Foundation Programme

LESSON 1 NOTES
 FINAL DIPLOMA ASSIGNMENT

100 Multiple Choice Questions and Answers Online.

Two hours to complete test.
Pass: 70%
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THE PURPOSE OF FINANCIAL MARKETS

Raising Capital
The Transfer of Risk
Price Discovery (price determination through interaction)
The Transfer of Liquidity
International Trade

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 WHAT IS TRADABLE INSTRUMENT TYPES

Options Options to purchase X price at Y time. Right without an

obligation to acquire.
Futures Physical delivery dates to underlying assets. High leverage
association.
Spread Betting Gains are tax free. Broker is a Market Maker.
Conceivable conict of interests. Third Party Risk.
CFDs speculate on price without acquiring. Moderate Leverage
association. A competitive brokerage industry competing over
spread and swap costs and over market access. Both Straight
through processing and market maker brokers exist in the industry.

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 WHAT IS TRADABLE INSTRUMENT TYPES

A nancial instrument is a tradable product or negotiable item from

where its value derives from an underlying asset, hence the term
nancial derivative. Examples of these tradable instruments are
nancial securities like equity stocks, commodities and equity
indices. An instrument is a means by which something of value is
transferred, held or accomplished.

All of these nancial instruments create a legal contract, will or

deed.

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 OPTIONS

Options are nancial contracts between buyers and sellers that

allow market participants to speculate on large price movements.
The buyer of an option purchases the right to exercise that option
if the price rises or falls to the desired price, at a given time in the
future. The seller of that option, therefore, takes the other side of
this trade and assumes the risk.

Calculating the risk on this trade, the option seller makes a market
for this trade speculation and creates the options price. This price is
known as the option premium, and is the price the buyer paid for
purchasing the option contract.

There is now an agreement between buyer and seller of that option.

Again, the buyer will make a prot if the price reaches the desired
strike price on expiration date, or will lose the cost of the premium
paid if the desired price is not reached. Options are tradable on
many dierent asset classes including commodity, equities, forex
and xed income derivatives.

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 FUTURES

Physical delivery dates. Associated with high leverage.

TThere are various market participants trading in the futures

markets. Hedgers and speculator for the most part make up the
larger extent of liquidity. Intraday traders such as professional
trading houses, high frequency traders, and scalpers also add to this
liquidity.

Hedgers are more interested in nding stabilization through market

interaction. Balance trades are implemented to mitigate risk to an
organizations primary business. Their gains or losses are usually
oset to some degree by a corresponding gain or loss in the
underlying asset.

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 Think of a corn producer who would want to take a position in the
US corn futures market to stabilize operations. Agreeing a future
price of their corn crops now helps this organization to conduct
normal business operations and to plan operations ahead of time.

Speculators and other professional traders are trading in the markets

to avail of potential prots from constantly moving prices across all
asset classes.

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 SPREAD BETTING

Gains are tax free. Broker is a Market Maker. Conceivable conict

of interests. Third Party Risk.

Spread betting is a type of speculation that involves taking a bet on

the price movement of a security. A spread betting company quotes
two prices, the bid and oer price (also called the spread), and
investors bet whether the price of the underlying stock will be lower
than the bid or higher than the oer. The investor does not own the
underlying stock in spread betting, they simply speculate on the
price movement of the stock.

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 FREQUENTLY USED TERMS

Long is speculating that the price will rise you are Buying.
Bulls attack from below and force upwards i.e. rising markets.

The Price went up long so if we exit at

the current price we will make a prot

We enter here and the green line

represents our entry point

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 Short is speculating that the price will fall you are Selling.
Bears attack from the top driving down i.e. falling markets.

We entered a short position(sold)

here because it is spectaculated that the price will drop

Exiting now would leave us in prot

as the price is lower than we entered

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