

81
 Equity market
• Equity market: is the market where
equities (stocks) are traded.
• Types of equity:
– Common stocks
– Preferred stocks

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Sum-up: Debt securities vs. Equity

• Pros and cons of debt instruments versus

equity instruments?

83
PRIMARY MARKET VS. SECONDARY
MARKET
• Classified according to the characteristics
of participants and securities involved:
– Primary market
– Secondary market

84
 Primary market
• Primary markets is where deficit economic
units sell new securities.
– Primary market transactions provide funds to
the initial issuer of securities.
– Primary markets are not well known to the
public because the selling of securities to
initial buyers often takes place behind closed
doors.
• The sale of securities in primary markets
are usually made by underwriting
securities from investment bank.
– Underwriting: investment bank guarantees a
price for a corporation’s securities and then
sells them to the public.
85
 Secondary market
• Secondary markets is where investors trade
previously issued securities with each other.
– Secondary transactions do not provide funds to
the initial issuer of securities
– An important characteristic of securities traded in
secondary market is liquidity, the degree to which
securities can easily be liquidated (sold) without a
loss of value.
– Prices of securities on secondary markets are
determined by market’s supply and demand.
• E.g: New York Stock Exchange and NASDAQ;
foreign exchange market, futures markets...

86
 Secondary market
• Securities brokers and dealers are crucial to a
well-functioning secondary market.
– Brokers are agents of investors who match buyers
with sellers of securities:
• accept orders from clients and execute orders on behalf of
clients -> agent
• receive commission.
– Dealers buy securities for one price, i.e. bid price, and
sell them for a higher price, i.e. ask/offer price
• trade for its own account, a dealer may use its portfolio to
offer services to the public -> principal
• receive spread, i.e. the difference between bid price and ask
price.
• The dealer may actually be a client of another
broker.
87
 Sum-up: Primary market vs.
Secondary market

• Relationship between primary and

secondary markets?

88
 EXCHANGES VS. OTC
• Secondary markets can be organized in
two ways:
– Exchanges
– Over-the-Counter

89
 Exchanges
• Exchanges: where buyers and sellers of
securities (or their agents or brokers) meet
in one central location to conduct trades.
• Ex: The New York Stock Exchange for
stocks, The Chicago Board of Trade for
commodities (wheat, corn, silver and
other raw materials).

90
 OTC
• Over-the-Counter markets: dealers at
different locations who have an inventory
of securities stand ready to buy and sell
securities “over the counter” to anyone
who comes to them and is willing to
accept their prices.
• In contrast to the organized exchanges,
which have physical locations, the OTC
market has no fixed location – or, more
correctly, it is everywhere.
• Ex: Nasdaq for common stocks
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 Sum-up: Classifications of Financial
Markets
• 1. Primary Market
– New security issues sold to initial buyers (often behind closed
doors)
– Investment banks typically underwrite securities (i.e. guarantees
a price for the security and then sells it to the public)
• 2. Secondary Market
– Securities previously issued are bought and sold
– E.g.: NASDAQ, Futures, Options, Foreign Exchange
– Exchanges
• Trades conducted in central locations (e.g., New York Stock Exchange,
NYSE; London Stock Exchange, LSE)
– Over-the-Counter Markets
• Dealers at different locations buy and sell

92
 Sum-up: Classifications of Financial
Markets
• Debt Markets
– Short-term (maturity < 1 year): Money Market
– Intermediate-term (1year < maturity < 10 years)
– Long-term (maturity > 10 years)
• Equity Markets
– Common stocks: claims to share in assets and net income
– No maturity date; periodic payments known as dividends
• Capital Market: Intermediate + Long Term Debt +
Equity
– Examples: Bonds, mortgages

93
 DERIVATIVES MARKET
• The derivatives market is the financial market
for derivatives, financial instruments like
futures contracts or options, which are
derived from other forms of assets.
• The market can be divided into two, that for
exchange-traded derivatives and that for over-
the-counter derivatives.

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 Derivatives market
• Participants in a derivative market can be
segregated into four sets based on their
trading motives.
– Hedgers
– Speculators
– Margin Traders
– Arbitrageurs

95
 Group work
• Stock market index?
– Country
– Stock market index of that country
– Introduce or brief explain about that index

96