Financial Risk Management

Financial Markets and

Institutions: An Introduction to
Risk Management Approach
Anthony Saunders
Marcia Millon Cornett.
3rd Edition
Overview of Financial Markets:
A financial market is a market that
brings buyers and sellers together to trade
in financial assets such as stocks, bonds,
commodities, derivatives and currencies.
The purpose of a financial market is to
set prices for global trade, raise capital
and transfer liquidity and risk.
Overview of Financial Markets:
Financial Markets can be distinguish along
with two major dimensions.
1. Primary versus secondary markets:
2. Money versus capital markets :
1:Primary Markets versus secondary
markets:
Primary Markets: are markets in which
users of funds (Corporations) raise funds
through new issues of financial instruments,
such as stocks and bounds.
The fund users have new projects or
expended production needs but do not have
sufficient internally generated funds to
support these needs. For this purpose the
fund users issue securities in the external
primary markets to raise additional funds.
1:Primary Markets versus secondary
markets:
New issues of financial instruments are
sold to initial suppliers of funds
(household)in exchange for
funds(money)that the issuer or user of
funds needs
1:Primary Markets versus secondary
markets:
Secondary Markets: once financial
instruments such as stocks are issued in
primary markets, they are then traded-that is
rebought and resold-in secondary markets.
Buyers of secondary market securities are
economic agents(consumers, businesses, and
governments)with excess funds.
Sellers of secondary market financial
instruments are economic agents in need of
funds.
Secondary Markets:
Secondary market provide a centralized
market place where economic agents
KNOW They can transact quickly and
efficiently .
Funds are exchanged with the help of
security broker ,acting as intermediary
between the buyer and seller of the
instrument
2:Money Markets versus Capital
Markets:
Money Markets are markets that trade debt
securities or instruments with maturities of
one year or less .
In the money markets, Economic agents with
short-term excess supplies of funds can lend
funds to economic agents who have short term
needs or shortages of funds .
Short term nature of these instruments means
that fluctuation in their prices in the secondary
markets.
Money Market instruments:
A variety of money market securities are
issued by corporation and government
units to obtain short term funds.
These securities include , Treasury bills,
federal funds, repurchase agreements ,
commercial papers , negotiable
certificates of deposits, and bankers
acceptance .
Capital Markets:
Capital Markets are that trade equity
(stocks)and debt(bonds)instruments wit
maturities of more then one year
The major suppliers of capital market
securities(or users of funds ) are
corporations and governments ,
households are the major suppliers of
funds for these securities.
Capital Market Instruments:
What is Risk ?
Risk exists if there is something you don’t
want to happen – having a chance to
happen!!!
The probability that some event will
cause an undesirable outcome on the
financial health of your business and/or
other business/family goals.
Objective and subjective risk :
Subjective risk refers to the mental state of an
individual who experiences doubt or worry as to
the outcome of a given event
◦ It is essentially the psychological uncertainty that
arises from an individual’s mental attitude or state of
mind
Objective risk differs from subjective risk in the
sense that it is more precisely observable and
therefore measurable
◦ It is the probable variation of actual from expected
experience
Thank you