Basic Information on Capital Markets
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The main assets we shall be concerned with in this book are securities and derivatives. Securities are normally traded on organized markets and include stock, bonds, currencies, commodities (at least to the extent that they are held for investment purposes, and not for consumption), etc. Here, we mostly focus on stocks and currencies. We do this for two main reasons: (i) much of the research, especially by physicists, has been concentrated on these assets; (ii) they are conceptually simpler than, e.g., bonds and therefore more suited to explain the basic mechanisms. Bond prices are influenced by interest rates. The interest rates, however, depend on the maturity of the bond, and the maturity time therefore introduces an additional variable into the problem. Notice, however, that bond markets typically are much bigger than stock markets. Institutional investors such as insurance companies invest large volumes of money on the bond market because there they face less risk than with investments in, e.g., stocks.
KeywordsCall Option Bond Market Limit Order Future Contract Underlying Asset
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