Futures Market and Contracts

10 Questions

What are the advantages of trading in third and fourth markets?

Speed, reduced trading costs, and anonymity.

What type of investors prefer risk-free assets over risky assets when expected returns are the same?

Risk-averse investors

What is the term for a market where stock prices are going up and market indices are rising?

Bull market

What is the characteristic of a bear market?

Economy is bad, recession is looming, and stock prices are falling.

What type of investors are willing to pay a higher price for an investment regardless of the risks involved?

Risk-taker investors

What is the term for a market where stock prices are falling and the economy is bad?

Bear market

What is the minimum percentage rise in the value of the market to be considered a bull market?

20%

What type of investors do not take into account the risks involved in the investment and focus only on the expected return?

Risk-neutral investors

What is a characteristic of a bull market?

The number of shares traded is high and the number of companies entering the stock market rises.

What is a large block trade in the third and fourth markets?

A transaction involving large block trades.

Study Notes

Futures Market

A futures market is where contracts are traded that give the holder the right to buy or sell an asset at a specified price in the future.
The contract's price is adjusted daily as the price of the underlying asset changes and approaches expiration.
Two participants in the futures market: buyer and seller.

Difference between Futures and Forward Contracts

In a futures contract, the contract's price is adjusted daily based on the price of the underlying asset.
In a forward contract, cash payment occurs only at the end of the contract period, and the value of the contract can change daily.

Forward Market

A forward market involves trading contracts that call for the future delivery of financial instruments, commodities, or currencies.
Forward contracts are contractual agreements between a buyer and a seller to exchange a pre-specified asset for cash at a later date.
The forward contract guarantees a future price for the asset, and the price is fixed over the life of the contract.

Options Market

An options market is where stock options are traded.
Options can be used to transfer credit risk, such as through a credit risk swap.

Commodity and Equity Swaps

A commodity swap is a type of swap agreement that trades a floating price based on an underlying commodity for a fixed price over a specified period.
An equity swap is a financial derivative instrument that exchanges a set of future cash flows, typically an equity-based return against a fixed or floating interest rate.

Third and Fourth Market

The third market refers to transactions between broker-dealers and large institutions.
The fourth market refers to transactions between securities firms and large institutional investors like pension funds and investment companies.
These markets involve large block trades and offer advantages such as speed, reduced trading costs, and anonymity.

Types of Investors

Risk-averse investors (bulls and chickens) prefer risk-free assets and require a higher return to invest in risky assets.
Risk-taker investors (bears and pigs) are willing to pay a higher price for an investment regardless of the risks involved.
Risk-neutral investors focus only on the expected return and do not take into account the risks involved.

Bull and Bear Markets

A bull market is when the market is showing confidence, stock prices are rising, and market indices are going up.
A bull market is characterized by a rise in the value of the market of at least 20%.
A bear market is the opposite of a bull market, where the economy is bad, recession is looming, and stock prices are falling.