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CHAPTER 1 An Overview of Financial Markets and Institutions
Basic components of the financial system: Markets and institutions. 2
All Economic units can be classified in to :
Thus the Budget positions of any economic unit can be : Surplus or deficit or balanced in a given budget period
Financial claims arise as SSUs lend to DSUs.
Method s of Financing 1. Direct Financing: The simplest way for funds to flow.
Direct Financing: efficient for large transactions if preferences match.
Common arrangements in direct finance. An important player in direct finance is investment bankers(firms that help the companies sell new debt or equity).
Investment banks services:
Once the financial claim is issued Brokers and dealers facilitates secondary market transactions.
Problem with direct financing: DSUs and SSUs cannot always match preferences.
2. Indirect Financing (“Financial Intermediation”):
Financial intermediaries transform claims
Comparative advantage of financial intermediaries
Intermediaries perform 5 basic services as they transform claims.
Intermediation Services, cont.
Benefits of financial intermediation are a primary rationale for the financial system.
4 Major types of financial intermediaries transform claims to meet various needs.
1. Depository Institutions take deposits and make loans.
1. 1 Commercial Banks
1. 2 Thrift Institutions
1. 3 Credit Unions: Unique Characteristics
2. Contractual Institutions bring long-term savers and borrowers together.
2. 1 Life Insurance Companies insure against lost income at death.
2. 2 Casualty Insurance Companies cover property against loss or damage.
2. 3 Pension Funds help workers plan for retirement.
3. Investment Funds : Help small investors share the benefits of large investments and provide them denomination flexibility and default risk intermediations.
4. “Other” Financial Institutions
Financial Markets are classified in several ways.
Primary and Secondary Markets
Organized and Over-the-Counter Markets
Spot and Futures Markets
Foreign Exchange Markets(FOREX)
International and Domestic Markets
Money and Capital Markets
Examples of Major Money Market Instruments
Examples of Major Capital Market Instruments
Efficiency in financial markets
Risks of Financial Institutions
Risks of Financial Institutions, cont.