Before you start
You will be able to
- Explain the four jobs financial markets do: channelling savings to investment, discovering prices, providing liquidity and sharing risk.
- Distinguish direct finance from indirect finance, and calculate an intermediary’s interest-rate spread.
- Classify a transaction as primary or secondary, and an instrument as belonging to the money market or the capital market.
- Describe what is traded in equity, bond, foreign-exchange, commodity and derivatives markets, and convert an amount between currencies.
- Compare exchanges with over-the-counter markets.
Review first
- Capital and liquidity — You need the difference between debt and equity and the meaning of liquidity.
- What finance is: money, time and risk — Markets price time and risk; this lesson assumes you know why both matter.
Fictional case A fictional coffee business founded by Ana Lim. It starts as a catering and barista-training service, opens its own cafés and an online shop for beans, and plans a canned cold brew.
The idea
Fictional case
On 1 January 2026 Ana Lim has $26,000 in a savings account at Coastline Bank, earning 1.5% a year. She does not know who else banks there, and she has never met the bank’s borrowers. Yet two months later Coastline lends $10,000 to her new company, Lantern Coffee Co., at 6% a year. Money that people like Ana leave with the bank is what lets the bank lend to businesses like Lantern. Ana sits on both sides of the same system: as a saver, she lends to the bank; as Lantern’s owner, she runs a company that borrows from it. This lesson is about that system: the markets and institutions through which savers’ money reaches the people who can use it.
Every economy has people with money they do not need yet and people with uses for money they do not have yet. A household saving for retirement has the first; a café that needs an espresso machine, a government building a bridge or a family buying a house has the second. A financial market is any arrangement through which the first group provides money to the second in exchange for a claim on future payments. The claim might be a share of a company, a bond, a bank deposit or a loan contract. All of them are financial assets: their value comes not from what they are physically but from the payments they promise or make possible.
A financial asset that can be bought and sold, such as a share or a bond, is called a security. Whoever creates the security and receives the money is its issuer: a company issuing shares, a government issuing bonds. The prices at which securities trade show what investors are willing to pay today for uncertain payments in the future, so financial markets are where the two ideas at the centre of finance, time and risk, are given a price.
What financial markets do
It helps to see financial markets as doing four jobs. Each one is a reason they exist, and each one can fail, which is why later lessons and courses spend so long on them.
- Moving savings to investment. Markets channel money from those who have it to those who can use it productively. Without them, a firm could invest only what its owners had saved, and a saver could earn a return only by running a business. Lantern exists partly because Coastline Bank could gather many people’s savings and lend some of them to Ana’s company.
- Discovering prices. When many buyers and sellers trade, the price that results gathers what all of them know and expect. The price of a company’s shares summarises investors’ views of its future; the interest rate on a government bond shows what lenders demand to wait. Firms use these prices to judge what their own money costs, and savers use them to compare choices. This is called price discovery.
- Providing liquidity. A saver who might need cash next month will not lend for ten years unless she can sell her claim to someone else first. Markets in which existing claims are resold let investors get their money back without the borrower repaying early. That ability to turn an asset into cash quickly and at a fair price is liquidity, and markets create it.
- Sharing risk. Markets let risk move to the people most willing to bear it. A saver can spread small amounts across hundreds of companies rather than betting on one; a coffee roaster worried about bean prices can pass that risk to an investor who accepts it for a reward. Risk does not disappear, but it ends up where it costs least.
Markets also lower the cost of finding a counterparty and of finding out whether it can be trusted. A bank checks a borrower once for many depositors; a public company publishes one set of audited statements for millions of investors. Those savings in search and information costs are much of what a financial system is for.
Direct and indirect finance
Money can travel from savers to borrowers by two routes. In direct finance the borrower sells its securities to the savers themselves, usually through a market: when a company sells bonds to investors, the investors hold a claim on the company. In indirect finance a financial intermediary, such as a bank, an insurance company or an investment fund, stands in the middle. The saver holds a claim on the intermediary (a deposit, an insurance policy, a share in a fund), and the intermediary holds the claim on the borrower (a loan, a bond). Ana’s savings account and Lantern’s loan are both indirect finance: Ana is owed money by Coastline, not by Lantern, and Lantern owes Coastline, not Ana.
