Viney_7e_PowerPoint__ch04.ppt

* * * * * * * * * * * * * * * * * * * * Derivative market role The stock exchange provides a market for trading equity-related derivative products A derivative is a financial security that derives its price from an underlying commodity (e.g. gold) or financial instrument (e.g. BHP shares) Derivative products are described as: exchange-traded contracts standardised financial contracts traded on a formal exchange over-the-counter contracts non-standardised contracts negotiated between writer and buyer (cont.) Derivative market role (cont.) The stock exchange provides a market for trading equity-related derivative products (cont.) Derivatives serve as a: risk management tool (hedge) speculative instrument Derivatives traded on a stock exchange include: options warrants futures contracts Contracts for difference Interest rate market role The listing, quotation and trading of typically longer term debt instruments on a stock exchange Straight corporate bonds Floating rate notes (FRNs) Convertible notes Preference shares (cont.) Interest rate market role (cont.) This role adds value to a debt issue owing to: transparency information about price, yield, maturity, credit rating of debt instruments ease of entry electronic trading system facilitates buy and sell orders at minimum cost and time delay at current market prices liquidity quotation on a stock exchange provides access to a wider market Trading and settlement roles The Australian Securities Exchange (ASX) uses ASX Trade and ASX Trade24, which are integrated computer-based trading systems to trade all listed securities and derivatives Clients’ orders are executed via computer from the broker’s office Orders are executed in order of time received and the buy/sell price (cont.) Trading and settlement roles (cont.) The ASX uses CHESS (Clearing House Electronic Sub-register System) Facilitates the settlement of transactions conducted through ASX Trade Settlement of transactions within three days (T + 3) Pr