Market Organization and Structure

Сентябрь 10, 2022

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Экономика
Market Organization and Structure

Содержание

2. WHAT ARE THE MAIN FUNCTIONS OF THE FINANCIAL SYSTEM? Save money for future use Borrow money
3. HOW ARE MARKETS CLASSIFIED? Category 1 Spot markets Forward and futures markets Options markets Category 2
4. PRIMARY MARKET Public offering: Initial public offering (IPO) Public offering: Seasoned offering Private placement Shelf registration
5. HOW DO SECONDARY MARKETS SUPPORT PRIMARY MARKETS? Low transaction costs Small price concessions SECONDARY MARKETS PRIMARY
6. HOW ARE ASSETS CLASSIFIED? Assets Securities Currencies Contracts Commodities Real assets
7. HOW ARE SECURITIES CLASSIFIED? Fixed income Equities Pooled investments Public Private
8. POOLED INVESTMENTS ETFs (Depositories) Investors Hedge Funds Real Estate Investment Trusts (REITs) Mutual Funds Limited Partnership
9. WHAT POSITIONS CAN I TAKE IN AN ASSET? Long positions Assets or contracts are owned Position
10. HOW ARE CONTRACTS CLASSIFIED? Forward contracts Futures contracts Swap contracts Option contracts Other contracts (REPO)
11. HEDGING WITH FORWARD CONTRACTS Farmer needs TO SELL wheat to the miller at a future date.
12. FUTURES VERSUS FORWARD CONTRACTS FUTURES CONTRACTS Standardized Clearinghouse guarantees performance Strong secondary markets FORWARD CONTRACTS Customized
13. SWAP CONTRACTS Swap contracts Interest rate Commodity Currency Equity
15. OPTION POSITIONS AND THEIR UNDERLYING RISK EXPOSURES
16. REPURCHASE AGREEMENTS (REPO) Direct Repurchase Agreements (Direct REPO): one party sells securities to another with an
17. INSURANCE Parties willing to bear risk Buyers of insurance contracts
18. CREDIT DEFAULT SWAPS (CDS) Protection buyer Protection seller Protection buyer Premium Protection against default Protection seller
19. Source: http://debtproff.info/securitization-of-debt-pdf.html
20. EXAMPLE OF SECURITIZATION Mortgage-backed securities Mortgages Mortgage Bank Balance Sheet Homeowners Lend money to homeowners Mortgages
21. Source: http://awesome-b5.website/loan-to-value-definition-mortgage-backed
22. TERMINOLOGY FOR LEVERED POSITIONS
23. EXAMPLE: COMPUTING TOTAL RETURN TO A LEVERAGED STOCK PURCHASE A buyer buys stock on margin and
24. EXAMPLE: MARGIN CALL PRICE A trader buys stock on margin posting 40 percent of the initial
25. COMPARE AND CONTRAST EXECUTION, VALIDITY, AND CLEARING INSTRUCTIONS
26. EXECUTION INSTRUCTIONS Execution instructions specify how to trade A MARKET ORDER instructs the broker to execute
27. LIMIT ORDER BOOK: “26 BID, OFFERED AT 28”
28. VALIDITY INSTRUCTIONS Day order Good-till-cancelled order (GTC) Immediate-or-cancel order (IOC) Good-on-close order Good-on-open order Stop orders
29. STOP ORDERS (STOP-LOSS ORDERS) STOP-SELL ORDER: Sell at $30
30. EXECUTION MECHANISMS ORDER-DRIVEN MARKETS Order-matching systems run by an exchange (all orders of both buyers and
31. ORDER-DRIVEN MARKETS ORDER PRECEDENCE HIERARCHY Price priority Secondary precedence rules
32. WHAT ARE THE CHARACTERISTICS OF WELL-FUNCTIONING FINANCIAL SYSTEM? Well-functioning financial system Completeness Operationally efficient Informationally efficient
33. WHAT ARE THE OBJECTIVES OF MARKET REGULATION? Control fraud Control agency problems Promote fairness Set mutually
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Слайд 2

WHAT ARE THE MAIN FUNCTIONS OF THE FINANCIAL SYSTEM?
Save money for

future use
Borrow money for current use
Raise equity capital
Manage risks
Exchange assets for immediate and future deliveries
Trade on information