Intermediaries earn their place by doing things a single saver cannot. They pool many small deposits into loans of useful size. They study borrowers once on behalf of thousands of savers and keep watching them afterwards. They spread their lending over many borrowers, so one failure does not ruin a depositor. And they turn long, illiquid loans into short, liquid deposits: Lantern’s loan runs for two years, but Ana can withdraw her savings any day. That last service, called maturity transformation, is valuable and also risky, because if too many depositors ask for their money at once the bank cannot call in its loans fast enough.
Intermediaries are paid for these services through the gap between what they charge borrowers and what they pay savers, called the interest-rate spread. Coastline pays Ana 1.5% a year and charges Lantern 6%, a spread of percentage points. That is not all profit. Out of it the bank must pay its staff and systems, absorb the loans that are never repaid and earn a return for its own shareholders.
In depth
Primary and secondary markets
A security is sold for the first time in the primary market, and the money goes to the issuer. When a company sells shares to the public for the first time, the sale is an initial public offering (IPO); later sales of new shares by a company that is already listed are seasoned offerings. Governments use the primary market constantly: the US Treasury sells new Treasury securities at regular auctions, including weekly auctions of short-term bills.
Once issued, a security can be resold between investors in the secondary market. Here the issuer receives nothing. Harbourline Roasters Inc., the fictional listed roaster this course uses, has 18 million shares trading at $42.50. When one investor sells 1,000 of them to another for dollars, the whole $42,500 passes from buyer to seller, and Harbourline’s bank balance does not change by a cent.
The secondary market still matters to the issuer, for two reasons. First, it creates liquidity: investors pay more for a new security, and so demand a lower return from the issuer, if they know they can sell it easily later. Second, secondary-market prices tell the issuer what investors think it is worth and what return they currently demand, which sets the terms of its next primary-market sale. If Harbourline’s share price fell sharply, a new share issue would raise less money for each share sold.
Money markets and capital markets
Markets are also sorted by how long the claims last. The money market trades short-term debt, maturing in less than a year and sometimes overnight: it is where governments, banks and large companies manage cash they will need soon or have spare for a while. The instruments are low-risk, highly liquid and usually traded in large amounts. The capital market trades longer-term claims: debt maturing in more than a year, and shares, which never mature at all. It finances the long-lived things: factories, buildings, infrastructure, research.
| Market | Instrument | Issued by | Usual life |
|---|---|---|---|
| Money market | Treasury bill | Federal government | Less than one year |
| Money market | Commercial paper (unsecured short-term debt) | Large, highly rated companies and financial institutions | 1 to 270 days |
| Money market | Federal funds (overnight loans between banks) | Banks, to each other | Overnight |
| Capital market | Treasury note or bond | Federal government | Notes 2 to 10 years; bonds 20 or 30 years |
| Capital market | Corporate bond | Companies | Usually several years or more |
| Capital market | Common stock (shares) | Companies | No maturity |
Source: OpenStax, Principles of Finance, section 1.7. The one-year line between the two markets is a convention, not a law of nature.
The two markets are linked by a simple rule of good practice: match the life of the money to the life of the use. A company that funds a ten-year roasting plant with 90-day commercial paper must borrow again every 90 days for ten years, and if lenders lose confidence in one of those quarters it may be unable to roll the debt over. That mismatch is exactly the risk banks take on deliberately, and one reason banks are closely regulated.
Markets by what is traded
A third way to sort markets is by the kind of claim traded. The five you will meet most often are these.
- Equity market
- The market for shares (stock), which are ownership claims on a company. Shareholders receive whatever is left after everyone else has been paid, through dividends and a rising share price, and have no promise of either. Shares of large companies trade on stock exchanges; this is the market most people mean by “the market”.
