Buyers and sellers communicate with the brokers, exchanges, and dealers that arrange their trades by issuing orders. All orders specify what instrument to trade, how much to trade, and whether to buy or sell. Most orders also have other instructions attached to them. These additional instructions may include execution instructions, validity instructions, and clearing instructions. Execution…
The borrowed money is called the margin loan, and they are said to buy on margin. The interest rate that the buyers pay for their margin loan is called the call money rate. The initial margin requirement is the minimum fraction of the purchase price that must be trader’s equity. The relation between risk and…
People generally solve their financial and risk management problems by taking positions in various assets or contracts. A position in an asset is the quantity of the instrument that an entity owes or owns. A portfolio consists of a set of positions. People have long positions when they own assets or contracts. People have short…
Clearinghouses arrange for final settlement of trades. Summary By facilitating transactions among buyers and sellers, financial intermediaries provide services essential to a well-functioning financial system. They facilitate transactions the following ways:
The process of buying assets, placing them in a pool, and then selling securities that represent ownership of the pool is called securitisation. The corporation or trust is called a special purpose vehicle (SPV) or, alternatively, a special purpose entity (SPE). Depository Institutions and Other Financial Corporations Depository institutions include commercial banks, savings and loan…
Financial intermediaries help entities achieve their financial goals. These intermediaries include commercial, mortgage, and investment banks; credit unions, credit card companies, and various other finance corporations; brokers and exchanges; dealers and arbitrageurs; clearinghouses and depositories; mutual funds and hedge funds; and insurance companies. The services and products that financial intermediaries provide allow their clients to…
A contract is an agreement among traders to do something in the future. Contracts include forward, futures, swap, option, and insurance contracts. The values of most contracts depend on the value of an underlying asset. The underlying asset may be a commodity, a security, an index representing the values of other instruments, a currency pair or…
Currencies are monies issued by national monetary authorities. Currencies trade in foreign exchange markets. In spot currency transactions, one currency is immediately or almost immediately exchanged for another. The rate of exchange is called the spot exchange rate. Retail currency trades most commonly take place through commercial banks when their customers exchange currencies at a…
People, companies, and governments sell securities to raise money. Securities include bonds, notes, commercial paper, mortgages, common stocks, preferred stocks, warrants, mutual fund shares, unit trusts, and depository receipts. These can be classified broadly as fixed-income instruments, equities, and shares in pooled investment vehicles. Fixed Income Fixed-income instruments contractually include predetermined payment schedules that usually…
People, companies, and governments use many different assets and contracts to further their financial goals and to manage their risks. The most common assets include financial assets (such as bank deposits, certificates of deposit, loans, mortgages, corporate and government bonds and notes, common and preferred stocks, real estate investment trusts, master limited partnership interests, pooled…