Financial Markets Overview Quiz

Study Notes

Bond Markets: Platforms for issuing and trading debt securities.
Commodity Markets: Venue for trading raw materials like gold and oil.
Forex Markets: Market for trading national currencies.
Derivatives Markets: Focus on trading financial instruments based on underlying assets.

Investors: Individuals or entities engaging in purchasing and selling financial assets.
Brokers and Dealers: Facilitate trades as intermediaries.
Market Makers: Provide liquidity by offering buy and sell price quotes.
Regulatory Bodies: Government agencies such as FCA and SEC monitoring market activities.

Equities: Shares that signify ownership in a company.
Bonds: Debt securities representing an obligation of the issuer to the holders.
Commodities: Marketable physical goods.
Currencies: National currencies exchanged in forex markets.
Derivatives: Instruments whose value is based on underlying assets.

Definition: Financial contracts whose value is derived from an underlying asset.
Types of Derivatives:
- Forwards: Customized contracts for future asset purchase or sale.
- Futures: Standardized contracts traded on exchanges.
- Options: Contracts providing an opportunity, not obligation, to transact at a set price.
- Swaps: Agreements for exchanging cash flows or financial instruments.

Equities (Stocks): Represent ownership in a company with dividends tied to profits.
Bonds: Typically involve semi-annual interest payments with a maturity date for repayment.
Commodities: Include physical goods like oil and gold, traded based on spot prices or futures contracts.
Currencies: Traded in pairs with fluctuating exchange rates.
Interest Rates: Represent borrowing costs, influenced by central bank policy.

Forward Contracts: Customized trade agreements with higher risk due to non-standardization.
Futures Contracts: Standardized agreements traded on established exchanges.
Options:
- Call Options: Grant the right to buy at a specified price.
- Put Options: Grant the right to sell at a specified price.
Swaps: Used for managing interest rate or currency exposure.
Structured Products: Combination of derivatives with traditional securities to customize risk and return profiles.

Intrinsic Value: Value realized if the derivative is exercised immediately.
Time Value: Additional value based on remaining time until expiration.
Key Pricing Models: Includes the Black-Scholes Model and Binomial Model for option valuation.
Mark-to-Market Valuation: Updating a derivative’s value to reflect current market conditions.

Hedging Techniques: Including long, short, and delta hedging strategies.
Speculation vs. Hedging: Differentiates risk-taking for profit from risk mitigation.
Risk Measures: Delta, Gamma, Vega, and Theta assess sensitivity to price changes, volatility, and time decay.

Regulatory Bodies: Notable authorities include FCA, SEC, and CFTC.
Key Regulations: Dodd-Frank Act and MiFID II focusing on market transparency and supervision.
Compliance Requirements: Due diligence measures such as KYC and AML, along with trade reporting protocols.

Execution Process: Involves order placement, matching, and confirmation between parties.
Clearing and Settlement: Ensures trade validation and payment transfer for ownership.
Documentation: Legal contracts and records are critical for audits and regulatory compliance.

Definition: Investment strategies merging traditional instruments with derivatives.
Components: Underlying assets and derivatives shaping investment outcomes, often include capital protection features.
Types of Structured Products: Equity-linked notes, capital-protected notes, and yield enhancement products.
Risks and Benefits: Offer customization and potential returns but can be complex with liquidity concerns.

Hedging with Futures: Example of a farmer locking in crop prices via futures.
Speculation with Options: Example of a trader betting on stock price direction.
Creating Structured Products: A case where a bank offers capital-protected notes to risk-averse investors demonstrating returns based on equity index performance.
Best Practices: Emphasis on thorough risk assessment, documentation, and regulatory compliance in derivatives trading.