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LOS 56. a (Types of market participants (Speculators (Speculators forecast…
LOS 56. a
Derivatives
Examples
Futures, forwards, options, swaps
Concept
A derivative’s value is derived from the value of another asset or an interest rate
Types of derivatives markets
Over-the-counter markets
Limited trading in secondary markets
Default(counter-party) risk exists
Created by dealers or financial institutions
Examples include forwards, swaps and bond options
Custom contracts
Exchange traded markets
Regulated
Free of default
Standardized
Examples include futures and some options
Traded in centralized locations(exchanges)
Types of market participants
Speculators
Speculators forecast expected price movements and take accordant positions that maximize profit
Arbitrageurs
Arbitrageurs exploit market imperfections and inefficiencies to their advantage
Hedgers
Someone interested in reducing their asset exposure to price volatility