What gets traded
Markets exist to move risk and capital between people. What is traded falls into a few asset classes: equities (ownership of companies), fixed income (loans to governments and companies), currencies (foreign exchange, FX), commodities (oil, gold, wheat) and, more recently, digital assets.
Inside each class there are instruments: the actual contracts you can buy or sell. A share of Apple, a 10-year US Treasury note, a EUR/USD forward and a crude-oil futures contract are all instruments. A cash instrument is worth what it is (a share). A derivative is worth something because of another asset, its underlying (an option on that share).
- Cash instrument: you own the thing itself, for example a share or a bond.
- Derivative: a contract whose value depends on an underlying asset (futures, options, swaps).
- ETF: a fund whose shares trade on an exchange like a stock.
- Futures contract: a standardised agreement to buy or sell an asset at a set price on a future date.
- Option: the right, not the obligation, to buy (call) or sell (put) at a set price.
- Swap: an agreement to exchange cash flows, usually traded over the counter.
Listed versus over the counter
Standardised instruments (stocks, ETFs, listed options, futures) trade on exchanges: prices are public and a clearing house stands behind every trade. Customised instruments (most swaps, many bonds, FX forwards) trade over the counter (OTC): two parties agree the terms directly, usually through a dealer, and prices are less visible.
Lab · what's graded
- Instruments and asset classes20 pts
- Which is a derivative?10 pts
- Listed instruments15 pts
- Notional of a futures position20 pts
- What is an ETF?15 pts
- Listed versus OTC20 pts