Introduction to Derivative Markets Flashcards
Definition: Derivative instruments
Contracts between two parties to buy/sell or exchange (optional of obligatory) a standard or non-standard quantity and quality of an asset or cash flow at a predetermined price on or before a specified date in the future.
Definition: Derivative markets
It’s the financial market for derivatives.
Definition: Financial system
The financial system describes the arrangements (i.e., financial markets, intermediaries and control systems) which allow for the exchange of financial instruments (i.e., financial contracts), so that funds may flow between participants (i.e. lenders and borrowers).
Definition: Financial intermediaries
institutions which intermediate between lenders and borrowers, as the financial middleman, and thus facilitate the flow of funds from savers to borrowers.
Definition: Money market
Market for the issue of all short-term debt (marketable or non-marketable) and trading
(marketable) of securities with maturities of less than one year.
Definition: Bond market
The market for the issue (primary market) and the trading (secondary market) of marketable long-term securities with maturities longer than one year.
Distinguish between: Derivative and underlying instrument.
Derivative - Contracts between two parties to buy/sell or exchange (optional of obligatory) a standard or non-standard quantity and quality of an asset or cash flow at a predetermined price on or before a specified date in the future.
Underlying instruments - instruments that are traded in the underlying cash markets
Distinguish between: Ultimate lenders and borrowers
Ultimate lenders - Surplus economic units, hence nonfinancial entities whose savings exceed their real consumption.
Ultimate borrowers - Deficit economic units whose income are insufficient for financing their current spending plans.
Distinguish between: Depository and non-depository intermediaries
Depository Intermediaries - Commonly referred to as banks. Speed up the flow of funds from lenders to borrowers. Accepts deposits from individuals and institutions and making loans with deposited funds.
Non - Depository Intermediaries - Do not accept deposits, instead receive contractual contributions from lenders and invest the funds.
Example: Depository intermediaries
central banks, commercial banks, land & agricultural banks, credit unions, mutual savings banks and savings and loan associations.
Examples: Non-depository intermediaries
insurance companies, pension and provident funds, unit trusts, hedge funds, exchange traded funds (ETF’s), finance companies and investment trust/companies.
Distinguish between: Ordinary and preference shares
Ordinary shares - Permanent Capital, which
represent a share in the ownership of a company.
Preference shares - Long-term semi-permanent capital. Have preference over ordinary shares, Creditors (e.g. bond holders) have preference over preference shares in liquidation event.
