Financial markets & the special case of money


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Financial markets & the special case of money

  1. 1. Financial Markets & the special case of money
  2. 2. Financial Markets <ul><ul><li>Financial markets channel funds from savers to investors, thereby promoting economic efficiency </li></ul></ul><ul><ul><li>2. Financial markets are a key factor in producing economic growth </li></ul></ul><ul><ul><li>3. Financial markets affect personal wealth and behavior of business firms </li></ul></ul>1.
  3. 3. Classifications of Financial Markets <ul><li>Debt Markets </li></ul><ul><li>Short-term (maturity < 1 year) – the Money Market </li></ul><ul><li>Long-term (maturity > 10 year) – the Capital Market </li></ul><ul><li>Medium-term (maturity >1 and < 10 years) </li></ul>2.
  4. 4. Classifications of Financial Markets <ul><li>Equity Markets - Common stocks </li></ul><ul><li>Primary Market - New security issues sold to initial buyers e.g. individuals, companies </li></ul><ul><li>Secondary Market - Securities previously issued are bought and sold </li></ul>2.
  5. 5. Classifications of Financial Markets (Cont’d) <ul><li>Secondary Markets </li></ul><ul><li>Exchanges </li></ul><ul><li>Trades conducted in central locations (e.g., Karachi Stock Exchange , New York Stock Exchange, etc) </li></ul><ul><li>Over-the-Counter Markets </li></ul><ul><li>Dealers at different locations buy and sell </li></ul>2.
  6. 6. An Overview of the Financial System 2.
  7. 7. An Overview of the Financial System <ul><li>Primary Function of the Financial System is Financial Intermediation </li></ul><ul><li>The channeling of funds from households, firms and governments who have surplus funds (savers) to those who have a shortage of funds (borrowers). </li></ul>2.
  8. 8. Monetary and Fiscal Policy <ul><li>Monetary policy is the management of the money supply and interest rates </li></ul><ul><li>Fiscal policy is government spending and taxation </li></ul><ul><ul><li>Budget deficit/surplus is the excess of expenditures/revenue over revenues/expenditures for a particular year </li></ul></ul><ul><ul><li>Any deficit must be financed by borrowing </li></ul></ul>1.
  9. 9. Banking and Financial Institutions <ul><li>Financial Intermediaries – non banking institutions that borrow funds from people who have saved and make loans to other people. e.g. Leasing companies ,Modaraba </li></ul><ul><li>Banks - institutions that accept deposits and make loans </li></ul><ul><li>Other Financial Institutions - insurance companies, finance companies, pension funds, mutual funds and investment banks </li></ul>1.
  10. 10. The Bond Market & Interest Rates <ul><li>A security (financial instrument) is a claim on the issuer’s future income or assets </li></ul><ul><li>An asset is any financial claim that is subject to ownership </li></ul><ul><li>A bond is a debt security that promises periodic payments for a specified time </li></ul><ul><li>An interest rate is the cost of borrowing or the price paid on the rental of funds </li></ul>1.
  11. 11. The Stock Market <ul><li>A stock represents a share of ownership in a corporation </li></ul><ul><li>A stock is a security that is a claim on the earnings and assets of that corporation </li></ul>1.
  12. 12. Foreign Exchange Market 1. <ul><li>The foreign exchange market is where one country’s currency is exchanged for another </li></ul><ul><li>The exchange rate is the price of one country’s currency in terms of another </li></ul><ul><li>Appreciation/depreciation is a rise/fall in the value of a country’s currency </li></ul>
  13. 13. Function of Financial Intermediaries <ul><li>Financial Intermediaries </li></ul><ul><li>Engage in process of indirect finance </li></ul><ul><li>Are needed because of transactions costs. </li></ul>2.
  14. 14. Function of Financial Intermediaries (Cont’d) <ul><li>Transactions Costs </li></ul><ul><li>1. Financial intermediaries make profits by </li></ul><ul><li>reducing transactions costs. </li></ul><ul><li>2. They reduce transactions costs by developing </li></ul><ul><li>expertise and taking advantage of </li></ul><ul><li>economies of scale. </li></ul>2.
  15. 15. Function of Financial Intermediaries (Cont’d) <ul><li>Risk Sharing </li></ul><ul><li>Create and sell assets with low risk characteristics e.g. Saving Bonds, and then use the funds to buy assets with more risk (also called asset transformation) e.g. Shares </li></ul><ul><li>Lower risk by helping people to diversify portfolios </li></ul>2.
  16. 16. Regulation of Financial Markets <ul><li>Primary Reasons for Regulation </li></ul><ul><li>Increase information to investors </li></ul><ul><ul><li>Decreases adverse selection and moral hazard problems </li></ul></ul><ul><ul><li>- Securities commissions force corporations to disclose information </li></ul></ul>2.
  17. 17. Regulation of Financial Markets (Cont’d) <ul><li>Primary Reasons for Regulation (continued) </li></ul><ul><li>2. Ensuring the soundness of intermediaries </li></ul><ul><ul><li>Prevents financial panics </li></ul></ul><ul><ul><li>Restrictions on entry/assets/activities, disclosure, deposit insurance, limits on competition </li></ul></ul>2.