Financial Markets & Institutions

ECF 5221
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Financial Markets
What are the Financial Markets?

Exchange of financial assets.
Shares Stock Market
Debt Bond Market
Foreign Exchange Markets
Derivatives Futures, Option Markets etc.
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Unit objectives - weekly outline
Teaching Processes 3 hour workshop

You will do the work!

Use your peers and make sure that if you are
having any difficulty that you come and see
me!!
Your responsibility to have a go before class
Financial Markets & Institutions
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Purpose of Lecture & Tutorial
Not to gain a perfect record of what was
said
Look forward - use your objectives as a
guide
Read text before lecture
Make a contribution
Uninformed
Noise
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Viney, C. (6
th
ed.). Financial Institutions,
Instruments and Markets, North Ryde, NSW:
McGraw Hill.

Required Text
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Recommended reading
Refer WWW sites for each week
Articles in e-reserve readings
Chapters in text book.
Financial Press
Australian Financial Review (AFR),
Business Review Weekly
The Australian


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ANY QUESTIONS?
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ECF 5221 FMI - Week One
Describe the role performed by the financial
system
Explain the concept of a financial asset and
identify the main types of financial assets
Functions of financial markets.
Explain how financial markets transfer funds
The nature of financial intermediation versus
direct financing.
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Introduction
Roles of financial markets:

to transfer funds from borrowers to lenders

to allocate funds between alternative uses

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Deficit and Surplus units
Income - Consumption = Saving
Less Investment Surplus (or
Deficit)
Definition: a surplus (deficit) unit saves more
(less) than it invests
Surpluses are put into the financial system
Deficits are covered the financial system
ECF 5221 -FMI - Week One
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Some Terms
investment refers to the acquisition of new
physical assets

saving means the change in a unit or
sectors net worth

dis-saving occurs when consumption
exceeds income
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Implications
Surplus units - lend to others
- increase their net assets
- issue financial claims

Deficit units - borrow from others
- run down their net assets
- take on financial obligations
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Intermediation
Also called indirect financing
Involves the transfer of funds between ultimate
savers and ultimate borrowers via deposit-taking
institutions
E.g. Mary deposits $100 in her bank account
and the bank then on-lends those funds to a
loan customer
What are the advantages of intermediation (4)
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Direct financing
The transfer of funds from ultimate savers to
ultimate borrowers without an intermediary
eg BHP issues shares and raises capital
directly from shareholders
What are the advantages?


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Disintermediation
Shift in the financial system assets away
from intermediaries towards direct financing
Reasons include ?
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Financial markets
Primary market is where investors purchase
financial securities from the original issuer
Secondary market is where investors trade
their securities with other investors
Example of a secondary market?
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Issuing Financial Securities
Public offering: the issuance of securities to
the general public
IPO (Initial Public Offering): An example of a
Primary Market
Private placement: the issuance of securities
to a single investor or group
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Liquidity of Financial Markets
Refers to the ease of buying and selling
without undue price fluctuations and cost
Related to volume of turnover
Depends on: depth, breadth, resilience
Dealers and brokers help create liquidity
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Trading Financial Securities
Exchange-traded is a market where securities are
dealt via a centralized exchange facility
Over-the-counter (OTC) is when securities are
issued and exchanged through a dealer or bank



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Securities Markets
A securities market is a market in which a
particular type of security is issued and traded.
Qualities of an efficient market
Liquidity
Stability
Negotiability
Risk


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Participants who add Liquidity
Market-makers:

Speculators:

Arbitragers:

Hedgers:
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Functions of the Financial System
Attributes of financial assets
Return or yield
Risk
Liquidity
Time-pattern of the cash flows

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Functions of the
Financial System (cont.)
An efficient financial system
Encourages savings
Savings flow to the most efficient users
Implements the monetary policy of governments
by influencing interest rates
The combination of assets and liabilities
comprising the desired attributes of return, risk,
liquidity and timing of cash flows
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Financial Instruments
Equity
Ownership interest in an asset
Residual claim on earnings and assets
Dividend
Liquidation
Types
Ordinary share
Hybrid (or quasi-equity) security
Preference shares
Convertible notes
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Financial Instruments (cont.)
Debt
Contractual claim to
Periodic interest payments
Repayment of principal
Ranks ahead of equity
Can be secured or unsecured
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Financial Instruments
(cont.)
Derivatives
A synthetic security providing specific future rights
that derives its price from a
Physical market commodity
Gold and oil
Financial security
Interest rate-sensitive debt instruments, currencies and
equities
Used mainly to manage price risk exposure, and
to speculate
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Financial Instruments
(cont.)
Four basic derivative contracts
Futures
Forward
Option contract
Swaps
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Recap
We have looked at the role performed by the
financial system
Explained the concept of a financial asset
and identify the main types of financial assets
Reviewed how financial markets transfer
funds
Had a look at the role of intermediation
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Next Week - Week Two
The demand for financial assets.
Primary, secondary and tertiary (or
derivative) markets.
Market organisation.
Factors influencing markets