Chapter 5 - Stock Markets, Derivatives Markets, and Foreign Exchange Markets

Abstract

The stock market is an important part of the economy of a country. The stock market consists of primary and secondary stock markets. Initial public offerings are issued in the primary market. Seasoned equity offerings are new shares offered by firms that already have stocks outstanding. The secondary stock market where investors trade can further be divided into auction and dealer markets. Derivatives have become an effective tool to reduce business risks. Corporations and financial institutions are the major users of derivatives. Most derivatives are based on one of the four types of assets: foreign exchange, interest rates (debt securities), commodities, and equities. Forwards, futures, options, and swaps are the major derivatives instruments. Mortgage-backed securities, collateralized debt obligations, and collateralized loan obligations are instruments of securitization. The most common forms of credit derivatives are credit default swaps, total return swaps, credit spread options, and credit-linked notes.