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8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
1/13
AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 1
Fall 2 13ADVANCED FINANCIAL INSTRUMENTS AND MARKETS
LectureNo.01
Government
Hammad Hassan MirzaAssistantProfessor(Finance)
DepartmentofBusinessAdministration
UniversityofSargodha
Simultaneously Philosophical and Practicalunderpinnings
Banking, Insurance, Securities, Derivatives, Financial
CourseIntroduction
.
International Bias but will try best to relate.
Course is more theoretical but cannot avoidmathematics/statistics completely.
Problem Sets/case studies/Quiz etc.
2PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
Onsuccessfulcompletionofthismodule,youareexpectedto:
1. Gainsomeknowledgeofthemainfunctionsoffinancialmarketsandinstitutions
CourseObjectives
.
capitalmarkets
and
Instruments
of
Risk
Management
3. Understandthenatureoffinancialinstrumentsandthereasonsforinnovatingsuchinstruments
4 . Beawareoftherelevantempiricalcapitalmarketsresearch
5. Becomefamiliarwiththekeyresearchmethodsusedinthefinancialmarketsliterature
3PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 2
Lecturefordisseminatingkeyconcepts
Discussionon racticalissues
TeachingMethodology
AssignmentsandPresentations/Projects
Quiz/CaseStudies
4PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
IndividualClassPresentations/Projects
RegularClassPresentations/Participation(7%)20%
Evaluation
TermPaper/Assignment(8%)ClassQuiz/CaseStudies(5%)MidTermTest (45Minutes) 20%
FinalExamination(2hours) 60%
100%
5PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
1. Fabozzi, Frank J., Franco Modigliani, Frank J. Jones, and Michael G.Ferri.Foundations of Financial Markets and Institutions, 4th ed. PrenticeHall, 2010.
2. FS Mishkin, SG Eakins. Financial Markets and Institutions 5th Edition.PearsonPublications
RecommendedText
3. John C. Hull,Options, Futures and Other Derivatives, 6 t Edition, PrenticeHall.
4. Frank J. Fabozzi:Bond Market Analysis and Strategies, Prentice Hall.
5. Szymon Borak Wolfgang Karl Hrdle Brenda Lpez Cabrera,Statistics ofFinancial Markets, Springer Heidelberg Dordrecht LondonNew York
6. Robert Dubil,An Arbitrage Guide to Financial Markets,2004 , John Wiley &SonsLtd
7. RelevantResearch Articles (Downloadable from www.financecottage.com)
6PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 3
1. FinancialInstitutionsandRoleofGovt.
2. RiskandFinancialcrisis
3. TechnologyandInventioninFinance
CourseContents(MidTerm)
4. PortfolioDiversificationandSupportingFinancialInst.
5. DeterminantsofAssetPricesandInterestRates
6. OrganizationandStructureofMarkets
7. MarketforGovernmentandCorporateSecurities
8. MortgageandSecuritizedAssetMarkets
9. MarketDerivativeSecurities7
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
1. CollateralPresentValueandVocabularyofFinance
2. MechanicsofFutureMarkets
3. HedgingStrategiesusingfutures
CourseContents(FinalTerm)
4. InterestratesandDeterminantsofForwardandFutureprices
5. MechanicsofOptionMarkets
6. Insurance:ThearchetypicalRiskManagementInstitution
7. FinancialInstrumentsandMajorWorldFinancialCrisis
8PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
TodaysSession
9PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 4
Why Finance
WallStreetCrash1 2
SessionI
JapaneseAssetPriceBubble
AsianFinancialCrisis
ImportanceofFinancialMarkets
BasicFinancialInstruments
10PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
The Wall Street Crash of 1929, also known astheBlack Tuesday and theStock Market Crash of1929, began in late October 1929 and was the mostdevastating stock market crash in the history ofthe United States, when taking into consideration
WallStreetCrashof1929
the full extent and duration of its fallout. The crashsignaled the beginning of the 10year GreatDepression that affected all Western industrializedcountriesand did not end in the United States untilthe onset of American mobilization for World WarII at the end of 1941. 15 million people hadunemployment coming to them after the bankscrashed.
