Sunday, April 19, 2009

settlement:cash or derivative markets

Financial markets can be categorized by whether the claims traded are direct or derivative.Cash markets refer to those markets in which actual claims are bought and sold with immediate settlement: The buyer pays money to the seller in exchange for the asset. Examples include the stock and bond markets. Alternatively,in (derivative markets),trades are made now,but settlement is made at a later date. for example,an investor could agree to buy a Treasury bond from a bond dealer one year from now at a prespecified price. why would anyone want to do this? The reason is that households and businesses use derivative markets to reduce their exposure to the risk of price fluctuations in cash markets (and sometimes even to bet on future price fluctuations).
Derivative claims, whose value is determined by (derived from) underlying assets (such as stocks,bonds,or foreign exchange),include financial futures and options. financial futures imply settlement of a purchase of a financial instrument at a specified future date, with the price determined at the outset. Options on financial contracts ,as the name suggests, confer on the trader the right(or option)to buy or sell a particular asset(shares of stock,bonds,or units of foreign currency,for example)within a specified time at a specified price.

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