A third type of financial market is foreign currency exchange markets Most

A third type of financial market is foreign currency

This preview shows page 15 - 16 out of 16 pages.

A third type of financial market is foreign-currency exchange markets. Most every currency is exchanged in these foreign currency exchange markets. Most currencies float; that is, the value of the currency can go up or down depending upon economic trends and situations that may be occurring within that government that affects, in some way, the perception of the value of its currency. Another type of financial market is the derivative marketplace. A derivative is essentially a financial instrument that is based on the performance of another financial instrument, hence the term derivative . For example, you can put together a portfolio of home mortgages and sell that as a derivative product. The idea behind a derivative is that it is supposed to stabilize the risk involved in that particular type of financial instrument. There can be a downside to that as well. Though they may offer some protection, they also can be quite volatile. This is a type of financial market that has been very popular over the last 15–20 years. Another type of financial market is the futures market. There can be futures in terms of oil production or natural gas production; cattle futures are another market in which people sell a future quantity of a particular commodity on the futures market. That is an extremely important market for the overall operation of the U.S. and world economy. Financial markets are quite varied. They can include capital markets, which are long-term (more on the stock and bonds side of things); money markets, which are T-bills (that is, U.S. Treasury bills); it could also involve commercial paper, which is essentially corporate IOUs. Commercial paper is part of the money market because its maturity dates are limited to no more than 270 days. Therefore,
Image of page 15
anything less than 12 months or an annual period is considered short-term, and it would be in the money market. Any financial instrument that has an intended life of longer than a year is in the capital marketplace. This defines the financial markets in general terms. The day-to-day operation of financial markets can be quite involved. You can probably include hedging funds under the general heading of financial markets too, but a hedge fund is a stopgap means to protect the value of the principal of that particular hedge fund, whether it is stocks, bonds, commodities, futures, or even currencies. All of this integral to the overall health of the economy, so when one of these areas suffers a decline, it is going to have ramifications across the other financial markets as well. Markets have been moving the last 40 years toward financial integration more and more; previously, if stocks were bad, investors could go to bonds, and if bonds are bad, investors could go to stocks. Now, if either of those is not performing particularly well, you could have some downturn in the other area as well.
Image of page 16

You've reached the end of your free preview.

Want to read all 16 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture