OSU BA 441 - Chapter 1 - Financial Intermediaries

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Financial Markets and Institutions – BA 441Chapter 1 – IntroductionSlide 3Slide 4Slide 5Slide 6Slide 7Slide 8Financial Markets and Institutions – BA 441Monday and Wednesday -- Bexell 32010:00 to 11:50 p.m.Chapter 1 – IntroductionDefinition of MarketsWhere an economic transaction takes placeExample: Car PurchaseExample: Swap (Bond swap from fixed to floating rate)Types of MarketsProduct FactorLaborCapital (Financial Markets)Course Focus -- Financial MarketsChapter 1 – IntroductionAssets – something that has value to the ownerTypesReal (tangible – physical attributes)Financial (intangible – claim to future cash)Financial Asset PlayersIssuerInvestorValue of AssetsPrice – arm’s length transaction between buyer and sellerPresent value of future cash flow (financial asset)Chapter 1 – IntroductionFinancial Markets and RiskExpected Cash FlowThe future cash flow is not always guaranteedRisk is the uncertainty about the future cash flowRisk -- TypesPurchasing Power Risk – InflationCredit Risk – Probability of DefaultForeign Exchange Risk – Currency ChangesChapter 1 – IntroductionRole of Financial AssetsTransfer funds from those with “excess” (investors) to those with “needs” or “opportunities” (issuers or borrowers)Issuers use funds to invest in tangible assetsThis is the end of the transfer processPotential for many intermediate steps before funds are used to purchase tangible assetsTransfer riskSome players (agents) can handle more risk and the “risk-averse” players can transfer some risk to the “risk-takers” – example insuranceChapter 1 – IntroductionFinancial MarketsWhere Financial Assets are Bought and SoldSome are physical some are notFunction of Financial MarketsPrice Discovery (set returns)LiquidityReduction of search and information costsTypes or Classifications (See Table 1-1, page 6)Money and Capital (time horizon)Primary and SecondaryCash or DerivativeChapter 1 – IntroductionClassification of Global MarketsInternal marketsDomestic or national market – issuer is “citizen” of the countryForeign market – issuer is “citizen” of a foreign countryRules for issue are controlled by country where financial assets are soldForeign market namesYankee (U.S.A.)Samurai (Japan) Bulldog (England)Rembrandt (Netherlands)Matador (Spain)External MarketsIssued outside the jurisdiction of a single country simultaneously in multiple countriesOffshore or EuromarketChapter 1 – IntroductionDerivative MarketsFinancial Assets that derive their value based on some specific underlying asset (real or financial)Forward ContractsFutures ContractsTraded on organized financial marketOptions ContractsCalls – right but not the obligation to buyPuts – right but not the obligation to


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OSU BA 441 - Chapter 1 - Financial Intermediaries

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