Chapter 01, Financial Markets & Institutions
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Transcript of Chapter 01, Financial Markets & Institutions
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Financial Markets & InstitutionsSubmitted to
Naveeda ZaibSubmitted by
Muhammad RafiRoll # 88BBA 7th
University of Azad Jammu & Kashmir, Kotli
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Chapter 1
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Why study Financial Markets and Institutions?
• Prudent investment and financing requires a thorough understanding of– the structure of domestic and international markets– the flow of funds through domestic and international
markets– the strategies used to manage risks faced by investors
and savers
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Financial Markets
• Financial markets are structures through which funds flow
• Financial markets can be distinguished along two dimensions– primary versus secondary markets– money versus capital markets
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Primary versus Secondary Markets
• Primary markets– markets in which users of funds (e.g.,
corporations and governments) raise funds by issuing financial instruments (e.g., stocks and bonds)
• Secondary markets– markets where financial instruments are
traded among investors (e.g., NYSE and Nasdaq)
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Money versus Capital Markets
• Money markets– markets that trade debt securities with
maturities of one year or less (e.g., CDs and U.S. Treasury bills)
• Capital markets– markets that trade debt (bonds) and equity
(stock) instruments with maturities of more than one year
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Foreign Exchange (FX) Markets
• FX markets– trading one currency for another (e.g., dollar for yen)
• Spot FX– the immediate exchange of currencies at current
exchange rates
• Forward FX– the exchange of currencies in the future on a specific
date and at a pre-specified exchange rate
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Derivative Security Markets
• Derivative security– a financial security whose payoff is linked to
(i.e., “derived” from) another security or commodity
– generally an agreement to exchange a standard quantity of assets at a set price on a specific date in the future
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Financial Market Regulation
• The Securities Act of 1933– full and fair disclosure and securities
registration• The Securities Exchange Act of 1934– Securities and Exchange Commission (SEC) is
the main regulator of securities markets
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Financial Institutions (FIs)
• Financial Institutions– institutions through which suppliers channel
money to users of funds• Financial Institutions are distinguished by
whether they accept deposits– depository versus non-depository financial
institutions
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Depository versus Non-Depository FIs
• Depository institutions– commercial banks, savings associations,
savings banks, credit unions• Non-depository institutions– insurance companies, securities firms and
investment banks, mutual funds, pension funds
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FIs Benefit Suppliers of Funds
• Reduce monitoring costs• Increase liquidity and lower price risk• Reduce transaction costs• Provide maturity intermediation• Provide denomination intermediation
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FIs Benefit the Overall Economy
• Conduit through which Federal Reserve conducts monetary policy
• Provides efficient credit allocation• Provide for intergenerational wealth
transfers• Provide payment services
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Risks Faced by Financial Institutions
• Credit• Foreign exchange• Country or
sovereign• Interest rate• Market
• Off-balance-sheet• Liquidity• Technology• Operational• Insolvency
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Regulation of Financial Institutions
• FIs are heavily regulated to protect society at large from market failures
• Regulations impose a burden on FIs and recent U.S. regulatory changes have been deregulatory in nature
• Regulators attempt to maximize social welfare while minimizing the burden imposed by regulation
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Globalization of Financial Markets and Institutions
• The pool of savings from foreign investors is increasing and investors look to diversify globally now more than ever before
• Information on foreign markets and investments is becoming readily accessible and deregulation across the globe is allowing even greater access
• International mutual funds allow diversified foreign investment with low transactions costs
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