Brain & Economics

Understanding decision making

Derivatives

The introduction of derivative trading greatly increased the complexity of the financial markets. By the one hand, it allows the investor a mechanism for for risk protedction, but, by the other hand, it allows leverage for high risk investiments searching for huge profits. The Derivative Market is a high risk market because its dependent on the uncertainty about future stock prices.

The evolution of INDG10 from October, 10, 2009 when the estimated IBov value by February, 17, 2010 begun to be traded at Bovespa is shown bellow.

Above, the linear relation between Ibov and INDG10, and the linear decrease of difference between Ibov current value and INDG10 trading value..

World Trading

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Anchorage

The linear relations shown by the figure at left support the proposal that future prices are anchored upon the current trading values.

The investor and the speculator bound their expectancies about future prices within a acceptable variation of the current prices. This acceptable variation is maximal at when the derivative begun to be traded and decreases in the following tradings in order to approach expectancies to the real value to be negociated in the derivative closing day.

Derivative anchorage on the current values is a consequence from the anchorage of stock prices and market indices to their previous history and to the limitations imposed by human perception about the adequacy for buying and selling prices offers.

 

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:: Brain and Economics :: 2010 ::