Chapter 3 Financial Markets and Raising Financial Capital

Chapter 3 Financial Markets and Raising Financial Capital Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458

Objectives § § § § § The Role of the Financial Markets The Role of Financial Intermediaries Subcomponents of the Financial Market Examples of Major Financial Markets How Trading Takes Place in the Stock and Bond Markets Interpreting Financial Information on Stock and Bond Trading Financial Intermediaries and Their Role in Hospitality Financing International Hospitality Firms and the Foreign Exchange Markets Price Risk and the Commodity Futures Markets Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458

Real Assets Versus Financial Assets n n Real assets are actual physical assets, such as buildings, land, equipment, and commodities Financial assets are claims against real assets Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458

n n Role of the Financial Markets – to facilitate the efficient transfer of financial resources Role of Financial Intermediaries–to facilitate the efficient transfer of financial resources (within or between markets) by bringing together suppliers and users of funds in the marketplace Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458

n The Capital Market–the market where financial securities having a maturity of a year or longer trade or are issued n Stock Market n Bond Market n Mortgage Market Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458

Financial Intermediaries in Hospitality Financing n Commercial Banks n Life Insurance Companies n Brokerage Firms n Pension Funds n Mutual Funds n Small Business Administration n Foreign Investment Funds Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry Financial Markets and Intermediaries(4: 34) http: //www. youtube. com/watch? v=5 l. Ol. Jr. NGNjo © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458

Foreign Exchange Markets n n Can be used to hedge foreign exchange risk Hedging in the foreign exchange markets thus becomes very important for hospitality firms with significant international operations. Without large and well-developed foreign exchange markets, this would be very difficult Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458

Price Risk and Commodity Futures Markets n n Various food products trade in these markets, including various grains, livestock and meat, coffee, sugar, and orange juice Contracts in the futures market are for large quantities of foodstuffs Needs a reasonable expectation of its future need for the particular foodstuff A hospitality firm does not have to take actual delivery of the contracted food product to have hedged its price Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458

Summary § The financial markets are different from the real asset markets in that financial assets represent claims against real assets and the cash flows that the assets generate. § Financial intermediaries such as banks, insurance companies, pension funds, and mutual funds facilitate the transfer of resources within the financial markets. § Commodity markets are useful for hospitality firms wishing to hedge the price of food products. § Foreign exchange markets are useful for hospitality firms with international operations that want to hedge the foreign currency risk that such operations entail. Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry © 2007 Pearson Education, Inc. Upper Saddle River, NJ 07458