- Bond market
- The market for debt securities issued by governments, companies and other bodies. A bond promises interest and repayment of the amount borrowed on stated dates, so its holder is a lender, not an owner. Bonds are less standardised than shares, and many trade through dealers rather than on an exchange.
- Foreign-exchange market
- The market in which one currency is exchanged for another, for trade, travel, investment and hedging. Its scale is enormous: the Bank for International Settlements’ 2025 survey found average turnover of $9.6 trillion a day in April 2025, with the US dollar on one side of 89.2% of all trades. It is almost entirely over the counter.
- Commodity market
- The market for raw materials such as oil, metals and crops, coffee among them. Commodities are bought for immediate delivery in spot markets, but much of the trading is in futures contracts (below). Coffee “C” futures on ICE Futures U.S., for example, are the world benchmark for arabica coffee; each contract covers 37,500 pounds of green coffee.
- Derivatives market
- The market for contracts whose value is derived from something else: a share price, an interest rate, a currency, a commodity. The main kinds are forwards (a private agreement to buy or sell later at a price fixed today), futures (standardised forwards traded on an exchange), options (the right, but not the obligation, to buy or sell at a fixed price) and swaps (an exchange of one stream of payments for another, such as fixed interest for floating).
The first two are where firms raise capital: equity and bonds are the long-term money of the capital market. The foreign-exchange market lets that money cross borders. Commodity and derivatives markets are mostly about risk rather than raising money. A derivative creates no new capital for anyone: for every party who gains on the contract, another loses the same amount. Its use is to move risk. A firm that uses one to reduce a risk it already faces is hedging; a trader who uses one to take on risk in the hope of profit is speculating. Someone has to take the other side of every hedge, and speculators are often the ones who do.
Exchanges and over-the-counter markets
Finally, markets differ in where and how trades happen. An exchange is an organised marketplace with published rules, a list of approved securities or contracts, and prices that everyone can see. In the United States an exchange that registers with the SEC under section 6 of the Securities Exchange Act is a national securities exchange; the New York Stock Exchange and the Nasdaq Stock Market are two of them. Futures contracts, such as the coffee futures above, also trade on exchanges. Even shares listed on an exchange are not always traded there: the SEC’s staff reported in 2021 that less than 60% of US share-trading volume is typically executed on exchanges, with the rest handled off-exchange, much of it by market makers that trade directly with retail investors’ orders.
In an over-the-counter market (OTC) there is no central marketplace. Trades are negotiated between two parties, usually with a dealer that quotes prices at which it will buy and sell, over the phone or through electronic systems. OTC trading suits instruments that are too varied or too rarely traded for an exchange: most foreign exchange, many bonds (which differ in issuer, coupon and maturity), and derivatives tailored to one client. Shares not listed on an exchange also trade OTC, through quotation systems on which broker-dealers post prices. Some of those companies do not file periodic reports or audited financial statements with the SEC, so reliable information can be hard to find (Investor.gov).
| Exchange | Over the counter | |
|---|---|---|
| How a trade happens | Orders meet in a central marketplace under the exchange’s rules | Negotiated between two parties, usually with a dealer |
| What is traded | Standardised: listed shares, futures, many options | Anything: bonds, currencies, tailored derivatives, unlisted shares |
| Prices | Published and visible to everyone | Often known only to the two parties; reporting varies by market |
| Clearing and settlement | Through a clearing agency linked to the exchange | Arranged between the two parties, unless they use a clearing agency |
| Examples | New York Stock Exchange, Nasdaq, futures exchanges | Foreign exchange, most corporate bonds, currency forwards |
Neither is better in general. Exchanges give transparency and liquidity for standard products; OTC markets give flexibility for products that are not standard. “Over the counter” does not mean unregulated: in the United States, broker-dealers that trade securities with customers are regulated by the SEC and supervised day to day by FINRA, the industry’s largest self-regulatory organisation.
Limits: when markets do their jobs badly
Each of the four jobs can fail. Prices can move far from any sensible value when investors follow each other; liquidity that seemed permanent can vanish in a panic, just when people need it; borrowers know more about themselves than lenders do, so lenders may charge everyone more or refuse to lend at all; and intermediaries that borrow short and lend long can suffer runs. These failures are why markets come with rules, disclosure requirements, deposit insurance and central banks, which the next lesson introduces.
