Mizzou MATH 4355 - Invest Sci Notes (14 pages)

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Invest Sci Notes



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Invest Sci Notes

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Pages:
14
School:
University of Missouri
Course:
Math 4355 - Investment Science I

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Chapter 1 Intro to Derivatives 09 04 2013 1 2 After a trade has taken place a clearinghouse matches the buyers and sellers keeping track of their obligations and payments Traders that deal directly with a clearinghouse are called clearing members If you buy a share of stock as an individual your transaction ultimately is cleared through the account of a clearing member Derivative exchanges are always associated with a clearing organization because such traders must also be cleared and settled The substitution of one counterparty for another is known as novation Over the Counter OTC large traders trade many financial claims directly with the dealer bypassing organized exchanges Why buyers and sellers would transact directly o Easier to trade a large quantity directly o Might wish to trade a custom financial claim that is not available on an exchange o Trade a number of different financial claims at once Measures of Market Size and Activity Trading volume counts the number of financial claims that change hands daily or annually On stock exchange trading volume refers to the number of shares traded On an option exchange trading volume refers to the number of options traded but each option on an individual stock covers 100 shares of stock Market value market cap of the listed financial claims on an exchange is the sum of the market value of the claims that could be traded without regard to whether they have been traded A firm will 1 million shares and a share price of 50 has a market value of 500 million Notional value measures the scale of a position usually with reference to some underlying asset Suppose the price of a stock is 100 and that you have a derivative contract giving you the right to buy 100 shares at a future date The notional value of such contract is 100 shares or 10 000 Open interest measures the total number of contracts for which counter parties have a future obligation to perform Stock and Bond Markets Bond market is similar in size to stock market



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