Financial Contracts
The basis of finance is to bind contractual relationships between people. These contractual relationships can be as example:
- "renting" money (loans, bonds)
- buying a property share of a company's profits and voting rights (stocks)
- paying someone to protect us against some risk (options, insurances, credit derivatives)
- pre-arranging availability of money for a given rate (Interest Rate Futures)
- ...
These financial contracts (or instruments) share some common properties, they have:
- a price
- an owner
- a counterparty on the other hand of the contract
- a date of origination
A convenient way to see financial contracts or instruments is to see them as streams of cash-flows, i.e. a certain number of certain or contingent money exchanges between the counterparties. These cash-flows always happen on pre-arranged terms
posted by Walter @ 11:53 PM
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