Formulas
Intermediary’s interest-rate spread
- The spread: the gap between the lending rate and the deposit ratepercentage points
- The rate the intermediary charges borrowers% a year
- The rate the intermediary pays savers% a year
Assumes. Both rates are stated on the same basis (here, simple annual rates).
The dollar margin on an amount A lent for a year is A × s. It must cover operating costs, loans that are never repaid and a return to the intermediary’s owners, so a spread is not a profit.
Converting between currencies
- The amount in US dollars$
- The amount in the foreign currencyunits of foreign currency
- The exchange rate quoted as dollars per one unit of the foreign currency$ per unit
Assumes. The rate is quoted as dollars per unit of foreign currency. If it is quoted the other way (units of foreign currency per dollar), divide instead of multiplying.
Banks quote a slightly lower rate to buy a currency than to sell it; the gap is their spread. F08 Advanced Financial Decision-Making covers hedging exchange-rate risk.
Worked examples
Fictional figures
Classify each transaction on every dimension that applies: is it direct or indirect finance; primary or secondary market; money market or capital market; and which kind of market (equity, bond, foreign exchange, commodity, derivatives)? (a) Ana keeps her savings in a Coastline Bank savings account. (b) Harbourline Roasters sells new ten-year bonds to investors. (c) A pension fund buys 10,000 Harbourline shares from a mutual fund on a stock exchange. (d) The US Treasury auctions new bills maturing in six months. (e) A coffee importer sells coffee futures to protect the value of beans it will receive in four months.
- (a) Ana’s claim is on the bank, not on the bank’s borrowers, so this is indirect finance. A savings deposit can be withdrawn at any time, so it is a short-term claim, though it is a bank product rather than a traded money-market instrument.
- (b) Harbourline receives the money and the investors hold Harbourline’s own securities: direct finance, in the primary market (first sale), in the capital market (more than a year) and the bond market.
- (c) The shares already exist and the money goes from one fund to another, so this is the secondary market, in the capital market and the equity market, on an exchange. Harbourline receives nothing.
- (d) New securities, money to the issuer: primary market. A life under a year puts Treasury bills in the money market; the buyers hold the government’s own debt, so it is direct finance.
- (e) The futures contract raises no money for anyone; it moves the risk of a fall in coffee prices from the importer to whoever buys the contract. That is the derivatives market (on a commodity), and the importer is hedging.
Answer. (a) Indirect finance. (b) Direct, primary, capital market, bonds. (c) Secondary, capital market, equity, on an exchange. (d) Direct, primary, money market. (e) Derivatives market (a commodity future), used for hedging.
What it means. The labels answer different questions (who stands in the middle, whether the issuer gets the money, how long the claim lasts, what is traded) so one transaction carries several of them at once. Only (b) and (d) raise new money for the issuer.
Fictional figures
Kestrel Battery Installers, a fictional US company that fits home battery-storage systems, orders battery modules from a German supplier for €80,000, payable in 90 days. Today a euro costs $1.10. Kestrel’s bank offers a 90-day forward contract at $1.11 per euro. What would the invoice cost in dollars today? What will it cost if, in 90 days, the euro has risen to $1.16 or fallen to $1.05? What does the forward contract do?
- Convert at today’s rate with : dollars. This is what the order would cost if Kestrel paid today.
- If Kestrel waits and pays at the rate in 90 days, the cost is uncertain. At $1.16: dollars, $4,800 more than today. At $1.05: dollars, $4,000 less. The supplier is paid €80,000 either way; Kestrel bears all the currency risk.
- The forward contract fixes the rate now for an exchange in 90 days: dollars, whatever happens to the euro. It is an over-the-counter derivative agreed with the bank; no money changes hands until the 90 days are up.
