Primary securities are in positive net supply often

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Primary securities are in positive net supply, often representing claims on real assets. 15.407 Lecture Notes Fall 2003 c Jiang Wang
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Introduction to Part B – Valuation 2. Secondary Market — trading of primary securities (a) Market organization: Exchanges — NYSE, AMEX OTC — Bond market, FX market, NASDAQ Direct Trading (b) Trading process: Trading costs — commission, bid-ask spread, etc. Buying on margin Short sales (c) Long and short positions: For a long position in a financial security, its value increases as the value of the security increases. For a short position in a financial security, its value decreases as the value of the security increases. Example. You own a BMW: you are long one BMW. Example. In one week, you have to deliver to your spouse a BMW that you don’t have yet: you are short one BMW. c Jiang Wang Fall 2003 15.407 Lecture Notes
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Introduction to Part B – Valuation 3. Derivatives Market (a) Securities: Forward and futures Options Swaps . . . (b) Trading: Exchanges and OTC Observation : Derivative securities have zero net supply and their payoffs depend on the prices of other securities. 15.407 Lecture Notes Fall 2003 c Jiang Wang
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Introduction to Part B – Valuation III. Pricing of Financial Securities First Pricing Principle : No arbitrage opportunities.
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