Financial Markets. It is a market in which people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. They facilitate transfers of fundsfrom person or business without investment opportunities (Lenders or Savers) to those who have investment opportunities (Borrower or Spenders).
-Direct financing: funds are transferred directly from ultimate savers to ultimate borrowers.
-Indirect financing: A financial intermediar transforms financial claims with one set of characteristics into financial claims with other characteristics.
Classification of financial markets
- Primary markets which facilitate the issuance of new securities. For example, the sale of new corporate stock or new Treasury secuirties.
- Secondary markets which facilitate the trading of existing securities. For example, the sale of existing stock.
With who the trade is done:
-Organized exchanged: trades conducted in central locations (NYSE, CME,...)
-Over the Counter (OTC): Dealers at different locations buy and sell.
Investing: The act of commiting money or capital to an endeavour with the expectation of obtaining an additional income or profit.
Hedging: It is an investment position intended to offset potential losses or gains that may be incured by a companion investment. A hedge is used to reduce any substantial losses or gains suffered by an individual or organization. It can be constructed with futures, swaps, options, etc.
Trading: Buying and selling securities or commodities on a short-term basis, hoping to make quick profits.
Speculation: The practice of engaging in risky financial transactions in an attempt to profit from short term fluctuations in the market value of a tradable financial instrument - rather thanattempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, dividends or interest.
A derivative is a contract on an underlying variable. Example: a forward contract on salmon. This contract is an agreement between two parts to buy/sell salmon in the future at a certain fixed price.
Continously Compound Interest
The future value is:
r: annual interest rate
m: number of compounding periods (per year monthly, quarterly,...)
T: number of years
Infinite number of periods
Definition of exponential