Understanding Finance from scratch

Chapter 4 If you want to swim, you must first know how deep the water is - learn some financial market knowledge every day (3)
Foreign exchange black market: refers to the illegal foreign exchange market.The foreign exchange black market is first produced under the conditions of government restrictions or laws prohibiting foreign exchange transactions; secondly, the transaction process is non-public.Since most developing countries implement foreign exchange control policies and do not allow free foreign exchange markets to exist, black foreign exchange markets in these countries are relatively common.

Official market: It refers to the market where foreign exchange is bought and sold in accordance with the government's foreign exchange control laws.This foreign exchange market has specific regulations on participating entities, exchange rates and trading processes.In developing countries, official markets are more common.

Moreover, unlike the stock market with call auctions, the foreign exchange market is more like a farmers' market. All buyers and sellers are completely open, reflecting absolute freedom. Buyers can freely inquire about prices, and sellers can freely quote prices. The transaction is voluntary, and the transaction price is "one is willing to fight, the other is willing to suffer" for both parties. This is completely different from the stock market. The foreign exchange market has no rules for call auctions and centralized computer matching.

Knowing the difference between the stock market and the foreign exchange market, investors will not be surprised by the difference in quotations between banks, which is completely a market behavior.

Why has the foreign exchange market become a hot spot for investment in recent years?

First of all, thanks to the prosperity and development of the Internet.With the help of the Internet, investors get a shortcut to enter the foreign exchange market.The trading spread is reduced to 3~5 points; Dow Jones news, Reuters quotes, professional chart tools, etc., which only financial institutions can afford in the past, can now be used for free as long as you open an account; Now sitting at home, you can do it in seconds with a single click of the mouse.

It is with the help of the rapid development of the Internet that more and more individual investors enter the foreign exchange market, making the foreign exchange market a global investment hotspot. A large amount of funds, a large number of professional or amateur stock and futures investors enter the foreign exchange market to seek gold. Promote the foreign exchange market to become the new favorite of individual investors.

Second, the convenient liquidation process reduces investor costs.Due to the increasing development of information technology, the original cumbersome background liquidation process can now be completed in an instant through the trading platform of online brokers. For investors, the original huge liquidation team is no longer necessary.In this way, by participating in the foreign exchange market through the Internet, investors save a lot of time and capital costs, so that they can concentrate their time and energy on the decision-making and operation of transactions.

Insurance market: a "safety rope" for the future

There are two men in a small town, one is very rich and runs a big factory.The other lived an ordinary life.

An accident took the lives of two people.The rich man's factory immediately fell into chaos and soon went bankrupt. His family had to move out of the original big house, and life became increasingly difficult.The other, although his family was in grief, because he had taken out the insurance before his death, his family was compensated by the insurance company, and they still lived a life without worrying about food and clothing.

It is the real wealth that can help you at the most critical time. It is precisely because insurance has a strong protection function that the insurance market is growing day by day.So, what is the composition of the insurance market?How is the development of my country's insurance market?
The insurance market refers to the sum of the exchange relationship of insurance commodities or the sum of the relationship between the supply and demand of insurance commodities.It can refer to a fixed trading place, such as an insurance exchange, or it can be the sum of all exchange relationships that realize the transfer of insurance commodities.The transaction object of the insurance market is the insurance protection provided by the insurer for consumers, that is, various insurance commodities.

In this way, the concept of the insurance market is a bit complicated, and it may be easier to understand if it is divided into subjects and objects.

(1) The main body of the insurance market.The main body of the insurance market refers to the participants in the transaction activities of the insurance market, including the supply side and the demand side of the insurance market, as well as the intermediary that acts as a medium between the supply and demand sides.The insurance market is the sum total of various exchange relationships concluded by these participants.

supply side of the insurance market.The supply side of the insurance market refers to all kinds of insurers who provide various insurance products and undertake, disperse and transfer the risks of others in the insurance market.Such as state-owned insurers, private insurers, joint insurers, cooperative insurers, and individual insurers.Usually they must be legal person organizations that have been reviewed and approved by the relevant state departments and approved to specialize in insurance business.

The demand side of the insurance market.The demand side of the insurance market refers to all actual and potential buyers of insurance products in the insurance market, that is, various policyholders.According to the different demand characteristics of insurance consumers, the demand side of the insurance market can be divided into individual policyholders, group policyholders, rural policyholders, urban policyholders, etc.According to the level of insurance demand, the demand side of the insurance market can also be divided into current policyholders and future policyholders.