- Compare: the forward costs $800 more than paying today’s rate would, but it removes a range of outcomes from $84,000 to $92,800. Kestrel gives up the chance of the $4,000 saving to avoid the risk of the $4,800 loss. The forward rate differs from today’s rate mainly because dollar and euro interest rates differ, not because the bank adds a fee; F08 explains why.
Answer. At today’s rate the invoice costs $88,000; unhedged, it would cost $92,800 if the euro rose to $1.16 or $84,000 if it fell to $1.05. The forward locks the cost at $88,800.
What it means. This is hedging: Kestrel uses a derivative to remove a risk it already has, not to bet. Whether to hedge depends on how much a $4,800 surprise would hurt: for a small firm with a fixed-price contract to install the batteries, it could wipe out the profit on the job, which is why many such firms hedge.
Fictional figures
Suppose Harbourline Roasters needs $30 million for a roasting plant it expects to use for 20 years. Its treasurer has four offers (all fictional): roll over 90-day commercial paper at 4.6% a year; a five-year bank loan at 6.25%; a new ten-year bond issue at 5.5%; or 750,000 new shares sold at $40 each. Harbourline’s 18 million existing shares trade at $42.50. Which markets does each option use, what does each cost in the first year, and which would you rule out?
- Name the markets. Commercial paper: money market, direct. Bank loan: indirect finance through an intermediary. Bond: capital market, bond market, direct, primary. Shares: capital market, equity market, direct, primary (a seasoned offering).
- First-year interest on the debt options: commercial paper , bank loan , bond million dollars. The shares carry no interest, but each new share is a permanent claim on future profits, and shareholders, who are paid last, expect a higher return than lenders. Equity is therefore usually the most expensive source of money even though it has no fixed payments.
- Size of the share issue: shares, or more shares than today. Existing owners would hold of the enlarged company. The $40 price is below the $42.50 market price because buyers of a large new issue often need a discount to take it.
- Match the life of the money to the life of the plant. Commercial paper is cheapest this year but must be renewed every 90 days for 20 years; if lenders lose confidence in one bad quarter, Harbourline must find $30 million at once. Rule it out. The bond is cheaper than the bank loan and lasts twice as long. Equity has no fixed payments, which helps if roasting margins are volatile, but it dilutes the current owners.
Answer. Rule out commercial paper (a money-market tool for a capital-market need). Of the rest, the ten-year bond costs least in interest ($1.65 million a year against $1.875 million for the loan) and lasts longest; new shares (750,000 of them, 4.2% more) cost no interest but give up 4% of the company, and shareholders expect a higher return than lenders, so equity is usually the dearest source.
What it means. The choice is not only about the cheapest rate. It is about matching maturity to the asset, about how much fixed debt the business can safely carry, and about who bears the risk. Choosing between debt and equity is the subject of F05 Corporate Finance.
Explore
Common mistakes
“When I buy a company’s shares, the company gets my money.”
Only in the primary market. Almost all share trading is secondary: you buy from another investor, who gets your money. The company is paid only when it issues new shares. The secondary market still matters to it, because liquid, well-priced shares make its next issue cheaper.
“The stock market is the financial market.”
It is the most visible one, but debt is raised through banks and the bond market, short-term cash is managed in the money market, currencies trade in the foreign-exchange market (an average of $9.6 trillion a day in April 2025, on the BIS survey) and risk moves through derivatives. Many households meet finance mainly through banks and funds.
“Over the counter means unregulated or shady.”
OTC describes how trades are made (negotiated between two parties, usually with a dealer), not whether they are legal. Most foreign exchange and many bonds trade OTC. It is true that some unlisted shares come with little public information, which is a reason for care, not a definition of OTC.
“A bank just passes savers’ money along.”
An intermediary changes the claim. Ana holds a liquid deposit she can withdraw any day; Lantern owes a two-year loan. The bank chooses and monitors the borrower, spreads the risk over many loans and turns long-term loans into short-term deposits. The interest-rate spread pays for that work and for the loans that go bad.
“Derivatives are just gambling.”
A derivative is a tool; what it does depends on who uses it and why. Kestrel’s forward contract reduces a risk it already faces, which is hedging. A trader with no euro invoice who takes the same contract is speculating. Both need each other: hedgers need someone willing to take the other side.
