On the spot market, real goods such as commodities or stocks are traded. Delivery and payment happen immediately after the transaction has been concluded. On the derivatives market, agreements on future trades are traded. Therefore the delivery and payment of the goods do not happen immediately after the transaction has been concluded. That said, it becomes clear that one the […]
Futures, Forwards and Options allow the investor to protect (hedge) his capital against price changes (losses). Both instruments offer many new opportunities for different kinds of investors as they can be easily adapted to one’s needs. In general derivative instruments allow investors to hedge their (spot market) investments against price changes (Therefore the derivatives market is also called a market […]
Option buyer (long) Option issuer (short) Call: He will exercise option if prices of underlying rise He believes prices of underlying will fall or stay the same. If the prices rise and the option buyer exercises his option the issuer muss sell him the goods for the previously specified strike price Put: He will exercise option if prices of underlying […]
The financial markets offer market participants many investment opportunities with different risks. In general, it can be assumed that if market participants choose alternatives with the same expected return, they will choose the alternative with the lowest extent of risk. However, as different investments involve different risks, it is in the market participants’ interest to achieve an optimal risk allocation. […]
Market risk describes the estimated loss in the event of a market downturn. It results from possible changes in interest rates, prices (stock prices, commodity prices, etc.), political risks, etc. One can’t diversify the market risk on the spot market; however, frequently, derivative instruments strategies are used to minimize market risks.
There are two kinds of instruments for the ECB.1) Open market operations: These instruments are important for controlling the interest rates as well as liquidity. The most important open market operation is the main refinancing operation. The main refinancing operations have a duration and frequency of one week. 2) Standing facilities: Standing liquidities are used to handle short term (overnight) […]
Derivatives are (artificial) financial products that derive their value from another product (underlying). Such an underlying could be pretty much anything that can have a value, e.g. commodities, stocks, or currencies. Derivative contracts are traded for the future buying and selling of underlying. Derivatives can be binding for one person ((otc)option) or for both trading partners (in the case of […]
The Sharpe Ratio is used to set the return of an investment in relation with its risk.In oder to caluclate the sharpe ratio you first deduct the risk free market rate from the performance of the financial instrument. The risk free market rate could be for example the Euribor in case of an investment fund operating in the EU. The […]