Intermediaries in the insurance market.The intermediary parties in the insurance market include not only those who act between the insurer and the policyholder, act as an intermediary between the supply and demand of insurance, connect the insurer and the policyholder and establish an insurance contract relationship, but also include those who are independent of the insurer and the policyholder. In addition, the person who handles the notarization, appraisal, adjustment, actuarial and other matters related to the insurance business entrusted by the parties to the insurance contract as a third party.Specifically, there are insurance agents (or companies), insurance brokers (or companies), insurance adjusters (banks), insurance lawyers, insurance adjusters, insurance actuaries, insurance surveyors, etc.

(2) The object of the insurance market.The object of the insurance market refers to the specific transaction objects of the supply and demand sides in the insurance market, and the transaction objects are all kinds of insurance commodities.This is a special form of commodity. ①Insurance commodity is an intangible commodity; ②Insurance commodity is a kind of "non-demand commodity"; ③The consumption of insurance commodity is a kind of invisible consumption.

We know that the form of insurance products is an insurance contract, which is actually the carrier of insurance products, and its content is a promise to provide economic security when an insured accident occurs.The premium rate is the price of insurance products, which is the cost paid by the policyholder to the insurer for the insured to obtain insurance protection.

What we are going to talk about next is the type of insurance market.

(1) According to the different underwriting procedures of insurance business, it can be divided into the original insurance market and the reinsurance market.

The original insurance market: also known as the direct business market, is a market where the insurance relationship is directly established between the insurer and the policyholder by signing an insurance contract.

Reinsurance market: also known as the reinsurance market, is a market where the original insurer transfers the direct business that has been underwritten to the reinsurer through a reinsurance contract to form an insurance relationship.

(2) According to the nature of insurance business, it can be divided into personal insurance market and property insurance market.

Personal insurance market: It is a market that provides various personal insurance products for social citizens.

Property insurance market: It is a market engaged in the transaction of various property insurance commodities.

(3) According to the space of insurance business activities, it can be divided into domestic business market and international insurance market.

Domestic business market: It is a market that provides various insurance products for the country, and can be divided into national insurance market and regional insurance market according to the scope of business area.

International insurance market: It is the insurance market where domestic insurers operate foreign insurance business.

(4) According to the degree of competition in the insurance market, it can be divided into monopoly insurance market, free competition insurance market, and monopoly competition insurance market.

Free competition insurance market: It is an insurance market where there are a large number of insurers in the insurance market, the trading of insurance products is completely free, and the laws of value and market supply and demand are fully functioning.

Monopoly insurance market: An insurance market in which one or several insurers monopolize the market share, including complete monopoly and oligopoly insurance markets.

Monopolistic competition insurance market: It is an insurance market in which large and small insurance companies coexist in free competition, and a few large companies have partial monopoly positions in certain businesses in the insurance market.

At this point, everyone should have a general understanding of the insurance market, but we also want to introduce the reinsurance market in particular.

Looking at any developed insurance market today, there is a sound and powerful reinsurance market behind it. The modern reinsurance market provides insurance companies with various ways of risk dispersion and transfer.For example, the famous reinsurance companies include Munich Reinsurance Company and Swiss Reinsurance Company.In the reinsurance market, insurers all over the world can fully arrange reinsurance business to ensure business stability.In particular, major domestic and international trade activities, such as aerospace projects and nuclear power plant projects, have huge risks and liabilities, and insurance is even more needed.Although the reinsurance market is developed from the insurance market, it is not a simple extension, but an indispensable and important part of the international insurance market.

Options Market: Expected Futures Market Innovation

We assume that the underlying is copper futures.Company A buys copper from Company B.However, Company A has limited funds and needs to go to the bank for a loan.Company A estimates that it will take about 3 months to get the loan, and is worried that the price of copper will rise during this period.Therefore, Company A and Company B agree that Company A will pay 1000 yuan/ton to Company B, and Company B agrees that Company A has the right to purchase copper at the agreed price of 3 yuan/ton at any time within 35000 months.

第一种情况：在3个月后，铜价格涨到45000元/吨。甲公司就按约定以35000元/吨的价钱买下，再以45000元/吨的价钱在市场卖出。扣除本金35000元/吨和权力金1000元/吨，甲公司从中赚了9000元/吨。

The second situation: After 3 months, the copper price drops to 22000 yuan/ton.Company A can give up the right to subscribe for copper, and turn to the market to directly buy copper at a price of 22000/ton.The amount of loss of Company A is limited to the royalties of 1000 yuan/ton already paid to Company B.

