Econ 413 Assignment 5. Financial Economics. Coursework

Financial Economics
Student’s Name
Institution
 Financial Economics
Information Efficient Market
It is a convention that aggressive stock traders leverage on firsthand information to gain a competitive advantage over the general public and in return gain profits pretty easily and faster. This is particularly true in a case where weak market efficiency is exhibited. Information efficient market theory, which further complements the efficient market hypothesis implies that any information on the stock market, be it the trading rules or the fundamental analysis has no impact on the stock prices simply because it has already been factored in (Ou-Yang & Wu, 2017). Therefore, markets are informationally efficient in the sense that those in possession of first-hand information are not able to leverage them to gain competitive advantages. The information efficient market theory is largely relied on by passive investors because the investors need not put into consideration the sudden stock market prices and analysis of information. Passive investment is rather a long-term investment strategy with minimum risks involved hence outperforms the active investment strategy. 
Derivatives
A derivative in financial economics refers to a financial asset that obtains its value from other assets such as stocks, bonds, interest rates, or currencies, either independently or collectively (Somanathan et al., 2017). In modern financial management, there are four main types of derivatives: options, swaps, futures, and forward derivatives (Somanathan et al., 2017). Financial managers employ the concept of derivatives for the purposes of hedging risks, determining the asset price, enhancing market efficiency, and also gaining other valuables assets that would otherwise be unavailable. Options are types of derivatives that permit traders to trade assets on a later date at a value that has been set in advance. Unlike the options that grant permission to traders, with futures, the traders are obligated to trade the asset as agreed upon. Hedging is a term used to refer to the maneuvers that stock traders employ to avert the losses due to negative prices. The profits or losses that are due to be incurred in an asset are substituted by the profits or losses on the futures or optio...