Equity

Equilibrium Interest Rate

rate at which the amount individuals, businesses, and governments desire to borrow equal to the amount businesses are willing to lend

Forward Contract

an agreement to buy or sell an asset in the future at a price specified in the contract at its inception

Futures Contract

similar to forward, except they are standardized and are traded on an exchange (in a secondary market) so they are liquid

Swap Contract

two parties make payments that are equivalent to one asset being traded for another (interest rates, currency, equity to debt)

Option Contract

gives its owners the right to buy or sell an asset at an specific exercise price at some specified time in the future

Call

gives buyer right to buy an asset

Put

gives buyer right to sell an asset

Insurance Contract

pays cash amount if an issuer defaults on its bonds

Credit Default Swaps

a form of insurance that makes a payment if an issuer defaults on its bonds

Commodities

trade in spot, forward, and futures markets

Futures & forwards allow both hedgers and speculators to participate in commodity markets without having to deliver or store physical commodities

Block Brokers

help with large trades, help conceal their client’s intentions so that the market does not move against them

Alternative Trading Systems (ATS)

serve same trading function as exchanges but have no regulatory funciton

Dealers

facilitate trading from own inventory

some dealers also act as brokers which can be a conflict of interest

Moral Hazard

occurs bc the insured may take more risks once they are protected against losses

Adverse Selection

occurs when those most likely to experience losses are the main buyers of insurance

Counterparty Risk

risk that the other party to a transaction will not fulfill its obligations

Long Position

gains when asset value increases, the buyer of an option (call or put) is long

Short Postion

gains when asset values decrease