Financial Market Notes

Financial Market Notes - Financial Markets Notes Professor...

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Financial Markets Notes Professor: Steve Levin Risk – financial uncertainty Hedger – lays off risk Speculator – assumes risk and is motivated by profit Bubbles – the characteristics are almost always the same Speculators are blamed, but in reality actually mitigate the bubble b/c they provide liquidity o They are selling when everyone else is buying (visa versa) Liquidity – easy and efficient entry and exit from a market (if market is deep = lots of liquidity) Trader – problem solver Trading is NOT a zero sum game because hedges give up equity in the market to reduce risk Spreading – trading against something else that has a market relationship Speculators Scalpers – in/out in seconds, care only that the market it moving. Take advantage of the inconsistency and inefficiency o Old scalping is over and different today with electronic trading. Will try to make 1 point while risking up to 10. Day traders – broad term, modest positions, often go home flat (no positions open) Position trader – has idea of where the market is going and holds for any person of time Spreaders – same as above Arbitrage – guaranteed profit by buying two identical securities at different prices at different locations at the same time. Suck up any inefficiency Leverage – borrowing money to maximize returns/losses (maximizes both profit and loss) Clearing house – arm of the exchange Keeps track of all transactions Algorithm calculations open interest at days end o Open interest If it’s declining that means people are liquidating, increasing people are going long Applies to options and futures Clearing members – group of corporations that provide liquidity through reserve capital Clearing firms – all must settle with the clearing houses daily and always has to pay to eliminate counter-party risk Dodd Act – came out of credit default swaps and failings of Lehman Bros. and Bear Sterns Move to bring everything to regulated exchange based platform Exchange clearing system would eliminate counter-party risk and never been in default
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Marketplace Millions of marketplaces (Wal-Mart, gold exchange, farmers market, etc) Buyers/sellers look for trust and ability to have recourse Exchange based auction (market) o Many buyers and sellers simultaneously (unlike one-way auctions like Ebay) Market trades 5 days a week Price protection – Price discovery – benchmark price used in alternate transaction (off market contract will specify buying cattle at the closing of the CME on 1/20/11 for example) Electronic trading – opened up the bid/offer process to everybody and not just the floor Result – volume, liquidity, open interest swelled Exchanges went public and were almost all successful Eliminated the need for as many floor guys and brokers Advantages - Transparency, cheaper transaction cost, speed and immediacy, greater access, efficient transactions, egalitarian, better risk control
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This note was uploaded on 02/19/2012 for the course BIP 364 taught by Professor Stephenlevin during the Fall '10 term at Northwestern.

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Financial Market Notes - Financial Markets Notes Professor...

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