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8/17/2019 Chapter 01 Financial Markets and Institutions
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8/17/2019 Chapter 01 Financial Markets and Institutions
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©2007, The McGraw-Hill Companies, All Rights
Chapter OneIntroduction
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Why study Financial Markets and
Institutions?
• They are the cornerstones of the
overall financial system in whichfinancial managers operate
• Individuals use both for investing
• Corporations and governments useboth for financing
• They are the cornerstones of the
overall financial system in which
financial managers operate
• Individuals use both for investing
• Corporations and governments useboth for financing
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Overview of Financial Markets
• rimary Markets versus !econdary
Markets
• Money Markets versus Capital
Markets
• Foreign "#change Markets
• rimary Markets versus !econdary
Markets• Money Markets versus Capital
Markets
• Foreign "#change Markets
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rimary Markets versus !econdary
Markets
• rimary Markets
– markets in which users of funds e!"!
cor#orations$ "overnments% raise funds &'issuin" financial instruments e!"! stocks and
&onds%
• !econdary Markets – markets where financial instruments are traded
amon" investors e!"! ()*+$ (,*,.%
• rimary Markets
– markets in which users of funds e!"!
cor#orations$ "overnments% raise funds &'issuin" financial instruments e!"! stocks and
&onds%
•!econdary Markets – markets where financial instruments are traded
amon" investors e!"! ()*+$ (,*,.%
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Money Markets versus Capital Markets
• Money Markets
– markets that trade de&t securities with
maturities of one 'ear or less e!"! 0s$ 2!*!
reasur' &ills%
• Capital Markets
– markets that trade de&t &onds% and euit'stock% instruments with maturities of more
than one 'ear
• Money Markets
– markets that trade de&t securities with
maturities of one 'ear or less e!"! 0s$ 2!*!reasur' &ills%
• Capital Markets
– markets that trade de&t &onds% and euit'stock% instruments with maturities of more
than one 'ear
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Money Market Instruments
Outstanding$ %&&'()''* +,-n.
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Capital Market Instruments
Outstanding$ %&&'()''* +,-n.
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Foreign "#change Markets
• /F01 markets deal in trading one currency
for another +e2g2 dollar for yen.
• The /spot1 F0 transaction involves theimmediate e#change of currencies at the
current e#change rate
• The /forward1 F0 transaction involves thee#change of currencies at a specified date in
the future and at a specified e#change rate
• /F01 markets deal in trading one currency
for another +e2g2 dollar for yen.
• The /spot1 F0 transaction involves theimmediate e#change of currencies at the
current e#change rate
• The /forward1 F0 transaction involves thee#change of currencies at a specified date in
the future and at a specified e#change rate
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3erivative !ecurity Markets
• The markets in which derivative
securities trade2
• 3erivative !ecurity
– ,n a"reement &etween two #arties to e9chan"e
a standard uantit' of an asset at a
#redetermined #rice on a s#ecified date in thefuture!
• The markets in which derivative
securities trade2
• 3erivative !ecurity
– ,n a"reement &etween two #arties to e9chan"e
a standard uantit' of an asset at a
#redetermined #rice on a s#ecified date in thefuture!
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Overview of Financial Institutions
• Institutions that #erform the essential
function of channelin" funds from thosewith sur#lus funds to those with shorta"es
of funds e!"! &anks$ thrifts$ insurance
com#anies$ securities firms andinvestment &anks$ finance com#anies$
mutual funds$ #ension funds%
• Institutions that #erform the essential
function of channelin" funds from those
with sur#lus funds to those with shorta"es
of funds e!"! &anks$ thrifts$ insurance
com#anies$ securities firms andinvestment &anks$ finance com#anies$
mutual funds$ #ension funds%
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Flow of Funds in a World without FIs4
3irect Transfer
5sers of Funds+Corporations.
!uppliers ofFunds
+6ouseholds.
;inancial 0laims
+uit' and de&t
instruments%
0ash
"#ample4 , firm sells shares directl' to investors without
"oin" throu"h a financial institution!
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Flow of Funds in a world with FIs4
Indirect transfer
5sers of FundsFI
+-rokers.
FI
+7sset
transformers.
!uppliers of Funds
;inancial 0laims
+uit' and de&t securities%
;inancial 0laims
e#osits and insurance #olicies%
0ash 0ash
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• !ecurities firms and investment banks
– financial institutions that underwrite securities
and en"a"e in securities &rokera"e and tradin"
• Finance companies
– financial institutions that make loans to
individuals and &usinesses• Mutual Funds
– financial institutions that #ool financial
resources and invest in diversified #ortfolios
• ension Funds
– financial institutions that offer savin"s #lans for
retirement
• !ecurities firms and investment banks
– financial institutions that underwrite securities
and en"a"e in securities &rokera"e and tradin"• Finance companies
– financial institutions that make loans to
individuals and &usinesses• Mutual Funds
– financial institutions that #ool financial
resources and invest in diversified #ortfolios
• ension Funds
– financial institutions that offer savin"s #lans for
retirement
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!ervices erformed by Financial
Intermediaries
• Monitoring Costs
• 8i9uidity and rice :isk • Transaction Cost !ervices
• Maturity Intermediation
• 3enomination Intermediation
• Monitoring Costs
• 8i9uidity and rice :isk • Transaction Cost !ervices
• Maturity Intermediation
• 3enomination Intermediation
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!ervices rovided by FIs -enefiting the
Overall "conomy
• Money !upply Transmission
•Credit 7llocation
• Intergenerational Wealth Transfers
• ayment !ervices
• Money !upply Transmission
• Credit 7llocation
• Intergenerational Wealth Transfers
• ayment !ervices
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:isks Faced by Financial Institutions
• Interest :ate :isk
• Foreign "#change :isk
• Market :isk
• Credit :isk • 8i9uidity :isk
• Off(-alance(!heet :isk
• Technology :isk • Operational :isk
• Country or !overeign :isk
• Insolvency :isk
• Interest :ate :isk
• Foreign "#change :isk
• Market :isk
• Credit :isk • 8i9uidity :isk
• Off(-alance(!heet :isk
• Technology :isk
• Operational :isk
• Country or !overeign :isk
• Insolvency :isk
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:egulation of Financial Institutions
• FIs provide vital financial services to
all sectors of the economy; therefore$
their regulation is in the public interest
• In an attempt to prevent their failure
and the failure of financial marketsoverall
• FIs provide vital financial services to
all sectors of the economy; therefore$
their regulation is in the public interest
• In an attempt to prevent their failure
and the failure of financial marketsoverall
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or source of international capital
• or source of international capital
•
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Factors 8eading to !ignificant