Слайд 3

HOW ARE MARKETS CLASSIFIED?
Category 1
Spot markets
Forward and futures markets
Options markets
Category 2
Primary

markets
Secondary markets

Category 3
Money markets
Capital markets

Category 4
Traditional investment markets
Alternative investment markets

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PRIMARY MARKET
Public offering: Initial public offering (IPO)
Public offering: Seasoned offering
Private placement
Shelf

registration
DRPS or DRIPS
Rights offering

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HOW DO SECONDARY MARKETS SUPPORT PRIMARY MARKETS?
Low transaction costs
Small price concessions
SECONDARY

MARKETS

PRIMARY MARKETS

Cost
of
Capital

Слайд 6

HOW ARE ASSETS CLASSIFIED?
Assets
Securities
Currencies
Contracts
Commodities
Real assets

Слайд 7

HOW ARE SECURITIES CLASSIFIED?
Fixed income
Equities
Pooled investments
Public
Private

Слайд 8

POOLED INVESTMENTS
ETFs
(Depositories)
Investors
Hedge Funds
Real Estate Investment Trusts
(REITs)
Mutual Funds
Limited
Partnership
Interests
ETFs (Depository
Receipts)
( Shares

of Mortgage REITs / Equity REITs

Слайд 9

WHAT POSITIONS CAN I TAKE IN AN ASSET?
Long positions
Assets or contracts

are owned
Position benefits from price appreciation
Short positions
Assets not owned are sold or contracts are sold
Position benefits from a decrease in price

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HOW ARE CONTRACTS CLASSIFIED?
Forward contracts
Futures contracts
Swap contracts
Option contracts
Other contracts (REPO)

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HEDGING WITH FORWARD CONTRACTS
Farmer needs TO SELL wheat to the miller

at a future date.

Risk: the price of wheat decreases.
The farmer is currently long wheat in the spot market (needs to sell it in the future).
The farmer hedges the spot market position by selling wheat forward.

Miller needs TO BUY wheat from the farmer at a future date to sell to bakers.

Risk: the price of wheat increases.
The miller is currently short wheat in the spot market (needs to buy it in the future).
The miller hedges the spot market position by buying wheat forward.

Слайд 12

FUTURES VERSUS FORWARD CONTRACTS
FUTURES CONTRACTS
Standardized
Clearinghouse guarantees performance
Strong secondary markets
FORWARD CONTRACTS
Customized
Counterparty risk
Typically

held to maturity

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SWAP CONTRACTS
Swap contracts
Interest rate
Commodity
Currency
Equity

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OPTION POSITIONS AND THEIR UNDERLYING RISK EXPOSURES

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REPURCHASE AGREEMENTS (REPO)
Direct Repurchase Agreements (Direct REPO): one party sells securities

to another with an agreement to repurchase them at a specified date and price
Essentially a loan backed by securities
A reverse REPO refers to the purchase of securities by one party from another with an agreement to sell them
Transactions amounts are usually for $10 million or more
Common maturities are from 1 day to 15 days and for one, three and six months
There is no secondary market for repos

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INSURANCE
Parties willing to bear risk
Buyers of insurance contracts

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CREDIT DEFAULT SWAPS (CDS)
Protection buyer
Protection seller
Protection buyer
Premium
Protection against default
Protection seller
Prior to

maturity or default

In the event of default

Deliverable obligation (physical settlement) or nothing (cash settlement)

Par (physical settlement) or par less recovery value (cash settlement)

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Source: http://debtproff.info/securitization-of-debt-pdf.html

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EXAMPLE OF SECURITIZATION
Mortgage-backed securities
Mortgages
Mortgage Bank Balance Sheet
Homeowners
Lend money to homeowners
Mortgages are

pooled and securities issued are claims on that pool. Interest and principal payments “pass-through” to investors.

Investors

Buy securities

Make payments

Receive
payments

Слайд 21

Source: http://awesome-b5.website/loan-to-value-definition-mortgage-backed

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TERMINOLOGY FOR LEVERED POSITIONS

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EXAMPLE: COMPUTING TOTAL RETURN TO A LEVERAGED STOCK PURCHASE
A buyer buys

stock on margin and holds the position for exactly one year, during which time the stock pays a dividend. For simplicity, assume that the interest on the loan and the dividend are both paid at the end of the year.
Purchase price $20/share Sale price $15/share
Shares purchased 1,000 Leverage ratio 2.5
Call money rate 5% Dividend $0.10/share
Commission $0.01/share
1. What is the total return on this investment?
2. Why is the loss greater than the 25 percent decrease in the market price?

