Beruflich Dokumente
Kultur Dokumente
Week 1
Introduction
1/5 Functions of a Financial System:
Composition of financial institutions, instruments and markets
facilitating transactions for goods and services and financial
transactions
Side note - Money (5 - Extra special savings divides wealth)
Yield
-Total financial compensation received from an investment, expressed as a
percentage of the amount invested
Risk
-Probability that the actual return on an investment will vary from the
expected return
Liquidity
-Ability to sell an asset within a reasonable time at current market prices
and for reasonable transaction costs
Ordinary Shares
Hybrid securities (preference shares, convertible notes)
Debt (Ranks ahead of equity)
Contractual claim to periodic interest payments and repayment of a principal
Secured / unsecured
Derivatives
Synthetic security providing specific future rights that derives price from
either a physical market commodity (gold, oil etc) or a financial
security (interest-rate-sensitive debt instruments, currencies and equities)
NO actual money to firm
o Four types:
Futures contract
Forward contract
Swap Contract
o Used
mainly
to manage
price riskvs
exposure
and to speculate.
Asset
vs.
Instrument
Security
Asset is entitlement to future CF,
Instrument is type of asset represented by paper/electronic paper
Security is a type of asset with a well-developed secondary market
Finance Companies
o Funds raised by issuing financial securities directly into money
markets and capital markets. (Do not receive deposits)
o Funds used to make loans and provide lease finance to customers in
the household and business sectors
>>> Makes money via borrowing from market at low rate and
lending at higher rate.
Unit Trusts
Matching Principal
o Short-term assets should be funded with short term (money
market) liabilities
>>> Seasonal inventory needs funded by overdraft
o Hence longer term assets funded with equity or capital market
liabilities
>>> Equipment funded by debentures
WHEN NOT ADHERED TO accentuates effects of frozen money
markets with the sup-prime market collapse
o Retail Markets:
-Transactions conducted primarily with financial intermediaries by the
household and small-to-medium-sized business sectors.
(Smaller transactions)
Highly standardised
o Capital Markets are where longer term securities are issued and
traded with original maturity times in excess of one year.
>>>Equity, corporate debt, government debt markets
(Also incorporates FOREX and derivatives markets)
Advantages:
- Avoids costs of intermediation
-Increase access to diverse range of markets
-Greater Flexibility in range of securities to issue for different
financing needs
Disadvantages:
- Matching of preferences
- Liquidity and marketability of a security
- Search and transaction costs
- Assessment of risk (especially default risk)
Advantages:
-Asset transformation
-Maturity transformation
-Credit risk diversification and transformation (access to
wholesale market)
(Savers credit risk limited to intermediary, which is chosen to
have expertise and information)
-Liquidity transformation
(convert financial assets to cash)
-Economies of scale
(Financial and operational benefits of organisational size and
business volume)