Guided practice
Work through these with hints when you need them. Every hint and every worked solution is there to be used.
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On your own
No hints this time. Answer, check, and read the feedback; the solution appears once you have answered or if you ask for it. Your first answers count toward mastery.
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In practice
Fictional case
Fieldfare Air, a fictional regional airline, has a treasurer whose job is to make sure the airline always has the money it needs, in the right currency, at a cost it can bear. Her week touches almost every market in this lesson.
On Monday she looks at cash. Ticket sales have left $40 million in the bank that will be needed in two months for fuel bills and salaries. Leaving it in a current account earns little; locking it up for years would be reckless. She buys Treasury bills maturing in eight weeks: money-market instruments that are liquid, carry almost no default risk and mature when the cash is needed. If an unexpected bill arrives first, she can sell them in the secondary market within a day.
On Tuesday she works on the fleet. Two new aircraft will be flown for twenty years or more, so she wants long-term money: the capital market. She compares a bond issue, which the airline’s investment bank would sell to pension funds and insurers (direct finance), with a loan from a group of banks (indirect finance). The bond is cheaper but requires public disclosure and a minimum size; the bank loan is quicker and can be renegotiated if traffic falls. She matches the life of the debt to the life of the aircraft, as the Harbourline example did.
On Wednesday she deals with risk. Jet fuel is one of the airline’s largest costs, and its price follows crude oil. She uses commodity derivatives to fix the price of part of next year’s fuel, accepting that if oil falls the airline will pay more than its competitors on that part. The aircraft are priced in US dollars, but a third of ticket sales are in euros, so she agrees currency forwards with the airline’s banks to convert expected euro receipts at known rates. Both are hedges: they reduce risks the airline already has.
On Thursday she reads the markets. The price of the airline’s own bonds in the secondary market tells her what return lenders currently demand from it, and therefore roughly what a new bond would cost. The airline’s share price, set every day by investors, tells the board what they think of its strategy. None of these trades raises money directly, yet they shape every financing decision she makes.
The same questions face Ana on a tiny scale. Her emergency fund belongs in something short-term and liquid; Lantern’s equipment, expected to last five years, is financed by Ana’s permanent equity and a two-year loan, which is why Lantern must plan to have $10,000 ready on 1 March 2028; and when Lantern buys beans whose price moves with the global coffee market, someone along the supply chain may well be hedging that price with coffee futures. Knowing which market does which job is the first step to using them well.
Knowledge check
Six questions, one attempt each, no hints. Score 80% or more to complete the lesson; you can take it again at any time.
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Summary
- Financial markets move money from savers to borrowers in exchange for claims on future payments, and they do four jobs: channel savings to investment, discover prices, provide liquidity and share risk.
- In direct finance the saver holds the borrower’s security; in indirect finance an intermediary (bank, insurer, fund) stands between them and is paid through the interest-rate spread, s = rL − rD.
- The primary market sells new securities and pays the issuer; the secondary market resells existing ones between investors, and the issuer receives nothing, though it benefits from the liquidity and prices.
- The money market trades debt maturing within a year (Treasury bills, commercial paper); the capital market trades longer debt and shares. Match the life of the financing to the life of the asset.
- Equity and bond markets raise capital; the foreign-exchange market converts currencies (amount in dollars = foreign amount × dollars per unit); commodity and derivatives markets mostly move risk, through hedging and speculation.
- Exchanges are organised marketplaces with standard products and public prices; over-the-counter markets are negotiated, usually with dealers, and suit varied or tailored instruments.
Key formulas
Terms introduced
- Financial market
- Any arrangement through which people with money to spare provide it to people who need it, in exchange for claims on future payments; also the place or system in which those claims are traded.
- Financial assets
- Claims whose value comes from the payments they promise or make possible, such as shares, bonds, deposits and loans, rather than from any physical use.
- Security
- A financial asset that can be bought and sold, such as a share or a bond.