Слайд 24

EXAMPLE: MARGIN CALL PRICE
A trader buys stock on margin posting 40

percent of the initial stock price of $20 as equity. The maintenance margin requirement for the position is 25 percent. Below what price will a margin call occur?

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COMPARE AND CONTRAST EXECUTION, VALIDITY, AND CLEARING INSTRUCTIONS

Слайд 26

EXECUTION INSTRUCTIONS
Execution instructions specify how to trade
A MARKET ORDER instructs the

broker to execute the trade immediately
A LIMIT ORDER places a minimum execution price on sell orders and a maximum execution price on buy orders
Execution instructions about volume of trade: all-or-nothing orders: execute only if the whole order can be filled. Orders can specify the minimum size of the trade
Trade visibility can also be specified. Hidden orders are those for which only the broker or exchange knows the trade size
Trades can also specify displace size, where some of the trade is visible to the market, but the rest is not (Iceberg orders)

Слайд 27

LIMIT ORDER BOOK: “26 BID, OFFERED AT 28”

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VALIDITY INSTRUCTIONS
Day order
Good-till-cancelled order (GTC)
Immediate-or-cancel order (IOC)
Good-on-close order
Good-on-open order
Stop orders (stop-loss

orders): stop-sell orders and stop-buy orders

Слайд 29

STOP ORDERS (STOP-LOSS ORDERS)
STOP-SELL ORDER:
Sell at $30

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EXECUTION MECHANISMS
ORDER-DRIVEN MARKETS
Order-matching systems run by an exchange (all orders of

both buyers and sellers are shown)
Stocks typically trade in order-driven markets

QUOTE-DRIVEN MARKETS

Customers trade with dealers
Almost all bonds and currencies and most spot commodities
Eg.: Bloomberg, TradeWeb

HYBRID MARKETS
NYSE, Nasdaq

BROKERED MARKETS

Brokers arrange trades
Trading in unique instruments

Слайд 31

ORDER-DRIVEN MARKETS
ORDER PRECEDENCE HIERARCHY
Price priority
Secondary precedence rules

Слайд 32

WHAT ARE THE CHARACTERISTICS OF WELL-FUNCTIONING FINANCIAL SYSTEM?
Well-functioning financial system
Completeness
Operationally efficient
Informationally

efficient

Слайд 33

WHAT ARE THE OBJECTIVES OF MARKET REGULATION?
Control fraud
Control agency problems
Promote fairness
Set

mutually beneficial standards

Prevent exploitation

Insure liabilities are funded

Market Organization and Structure

Содержание

WHAT ARE THE MAIN FUNCTIONS OF THE FINANCIAL SYSTEM?Save money for

HOW ARE MARKETS CLASSIFIED?Category 1Spot marketsForward and futures marketsOptions marketsCategory 2Primary

PRIMARY MARKETPublic offering: Initial public offering (IPO)Public offering: Seasoned offeringPrivate placementShelf

HOW DO SECONDARY MARKETS SUPPORT PRIMARY MARKETS?Low transaction costsSmall price concessionsSECONDARY

HOW ARE ASSETS CLASSIFIED?AssetsSecuritiesCurrenciesContractsCommoditiesReal assets

HOW ARE SECURITIES CLASSIFIED?Fixed incomeEquitiesPooled investmentsPublicPrivate

POOLED INVESTMENTSETFs(Depositories)InvestorsHedge FundsReal Estate Investment Trusts (REITs)Mutual FundsLimitedPartnership InterestsETFs (DepositoryReceipts)( Shares

WHAT POSITIONS CAN I TAKE IN AN ASSET?Long positionsAssets or contracts

HOW ARE CONTRACTS CLASSIFIED? Forward contractsFutures contractsSwap contractsOption contractsOther contracts (REPO)

HEDGING WITH FORWARD CONTRACTSFarmer needs TO SELL wheat to the miller

FUTURES VERSUS FORWARD CONTRACTSFUTURES CONTRACTSStandardizedClearinghouse guarantees performanceStrong secondary marketsFORWARD CONTRACTSCustomizedCounterparty riskTypically

SWAP CONTRACTSSwap contractsInterest rateCommodityCurrencyEquity

OPTION POSITIONS AND THEIR UNDERLYING RISK EXPOSURES

REPURCHASE AGREEMENTS (REPO)Direct Repurchase Agreements (Direct REPO): one party sells securities

INSURANCEParties willing to bear riskBuyers of insurance contracts

CREDIT DEFAULT SWAPS (CDS)Protection buyerProtection sellerProtection buyerPremiumProtection against defaultProtection sellerPrior to