information and disclosure and market maker and investor behavior according to

Information and disclosure and market maker and

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information and disclosure, and market maker and investor behavior according to O’Hara, (2007). Market microstructure is the study of the processes and results of exchanging assets under a specific set of rules. In addition, market micro structure examines trading in instruments. These instruments according to Harris (2002) include common stocks, preferred stocks, bonds, convertible bonds, warrants, options, futures contracts, foreign exchange contracts, swaps, reinsurance contracts, commodities, pollution credits, water rights and other betting contracts. The market structure and design focus on the relationship between price determination and trading rules of the derivatives. Market infrastructure allows the smooth and efficient operation of the derivatives exchange and hence it should be well structured. A well- structured market will provide efficient price discovery, low cost risk management and help capital markets in raising capital (Dodd, 2007). The evolution of technology has great influence the exchange architecture. Modern finance theory treats a derivatives exchange as an information (Tsetsekos, 1997). The transaction cost and timing cost focuses on the impact of transaction cost on investment returns and execution methods. Transaction costs include order processing costs, adverse selection costs, inventory holding costs, and monopoly power. According to Harris (2002), transaction costs include all costs associated with trading. These include explicit costs, implicit costs and missed trade opportunity costs. Traders must effectively manage their costs to successfully trade. The information and disclosure focuses on the market information and transparency, and the impact of the information on the behavior of the market participants. Transparency is the ability of market participants to observe the information in the trading process (O hara, 1995) across different markets. Information-based microstructure models have demonstrated that the information available in the trading process can affect the trading strategies of market participants. It thus follows that the market equilibrium depends on the degree of transparency. 2.2.3 Option Pricing Theory 15
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In 1973, Fischer Black and Myron S. Scholes published an article (Black and Scholes, 1973), which revolutionized financial theory and laid the foundation of a phenomenal growth in derivatives markets in the following decades. The so-called “Black-Scholes Formula” determines the value of a European call option as a function of the exercise price, the market price of the underlying asset, the time distance to exercise, the risk-free interest rate and the volatility of the underlying asset. The formula is based on the assumption that investors are able continually to adjust their portfolios. The sphere of finance is the study of economic resources across time and environment. To capture the influence of financial innovation you need sophisticated tools to analysis for decision like option pricing.
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