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EGEE3313 Economics OF Financial Markets

The document discusses the key elements of a financial system including money, financial instruments, financial markets, financial institutions, and a central bank. It describes how financial markets allow net savers and net borrowers to interact through direct finance in financial markets or indirect finance through financial intermediaries. The main types of financial markets are the bond market, stock market, foreign exchange market, and derivatives market. A financial system helps with risk sharing, lowering transaction costs, liquidating financial instruments, and disseminating information.

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Ng Wc
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65 views

EGEE3313 Economics OF Financial Markets

The document discusses the key elements of a financial system including money, financial instruments, financial markets, financial institutions, and a central bank. It describes how financial markets allow net savers and net borrowers to interact through direct finance in financial markets or indirect finance through financial intermediaries. The main types of financial markets are the bond market, stock market, foreign exchange market, and derivatives market. A financial system helps with risk sharing, lowering transaction costs, liquidating financial instruments, and disseminating information.

Uploaded by

Ng Wc
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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EGEE3313 ECONOMICS OF FINANCIAL MARKETS

I. INTRODUCTION
What is a Financial Systems? It contains 5 important elements: 1. Money 2. Financial instruments 3. Financial markets 4. Financial institutions 5. Central bank

Form and Operation of typical Financial System (refer to the diagram ) - Net Savers and Net Borrowers. - Financial market (Direct finance) - Financial intermediaries (Indirect finance) - Cash flow & Financial instruments flow. Types of Financial Markets i. Bond market ii. Stock market iii. Forex market iv. Derivatives market

The Financial System


Financial Intermediaries
In-direct Finance

Net Savers
- Household - Firms - Government - Foreign Sector

Net Borrowers
- Household - Firms - Government - Foreign Sector

Direct Finance

Financial Market
- Stock Market - Bond Market - Forex Market - Derivative Market
Flow of Fin. Instr.

Flow of Funds

Functions of a Financial Systems


i. Risk sharing. ii. Lowering the transaction cost. iii. To liquidate the financial instruments. iv. Disseminate information. Every asset when purchase contain 4 attributes: i. Return/yield. ii. Risk. iii. Liquidity. iv. Time pattern of the return. All participants in financial markets will have their own preference on those attributes!

THE STRUCTURE OF FINANCIAL MARKET

The financial markets is normally divided into 4 categories: i. Debt market vs Equity market ii. Primary market vs Secondary market iii. Exchange market vs OTC market iv. Money market vs capital market

1. Debt and Equity Market - Debt market refer to the issuing of debt instruments by fund demanders (Firms), ie. bond or mortgages. - Equity market refer to issuing of equity instrument by firms, ie. stock/share of the firm. - The classification of debt instruments depends on its maturity: a) short term (maturity <1 year) b) intermediate term (maturity 1-10 years) c) long term (maturity >10 years) - By differentiating these instruments by its maturity enable the instrument to be classified either into the money market instrument or into the capital market instrument.

2. Primary market and secondary market - Primary market issue new securities into the market. It can be a newly issues bond or share. - Secondary market refer to the market that trading the previously issued securities. - Transaction of shares in BURSA MALAYSIA, NYSE, NASDAQ, FT100, HANG SENG is done through brokers & dealers are the example of transaction on secondary market. - Should be noted that transaction conducted in secondary market doesn't affected the amount of fund already generated in the market.

Functions of secondary market: i. Facilitating buying and selling of financial instruments. ii. To liquidate the financial instruments. iii. Serve as an indicator whether there is a demand or not for a company to raise a fund through issuing a share. iv. As a pricing guide to the new security that is about to be issued into the market.

3. Exchange market and the OTC market - Exchange market is the organised market that form the transactions under one roof at fixed location (ie Bursa Malaysia, NYSE). - OTC market is where a dealers at different location that have an inventory of certain shares that wanted to sell to buyers at certain prices. - Or it could be done over the counter of a particular bank or financial institutions. - Transactions are normally done through on-line (ie at KLOFF and NASDAQ).

4. Money and Capital Market - Money market traded the SR debt instruments. - Capital market traded the medium to LR debt instruments. - Money market instruments normally have less risk due to the minimal price fluctuation. (Proffered by a commercial banks and corporations). - Capital market instruments are much riskier than money market instruments. (Normally preferred by financial intermediaries such as EPF and insurance companies).

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