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Asset Markets & Asset Prices Class Presentation Economics of Financial Market Prepared & Presented By: Beverly Ala July 18, 2010 Slide 2 Outline: Assets Asset Prices Asset Markets List of capital/asset markets: Differences among markets and the traded in them * Equity or Stock Markets * Bond Markets * Money Markets * Commodity Markets * Physical Asset Markets * Foreign Exchange Markets * Derivatives Markets Slide 3 Assets assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simplistically stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset) Two major asset classes are tangible assets and intangible assets. Slide 4 Asset Categories Slide 5 Asset Price is the process of estimating the potential market value of a financial asset or liabilities. The prices of assets, including land and buildings, productive equipment and securities. As assets can be sold again, their present prices are strongly influenced by expectations, their future prices, and by the interest rate at which future values are to be determined. Slide 6 List of Capital/Asset Market: Differences Among Markets & the Assets Traded in them Slide 7 Equity or Stock Markets The stock exchange is the main secondary market for shares in corporations-i.e. limited liability companies. It is a secondary market in the sense that the shares are already in existence, so that trade takes place between investors and need not directly involve the corporations themselves. Slide 8 Slide 9 Slide 10 Slide 11 Bond Markets These are markets for long- term securities such as government debt or corporate bonds. Bonds are usually regarded as less risky than shares because bonds normally oblige the issuer to take specific actions at definite dates in the future. A typical bond is a promise to pay a.) a sequence of coupons (commonly twice a year) b.) a lump sum maturity value (or face value) at a specified dates in the future. Slide 12 Slide 13 Slide 14 Slide 15 Slide 16 Money Markets Money market exist to facilitate the exchange of securities such as treasury bills (commonly 3-6 months government debt) or other loans with a short time to maturity. Although such securities are traded in markets. Any holder does not have to wait long before the issues is obliged to redeem the debt in compliance with the terms of the contract. Slide 17 Slide 18 Slide 19 Commodity Markets markets of some form exist for almost every commodity, though financial studies are usually confined to highly organized markets for a fairly narrow range of commodities, including precious metals (gold, silver, platinum), industrial metals (such as lead, tin and copper), petrochemicals or agricultural commodities such as cereals, soya beans, sugar and coffee). Most organized commodity markets involve trading in contracts for the delivery of the stated commodity at a future date, though perhaps one every near to the present. Slide 20 http://www.google.com.ph/imglanding?q=commodity%20market&imgurl=http://www.futuresindustry.org/images/fimag/05- 05commodity_notional.jpg&imgrefurl=http://www.futuresindustry.org/fimagazi-1929.asp%3Fa%3D1038&usg=__Fr- 2gchWWl47RMfCmrfFh2mm1tM=&h=307&w=331&sz=90&hl=en&itbs=1&tbnid=O0Xx2eH287_Z1M:&tbnh=110&tbnw=119&prev=/images%3Fq %3Dcommodity%2Bmarket%26hl%3Den%26client%3Dfirefox-a%26sa%3DG%26rls%3Dorg.mozilla:en- US:official%26gbv%3D2%26tbs%3Disch:1&client=firefox-a&sa=G&rls=org.mozilla:en- US:official&gbv=2&tbs=isch:1&start=0#tbnid=O0Xx2eH287_Z1M&start=2 Slide 21 Slide 22 http://econc10.bu.edu/economic_systems/Theory/Neoclassical/walras.htm Market Commodity Equilibrium Slide 23 Physical Asset Markets such as for real estate. In this case, the relevant asset for financial analysis is often a security (e.g. mortgage) constructed to have a well- defined relationship with the physical asset (e.g. mortgage being a loan secured against the equity property). It is not uncommon for mortgages to be securitized by financial intermediaries that issue bonds backed by (and with payoffs defined by) bondles of mortgages. Slide 24 Foreign Exchange Markets Forex or FX Market These are markets for one currency against another. Governments often intervene in such markets- not infrequently with disastrous consequences to fix or at least influence, exchange rates among currencies. Two features of FX markets are a.) the vast turnover of funds (often about $1.5 trillion each day in mid12001) and b.) round-the-clock trading. Slide 25 Derivatives Markets corresponding to most of the above categories are derivative, or synthetic, securities. They are derivative in the sense that their payoffs are defined in terms of the payoffs on an underlying asset or assets. The underlying asset could itself be a derivative so that a whole hierarchy of such instrument emerges. Slide 26 Derivatives Markets Derivatives is a generic term for a variety of financial instruments. Unlike financial instruments such as stocks and bonds, a derivative is usually a contract rather than an asset. Essentially, this means you buy a promise to convey ownership of the asset, rather than the asset itself. Futures and options are two commonly traded types of derivatives. An options contract gives the owner the right to buy or sell an asset at a set price on or before a given date. On the other hand, the owner of a futures contract is obligated to buy or sell the asset. Slide 27