6thCh2P - 1 CHAPTER 2(note this is chapter 5 in the 5 th...

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Unformatted text preview: 1 CHAPTER 2 (note: this is chapter 5 in the 5 th edition of the text) Financial Markets and Institutions The Capital Allocation Process Financial Markets Financial Institutions Stock Markets Stock Market Efficiency 2 Types of Markets Markets in general Physical assets Financial assets Money vs. Capital Primary vs. Secondary Spot vs. Future Private vs. Public 3 What are derivatives? How can they be used to reduce or increase risk? A derivative security’s value is “derived” from the price of another security (e.g., options and futures). Can be used to “hedge” or reduce risk. For example, an importer, whose profit falls when the dollar loses value, could purchase currency futures that do well when the dollar weakens. Also, speculators can use derivatives to bet on the direction of future stock prices, interest rates, exchange rates, and commodity prices. In many cases, these transactions produce high returns if you guess right, but large losses if you guess wrong. Here, derivatives can increase risk. 4 5...
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This note was uploaded on 03/02/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.

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6thCh2P - 1 CHAPTER 2(note this is chapter 5 in the 5 th...

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