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An introduction to financial markets and mathematical concepts

25 November, 2015 - 12:30

Almost everyone knows about the Hong Kong, London, New York and Tokyo stock exchanges. In fact, the trading activity in these markets frequently hits the front pages of newspapers and is featured on television daily news broadcasts. Of course, there are many other financial markets. Each of these has a character determined by the type of financial objects being exchanged.

Before getting involved with the details of financial risk and the quantitative process, it is important to set the scene by explaining the concepts related to three broad types of financial instruments that differ from basic equities:

  • derivatives;
  • forward and futures contracts; and
  • options.

Basic equities

Basic equities include cash, foreign currency, stocks, bonds, and money market or bank accounts. Equities are characterized by the following three basic properties:

  • they have value in and of themselves
  • they are traded in well-regulated, transparent markets (e.g. stock exchanges)
  • they are comparable to commodities; examples include physical goods, typically raw or partially processed agricultural or mining products that are commercially traded. In fact, they are all commercial goods.