This is options, and this is the advantage of the options market, which provides practitioners with a very flexible hedging tool.So, how does the options market evolve and develop?Does China have an options market?
The options market is a market where options contracts are traded.Option trading refers to the transaction of the right to purchase a specific commodity at an agreed price within a specific period of time. The most common option transactions include foreign exchange, index, and commodity option contracts.

Before introducing the options market in detail, we need to briefly introduce options.An option is actually the right to choose. The buyer pays the premium to obtain the right to buy and sell a certain asset at a specific price at a specific time in the future. What the buyer has is a right, not an obligation, and the seller is just the opposite.I believe that everyone can understand this from the previous short story.

The option market was created slowly over time due to the need for risk management.Options trading venues do not require specific venues. They can be traded on futures exchanges, or on specialized options exchanges, and options related to equity can be traded on stock exchanges.The development history of the option market is divided into several stages. It began in the American and European markets in the 18th century. start.Since the 1973s, the options market has been mainly limited to stock trading, and the total volume of global options transactions has grown rapidly. In 20, the total volume of options transactions on 80 global exchanges was 2009 billion, and the volume of futures transactions reached 70 billion.

At present, the world's largest options exchange is the Chicago Board Options Exchange; Europe's largest options exchange is the European Futures and Options Exchange, which was formerly known as the Deutsche Futures Exchange and the Swiss Options and Financial Futures Exchange; in Asia, South Korea's options The market is developing rapidly, and its transaction scale is huge. It is currently the country with the best development of options in the world. There are option transactions in Hong Kong, China and Taiwan, China.

In fact, it is relatively easy for the futures market to form a certain scale, because the futures products are relatively simple and there are fewer varieties; while the components of the options market are much more complicated, because the option prices and terms vary. Different combinations, including combinations of various investment and trading strategies.For example, there are approximately 8 combinations in Eurodollar options trading.Because of this, the risk for market makers is actually very high.This is why option trading in the United States developed very slowly before it developed into electronic trading. Complexity is an important reason. Most of the option trading in the United States is still call trading.The solution adopted by European futures exchanges is to allow brokers and customers to conduct transactions by telephone or email, and at the same time they set very low restrictions on block transactions, that is, they can basically conduct over-the-counter transactions.

Risk management in the options market is a top priority.When the relevant underlying option market fluctuates greatly, some order placing activities tend to become very active, such as frequently canceling orders, changing orders and placing new orders.In such a tense environment, it is inevitable that investors will make some stupid little mistakes when trading without realizing it, which will lead to big losses.In this regard, there are also unique measures to avoid such errors:

(1) The fluctuation range of the premium price on the next trading day is limited, that is, the fluctuation range of the option premium cannot exceed the theoretical price of the option plus/minus 200% of the closing price of the KOSPI15 index on that day.

(2) There is a limit on the maximum trading volume of each order. The current regulation is that the investor's trading volume in futures trading cannot exceed 1000 futures contracts per order, and in option trading, each order cannot exceed 5000 options contracts.

(3) Restrict changes in option premiums.For example, when the market price fluctuation exceeds 5%, the system will suspend trading for 1 minute or longer.

(4) In order to prevent people from maliciously manipulating the market, it is necessary to monitor the position of members at any time.The member's net futures position cannot exceed 5000 lots, but this does not include arbitrage and verified hedging positions.

(5) In terms of performance settlement, it is stipulated that before starting the first transaction, traders must first pay a certain amount of deposit.Afterwards, before each order is placed, the computer system will automatically calculate its deposit and check whether the member's account holds sufficient deposit amount.A margin system that combines futures and options positions is adopted.The initial margin is 15% and the maintenance margin is 10%.These risk prevention measures can ensure a more healthy development of the futures market.

(6) There are also some default risk protection measures in foreign option markets.For example, an organization called the "Joint Compensation Fund" is responsible for providing financial help to members who are financially strapped.Members pay a certain amount of money to the fund according to their trading volume.At present, the total fund has reached 8000 million US dollars.Therefore, when a member’s capital account is in crisis, help can be obtained from the following channels: margin paid to the exchange, funds stored in the joint compensation fund, funds stored in the joint compensation fund by other members, and membership fees paid by the exchange .

Investors are more concerned about the development of China's options market. The international futures market is very lively now. Today's oil price is soaring, and tomorrow's copper price is plummeting. All these seem to have something to do with China.And China's economic development is getting more and more attention from abroad, and more and more foreign financial fields hope to reflect China's economy.Now, my country has the conditions to launch commodity option trading, and the industry and investors are also eager to list commodity options.At present, my country's futures market has gradually matured. I believe that once options are introduced, the vast and active Chinese market will definitely develop faster and better!
(End of this chapter)