This paper will accept the challenge of creating new exchange-traded derivative products that would be a valuable addition to an established electronic stock exchange. The derivative created for this assignment would be an asset-based mortgage bundling investment trust that would deal with new construction in Asian nations. Since this derivative, and any new or existing derivative, would be traded on any exchange would have to meet stringent requirements, it is essential in the first part of this paper to discuss the two concepts of "electronic stock exchange" and "derivatives." The existing literature on both of these topics can be misleading inasmuch as there usually appears some murkiness in the precise definitions of what each of these concepts are. Part One, Derivatives will deal with the concept of derivatives, including their invention, uses, and, most importantly, the restrictions placed on derivative investments. Part Two, Stock Exchange Concept, sketches the general concept of a stock exchange, since the primary elements are required, whether the exchange is "land-based" or "electronic. Part Three will introduce the concept of the asset-based mortgage bundling investment trust. Part Four will then attempt to see how rationally this derivative fits within the parameters of an electronic stock exchange.
Part One: The Concept of a Derivative
Philosophically, and sometimes in practice, a financial derivative is really nothing more than a financial instrument that is valued proportionally to the value of either real assets or an index of assets (McClintock, 1996). In this respect, something as simple, the value of which is based on the value or values of one or more underlying assets or indexes of assets. In practice, derivatives are agreements, still usually between two or more companies rather than individuals that are based on equities (stocks), debt (bonds, bills, and notes), currencies, accounts receivable, pote...