The researcher of this essay focuses mostly on the analysis of the derivative markets and its issues, such as Hedging, Futures arbitrage, swap contract and covered calls. This essay also briefly discusses the possibilities of marketing in the future…
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There are several limitations in the price of future contracts and it is ensured by future arbitrage. The existence of price limits help to minimise the instability of prices by defending organizations against market overreaction. However, price limit can also make future contracts less liquid. Future arbitrage makes future contracts more valuable. Arbitrage generates a strong connection among the futures and commercial values (New York University, n.d.). Limit of arbitrage is significant for behavioural descriptions of irregularities and wider revision of asset valuation. Limit of future arbitrage is a portion of finance plan to clarify variances based on investors’ emotional prejudices. Arbitrageurs can face the following price limitations: Fundamental and non-fundamental risks Short-selling costs Leverage and margin constraints Constraints on equity capital Thus, the above statement 2 is true i.e. there are some defined limitations in future arbitrage in pricing future contracts (Gromb & Vayanos, 2010). Statement 3 “A swap contract can create a win/win situation for two swap players plus the financial intermediary arranging the swap” The interest rate swap is a derivative to interchange interest rate for accomplishing lesser borrowing rates. Swap players can change interest rate from static to floating and vice versa. Swapping is beneficial when one player desires to get an amount with a floating interest rate while other player wishes for preventing future risks by getting a static interest rate in its place. In swapping, both players have their own primacies and desires, thus it (swapping) can create win/win situation for them...
This essay states that in recent times, the world has converted into an uncertain place for financial organisations. Fluctuations in interest rates have extended, and stock markets are running through growing unpredictability. As a consequence of these variations, the financial organisations have happened to be more anxious about minimising the risks. As the demand for risk reduction techniques has enlarged, it has generated innovative financial tools named financial derivatives. These tools are very convenient in minimising the risks and help financial organisations to hedge. Hedging is a method which is used by financial organisations to counteract the regular risks of price variations. It is considered as important risk managing instrument for portfolio managers, bank executives and corporate accountants. In any derivative contract, the seller comes to an agreement to provide asset at a particular period in future and purchaser approves to pay fixed value for that asset. One can build a clean arbitrage if the future contract is mispriced. Majority of future contracts are priced according to arbitrage. In derivative contract, organisations need to choose investments which can provide good return with estimated price measures. It is also termed as speculation. Speculation is a procedure used in finance for securing profit from riskier investments, but it does not ensure security on investment or principal amount. Speculators use several approaches to make a decision prior to obtaining additional risks through investment.
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“Derivative Markets Essay Example | Topics and Well Written Essays - 1750 Words”, n.d. https://studentshare.org/marketing/1432059-derivative-markets.
The object of analysis for the purpose of this assignment are derivatives as a particular instrument or product the worth of which is obtained as a resultant of more than one fundamental variables referred to as an underlying asset, value associated with the reference rate and index by way of a contract.
The underlying factors of the market that determines the value of derivative contracts may be currency conversion rates, interest rates, equity prices, commodity prices, etc. The derivative contracts may take the form of options, swaps, futures, forwards, etc.
Financial market securities include bonds, stocks, commodities, agricultural goods and precious metals. The derivatives market is financial market for derivative instruments such as options contracts and futures contracts. The characteristic feature of derivative instrument is that the value of derivative is derived from the underlying.
However, with the advent of the modern foreign exchange markets, it is possible to trade on the various currencies with minimal risks because the exchange rates are developed and maintained at a consistent level (Hope & Fraser, 2003, p. 45). The international foreign exchange market offers businesses the opportunity to trade using local currency thus increasing the business penetration in the global market.
The financial industry as a whole is massive, according to Axiss (2005,5), "It is a major driver of Australia's economic growth, considerably outweighing agriculture and mining combined, the two Industries traditionally associated with Australia's economic wellbeing." The success of banks has benefited the economy as a whole but has also affected various financial institutions, instruments and markets in Australia.
Our focus in this paper is on financial options, but it is important, nonetheless, to gain some awareness of other types of options.
Options on individual stocks, also called equity options, are among the most popular. Exchange listed options are available on most widely traded stocks and an option on any stock can potentially be created on the over the counter market.
These models serve as a means of summarizing and exposing the mortgage contracts which are complex in nature. The models also explain the implicit options the mortgage contracts contain for borrowers. One of such options is to terminate the contract prior to maturity.
The author states that Eurodollar futures contract returns market potential for interest rates on Euro-Dollar securities for particular times in future. The ‘5 years E-Mini Bundle Futures’ of Eurodollar contracts offer organizations to get disclosure to the 5-year term on USD interest rate interchange.
Trading in financial markets can be direct between buyers and sellers, or can be through the stock exchange (Richard 2005, p.43-48).
Financial markets encompass six major functions, which include borrowing and
Under financial markets, four broader categories highly dominate which are bond, stocks, foreign exchange, and derivative markets. The following discussion briefly describes aforementioned types of financial markets.
Bonds are the debt instruments
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