Price discovery
The process by which trading reveals what the market thinks something is worth. Derivatives often lead it, being cheaper to trade and open when the underlying is not.
Where you will meet it
Price discovery appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Set out what derivatives offer users and the risks they carry
“They also aid price discovery, since the derivative market often trades when the underlying does not.”
- Name the main kinds of electronic trader and set out how they differ
“Some types provide liquidity and improve price discovery, while others extract value from slower participants.”
Practise it
Practise price discovery until it is automatic: questions that explain every wrong option.
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