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
11
The Japanese asset price bubble was an economicbubble in Japan from 1986 to 1991, in which real
'
Japaneseassetpricebubble1986
.
subsequent collapse lasted for more than a decade withstock prices initially bottoming in 2003, although they woulddescend even further amidst the global crisis in 2008. TheJapanese asset price bubble contributed to what some referto as the Lost Decade. Some economists, such as PaulKrugman, have argued that Japan fell into a liquiditytrap during these years.
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 5
The Asian financial crisis was a period of financialcrisis that gripped much of Asia beginning in July1997, and raised fears of a worldwide economic
AsianFinancialCrisis1997
meltdown due to financial contagion. The crisisstarted in Thailand with the financial collapse ofthe Thai baht after the Thai government was forcedto float the baht (due to lack of foreign currency tosupport its fixed exchange rate), cutting its peg tothe U.S. dollar, after exhaustive efforts to support itin the face of a severe financial overextension thatwas in part real estate driven.
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
13
The U.S.subprime mortgage crisis was a set of events andconditions that led to the late2000s financial crisis,
USSubprimeMortgage
characterized by a rise in subprime mortgagedelinquencies and foreclosures, and the resulting declineof securities backed by said mortgages. Several majorfinancial institutions collapsed in September 2008, withsignificant disruption in the flow of credit to businessesand consumers and the onset of a severe global recession.
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
14
Financial markets, such as bond and stock markets, arecrucial in our economy.
These markets channel funds from savers to investors,
ImportanceofFinancialMarkets
thereby promoting economic efficiency. Market activity affects personal wealth, the behavior of
business firms, and economy as a whole
Debt markets, or bond markets, allow governments,corporations, and individuals to borrow to financeactivities.
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 6
The stock market is the market where common stock(or just stock), representing ownership in a company,are traded.
Companies initially sell stock (in the primary market)
ImportanceofFinancialMarkets
to raise money. But after that, the stock is tradedamong investors (secondary market).
The foreign exchange market is where internationalcurrencies trade and exchange rates are set.
Although most people know little about this market,it has a daily volume around $1 trillion!
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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PakistanMarketIndicators20072013
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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1. PKR/USD2. KSE100Index3. InterestRate(SBOP)4. InflationRate5. PakGovt.BondYeild
DesignofFinancialMarkets
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
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HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 7
I tsyourTurn..
BasicFinancialInstruments
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
19
Introduction
FinancialAssets
FinancialMarkets
SessionII
GlobalizationandFinancialMarkets
DerivativeMarkets
RoleofFinancialIntermediaries
OverviewofAsset/LiabilityManagement forFIs
RoleofGovernment
20PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
ProductVSFactorMarket
FinancialMarketandFinancialAssets
FinancialAssets,FinancialInstruments,Securities
Introduction
DebtVS
Equity
Instruments
PricingPrinciplesofFinancialAssets
RoleofFinancialAsset
TransferofFundsfromSurplustoDeficitunits
Redistributionofunavoidablerisk
21PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 8
RoleofFinancialMarkets
PriceDiscoveryProcess
OfferingLiquidity
FinancialMarkets
ReductionofSearch/InformationCost
ClassificationofFinancialMarkets
PrimaryVsSecondary(Seasoningof Claim)
MoneyVsCapital(Maturity)
DebtVsEquity(NatureofClaim)
CashVsDerivative(Delivery/SettlementofClaim)
OrganizedVsOTC(Structure)22
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
The factorsthathaveledtotheintegrationofFinancialMarkets
GlobalizationofFinancialMarkets
Deregulation/Liberalization
TechnologicalAdvancesformonitoring/executing.
IncreasedInstitutionalizationofFinancialMarkets
23PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
FunctionsperformedbyFinancialInstitutions
FinancialIntermediation
FinancialInstitutions
Exchangeof
financial
assets
on
behalf
of
customers
Exchangeoffinancialassetsontheirownaccount
Assistingincreationoffinancialassets
Providinginvestmentadvice
Managementofportfolios
24PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 9
CommercialBanks
Savin andloanassociation
FinancialIntermediaries
SavingBanks
Insurancecompanies
Pensionfunds
CaptiveFinanceCompanies??
25PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
DirectandIndirectInvestments
Maturit Intermediation
RoleofFinancialIntermediaries
RiskDiversification
CostReduction
PaymentMechanism
26PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
NatureofLiabilities
Theamountandtimingofthecashoutlaysthatmustbemadetosatisfythecontractualtermsoftheobligationissued Li uidit Concerns
AssetLiabilityManagementofFinancialInstitutions
.
TYPEOFLIABILITY AMOUNT
OF
CASH
OUTLAYTIMING
OF
CASH
OUTLAY
Type I Known Known
Type II Known Uncertain
Type III Uncertain Known
Type IV U nc ert ain U nce rt ai n
27PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
13:49
HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 10
PrimaryAssetsandLiabilitiesofFIs
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
28
StopMarketFailure?
MainReasonsforRegulation1. IncreaseInformation toInvestors
Decreasesadverseselectionandmoralhazardproblems
RoleofGovernmentinFinancialMarkets
SECforcescorporationstodiscloseinformation
2. EnsuringtheSoundnessofFinancial Intermediaries Preventsfinancialpanics
Chartering,reportingrequirements,restrictionsonassetsandactivities,depositinsurance,andanticompetitivemeasures
3. ImprovingMonetaryControl Reserverequirements
29PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
Toprotectthepublicandtheeconomyfromfinancialpanics,thegovernmenthasimplementedsixtypesofregulations:
RestrictionsonEntry
RegulationReason:EnsureSoundnessofFinancialIntermediaries(cont.)
Disclosure
RestrictionsonAssetsandActivities
DepositInsurance
LimitsonCompetition
RestrictionsonInterestRates
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
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HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 11
RestrictionsonEntryRegulatorshavecreatedverytightregulationsastowho
isallowedtosetupafinancialintermediary
Regulation:RestrictiononEntry
financialintermediary,suchasabankoraninsurancecompany,mustobtainacharterfromthestateorthefederalgovernment
Onlyiftheyareupstandingcitizenswithimpeccablecredentialsandalargeamountofinitialfundswilltheybegivenacharter.
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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DisclosureRequirements
Therearestringentreportingrequirementsfor
Regulation:Disclosure
Theirbookkeepingmustfollowcertainstrictprinciples,
Theirbooksaresubjecttoperiodicinspection,
Theymustmakecertaininformationavailabletothepublic.
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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Restrictionsontheactivitiesandassetsofintermediarieshelpstoensuredepositorsthattheirfundsaresafeandthatthebankorotherfinancialintermediarywillbeableto
Regulation:RestrictiononAssetsandActivities
.
Intermediaryare
restricted
from
certain
risky
activities
And fromholdingcertainriskyassets,oratleastfromholdingagreaterquantityoftheseriskyassetsthanisprudent
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
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HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 12
The government can insure people depositors to afinancial intermediary from any financial loss if the
Regulation:DepositInsurance
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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Althoughtheevidencethatunbridledcompetitionamongfinancialintermediariespromotesfailuresthat
Regulation:LimitsonCompetition
w arm epu c sex reme ywea , asno stoppedthestateandfederalgovernmentsfromimposingmanyrestrictiveregulations
Inthepast,bankswerenotallowedtoopenupbranchesinotherstates,andinsomestatesbankswererestrictedfromopeningadditionallocations
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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Competition has also been inhibited by regulations thatimpose restrictions on interest rates that can be paid ondeposits
Regulation:RestrictionsonInterestRates
widespread belief that unrestricted interestrate
competition helped encourage bank failures during theGreat Depression
Later evidence does not seem to support this view, andrestrictions on interest rates have been abolished
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8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf
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AdvanceFinancialInstrumentsandMarketsLec#01
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HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 13
Because banks play a very important role in determining thesupply of money (which in turn affects many aspects of theeconomy), much regulation of these financial intermediariesis intended to improve control over the money supply
RegulationReason:ImproveMonetaryControl
One such regulation isreserve requirements,which make itobligatory for all depository institutions to keep a certainfraction of their deposits in accounts with the FederalReserve System (the Fed), the central bank in the UnitedStates
Reserve requirements help the Fed exercise more precisecontrol over the money supply
PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
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ThankYou!
38PropertyofDepartmentofBusinessAdministration,UniversityofSargodha