Financial Markets

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A commitment of money to an asset from which you expect to receive an appropriate return for a given level of risk

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Investment

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The attempt to profit over the short term from fluctuating prices

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Speculation

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Taking an opposite position from an existing risky positin fso the two cancel out and you lower your overall risk

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Hedging

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Simultaneously buying and selling the same asset in 2 different markets at two different prices in order to exploit pricing inefficiencies across markets and earn riskless profits

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Arbitrage

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Arbitrage

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Simultaneously buying and selling the same asset in 2 different markets at two different prices in order to exploit pricing inefficiencies across markets and earn riskless profits

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Hedging

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Taking an opposite position from an existing risky position for the two to cancel out and you lower your overall risk

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Speculation

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The attempt to profit over the short term from fluctuating prices

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Investment

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A commitment of money to an asset from which you expect to receive an appropriate return for a given level of risk

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Real Assets

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tangible, physical assets. They have an intrinsic value or are physical assets that can be used to create wealth.

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Financial Assets

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Intangible, paper or electronic claims to wealth or other assets.

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Money Markets

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Markets for short term debt instruments where oriinal maturiy is equal to or less than 1 year. e.g. commercial aper, egotiable cds, fed funds, t-bills

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Capital Markets

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markets for medium and long-term debt equities, e.g. notes, bonds, common stock and preferred stock

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Formal Markets

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markets with a formalized physical location, e.g. NYSE, AMEX, futures\options markets like CME (Chicago Mercantile Exchange)

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Informal Markets

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Computer and telecommunications based markets with no centralized physical location, e.g. nasdaq, forex

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Forex Markets

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Informal market for buying and selling foreign exchange for spot and forward delivery

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Spot Market

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eneric term for any market for immediate delivery of the asset being bought and sold. Delivery and settlement in 1-2 business days., e.g. spot FOREX market, spot commodities market, spot heating oil market

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Derivatives Markets

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Markets where derivatives such as options and futures contracts or Swaps are traded. Therlargest formal derivatives markets often trde both futures and options contracts. The swaps market is an informal market where swap counter parties arrange swap contracts through telecommunications linkages.

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Futures Market

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A market where standardized futures contracts are traded. e.g. of formal markets are CBOT (Chicago Board of Trade) and CME (Chicago Mercantile Exchange. The CME has established an informal, global market called GLOBEX.

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Forward Market

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Generic term for any market involving delivery of an asset at some time in the future. Typical forward delivery takes place in 30, 60, or 90 days but other arrangements are available.

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Options Market

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A market where standardized options contracts are traded. E.g. of formal markets are the old Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME) in the US. Now being replaced by Globex run by the CME Group.

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Primary Market

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A market where securities and other assets are sold for the first time, e.g. IPO, follow-on issue markets, new issue bonds, New issues transfer funds from investors to the issuers of the securities.

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Secondary Market

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Market where securities can be bought/sold after original issue. E.g. NYSE trades listed stocks and bonds in a formal market and NASDAQ stock market.

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The market in which currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world.

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What is a Forex Market

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1. 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.

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What is a spot market

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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. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

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Derivatives Markets

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Strategies used in open market operations in order to offset other anticipated market conditions that would probably affect the level of funds in the economy. For example, if a foreign country is expected to sell its US treasury securities holdings in exchange for US dollars, the Federal Reserve may decide to buy treasury securities in advance in order to maintain the same level of US dollars.

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DEFENSIVE OPEN MARKET OPERATIONS

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DEFENSIVE OPEN MARKET OPERATIONS

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Strategies used in open market operations in order to offset other anticipated market conditions that would probably affect the level of funds in the economy. For example, if a foreign country is expected to sell its US treasury securities holdings in exchange for US dollars, the Federal Reserve may decide to buy treasury securities in advance in order to maintain the same level of US dollars.

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Strategies in open market operations that are implemented to increase or decrease the level of funds available in the economy. Unlike defensive open market operations, these strategies are not done in response to or in anticipation of other market events.

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DYNAMIC OPEN MARKET OPERATIONS

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DYNAMIC OPEN MARKET OPERATIONS

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Strategies in open market operations that are implemented to increase or decrease the level of funds available in the economy. Unlike defensive open market operations, these strategies are not done in response to or in anticipation of other market events.

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Does dynamic or defensive OMO make monetary policy?

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Dynamic action implement a change in monetary policy. Defensive actions keep monetary policy unchanged by offsetting a change in the supply of bank reserves that is caused by factors beyond the Fed's direct control.

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__________ OMO occur infrequently, only when the FOMC changes the stance of monetary policy.

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Dynamic

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___________ OMO occur frequently, usually several times each week.

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Defensive

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What is Haircut?

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Writing down the value of a debt.

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What is the loanable funds theory?

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It suggests that the market interest rate is determined by the factors that control the supply of an demand for loanable funds.

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Market Segmentation Theory

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In different maturity segments of the market theere is a supply and demand for loanable funds, that determine the interest rate yield. Some people analyze the shape of the yield curve to use as a forecast for how the economy is doing.

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What is PET?

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Pure Expectations Theory.
It assumes tha the term structure of an interest contract only depends on the shorter term segments for determining the pricing and interest rate of longer maturities.

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PET Assumes that:

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Yields at higher maturities correspond exactly to future realized rates and are cmpounded from yields on shorter maturities