- Issuer
- The company, government or other body that creates a security and receives the money when it is first sold.
- Price discovery
- The process by which trading among many buyers and sellers produces a price that reflects their combined information and expectations.
- Direct finance
- Finance in which borrowers sell their own securities to savers, who then hold a claim on the borrower.
- Indirect finance
- Finance in which a financial intermediary takes savers’ money and provides it to borrowers; savers hold a claim on the intermediary, not on the borrower.
- Financial intermediary
- An institution, such as a bank, insurance company, pension fund or investment fund, that gathers money from savers and provides it to borrowers or invests it, changing the kind of claim along the way.
- Interest-rate spread
- The difference between the rate an intermediary charges borrowers and the rate it pays savers, in percentage points.
- Primary market
- The market in which new securities are sold for the first time, with the money going to the issuer.
- Initial public offering
- A company’s first sale of shares to the general public (IPO).
- Secondary market
- The market in which existing securities are resold between investors; the issuer receives none of the money.
- Money market
- The market for short-term debt maturing in less than a year, such as Treasury bills and commercial paper.
- Capital market
- The market for long-term finance: debt maturing in more than a year, and shares.
- Equity market
- The market for shares (stock), which are ownership claims on companies. Also called the stock market.
- Bond market
- The market for debt securities issued by governments, companies and other bodies.
- Bond
- A debt security that promises interest and repayment of the amount borrowed on stated dates; its holder is a lender to the issuer.
- Foreign-exchange market
- The market in which currencies are exchanged for one another. It is almost entirely over the counter.
- Commodity market
- The market for raw materials such as oil, metals and crops, traded for immediate delivery (spot) or through futures contracts.
- Derivatives market
- The market for contracts (forwards, futures, options, swaps) whose value depends on the price of something else, such as a share, a rate, a currency or a commodity.
- Hedging
- Using a financial contract, often a derivative, to reduce a risk one already faces.
- Exchange
- An organised marketplace with published rules and standardised products, where buyers’ and sellers’ orders meet and prices are visible to all.
- Over-the-counter market
- A market without a central marketplace, in which trades are negotiated between two parties, usually with a dealer (OTC).
Sources
- Dahlquist, J. & Knight, R. (2022). Principles of Finance, section 1.5, “Markets and Participants”. OpenStax. openstax.org/books/principles-finance/pages/1-5-markets-and-…
- Dahlquist, J. & Knight, R. (2022). Principles of Finance, section 1.7, “Financial Instruments”. OpenStax. openstax.org/books/principles-finance/pages/1-7-financial-in…
- US Securities and Exchange Commission, Investor.gov. Market Participants (How Stock Markets Work). investor.gov/introduction-investing/investing-basics/how-sto…
- Bank for International Settlements (2025). OTC foreign exchange turnover in April 2025. Triennial Central Bank Survey. bis.org/statistics/rpfx25_fx.htm
- US Securities and Exchange Commission. National Securities Exchanges. Division of Trading and Markets. sec.gov/about/divisions-offices/division-trading-markets/nat…
- ICE Futures U.S. Coffee C® Futures, contract specifications. ice.com/products/15/Coffee-C-Futures
- US Securities and Exchange Commission. Mission. sec.gov/about/mission
- Commodity Futures Trading Commission. Mission & Responsibilities. cftc.gov/About/MissionResponsibilities/index.htm
- US Securities and Exchange Commission. Derivatives (Dodd-Frank spotlight: division of authority over swaps). sec.gov/spotlight/dodd-frank/derivatives.shtml
- US Securities and Exchange Commission, Investor.gov. Investor Bulletin: An Introduction to Options. investor.gov/news-alerts/investor-bulletins/investor-bulleti…
- US Securities and Exchange Commission, Investor.gov. Over-the-counter (OTC) securities (glossary). investor.gov/introduction-investing/investing-basics/glossar…
- US Securities and Exchange Commission staff (2021). Staff Report on Equity and Options Market Structure Conditions in Early 2021. 14 October 2021. sec.gov/files/staff-report-equity-options-market-struction-c…