Legal Definitions - paper market

Definition: A market for the exchange of derivative instruments.

Example: The trading of futures contracts on a commodities exchange is an example of a paper market.

Explanation: In a paper market, the trading of financial instruments such as futures contracts, options, and swaps takes place. These instruments derive their value from an underlying asset such as a commodity, stock, or currency. The paper market allows investors to speculate on the future price movements of these assets without actually owning them. For example, a trader can buy a futures contract for oil in the paper market, which gives them the right to buy a certain amount of oil at a predetermined price on a future date. If the price of oil goes up, the trader can sell the futures contract for a profit without ever taking physical possession of the oil. The paper market provides liquidity and price discovery for these financial instruments, which can be used for hedging or speculative purposes.