This document provides an overview of financial markets and instruments. It describes the primary participants in financial markets as the government sector, household sector, and business sector. It also outlines various financial securities available in money markets and capital markets, such as treasury bills, certificates of deposit, stocks, bonds, and derivatives. The investment process is discussed as well, including establishing investment objectives, developing and implementing an investment strategy, and ongoing monitoring.

1. Financial Markets and Instruments: An Overview

2. Objective of this session SA: Financial Markets and Instruments: An Overview To introduce major features of financial markets, market participants, financial securities, and investment process.

3. Financial Markets SA: Financial Markets and Instruments: An Overview Primary Markets: Deal with Initial Public Offers Versus Secondary Markets: Deal with post IPO securities Money Markets: Deal with short-term securities Versus Capital Markets: Deal with long-term securities

4. Participants of Financial System SA: Financial Markets and Instruments: An Overview The Government Sector The Household Sector The Business Sector

8. Implications of Clientele Demands SA: Financial Markets and Instruments: An Overview Investment Banking Financial Intermediation Financial Innovations Responses to Taxation and Regulations

15. SA: Financial Markets and Instruments: An Overview Capital Market Instruments Longer-term and riskier securities Fixed income market Instruments Instruments for long-term borrowings Government bonds Conventional, Index linked Corporate bonds

16. SA: Financial Markets and Instruments: An Overview Capital Market Instruments Longer-term and riskier securities Equity market Instruments Ordinary shares Residual claim and limited liability Preference shares Stock market indices Equally weighted / value weighted

17. SA: Financial Markets and Instruments: An Overview Capital Market Instruments Derivative market Instruments A security whose value depends on the value of another security or asset. Options A security that gives the holder the right to buy (call) or sell (put) an asset at a specified price on or possibly before a specific date. Futures An agreement between two parties to trade a specific asset or security at a future date, with the terms and price agreed upon today.

19. Initial Margin SA: Financial Markets and Instruments: An Overview Initial Margin (IM) is amount required to be deposited with the broker (as % of total value of securities purchased) Actual Margin (AM) = Consider Number of shares purchased (N): 200 Price per share (P): £60 Initial margin requirement (IM): 50% How much the investor could borrow (B)?

20. Maintenance Margin SA: Financial Markets and Instruments: An Overview Maintenance Margin (MM) is required to minimise the risk of default. When share price declines below certain level MM is called by the broker. Consider N = 200 Purchase price per share: £60 Borrowing: $6000 (initial margin 50%) Maintenance margin: 40% What should be the price for margin call? How much you need to deposit if share price falls to £40?

22. The Investment Process SA: Financial Markets and Instruments: An Overview Source: Levy and Post (2005). 1. Investor characteristics 2. Investment vehicles 3. Strategy development 4. Strategy implementation 5. Strategy monitoring 5. Strategy monitoring

28. SA: Financial Markets and Instruments: An Overview Z. Bodie, A. Kane and A. J. Marcus, Investments , McGraw-Hill. Chapters: 1,2,3 Levy, H. and T. Post (2005), Investments , FT Prentice Hall. Chapters 1,2 and 3. Essential Readings