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 – IntroductionDefinition of MarketsWhere an economic transaction takes placeExample: Car PurchaseExample: Swap (Bond swap from fixed to floating rate)Types of MarketsProduct FactorLaborCapital (Financial Markets)Course Focus -- Financial MarketsChapter 1 – IntroductionAssets – something that has value to the ownerTypesReal (tangible – physical attributes)Financial (intangible – claim to future cash)Financial Asset PlayersIssuerInvestorValue of AssetsPrice – arm’s length transaction between buyer and sellerPresent value of future cash flow (financial asset)Chapter 1 – IntroductionFinancial Markets and RiskExpected Cash FlowThe future cash flow is not always guaranteedRisk is the uncertainty about the future cash flowRisk -- TypesPurchasing Power Risk – InflationCredit Risk – Probability of DefaultForeign Exchange Risk – Currency ChangesChapter 1 – IntroductionRole of Financial AssetsTransfer funds from those with “excess” (investors) to those with “needs” or “opportunities” (issuers or borrowers)Issuers use funds to invest in tangible assetsThis is the end of the transfer processPotential for many intermediate steps before funds are used to purchase tangible assetsTransfer riskSome players (agents) can handle more risk and the “risk-averse” players can transfer some risk to the “risk-takers” – example insuranceChapter 1 – IntroductionFinancial MarketsWhere Financial Assets are Bought and SoldSome are physical some are notFunction of Financial MarketsPrice Discovery (set returns)LiquidityReduction of search and information costsTypes or Classifications (See Table 1-1, page 6)Money and Capital (time horizon)Primary and SecondaryCash or DerivativeChapter 1 – IntroductionClassification of Global MarketsInternal marketsDomestic or national market – issuer is “citizen” of the countryForeign market – issuer is “citizen” of a foreign countryRules for issue are controlled by country where financial assets are soldForeign market namesYankee (U.S.A.)Samurai (Japan) Bulldog (England)Rembrandt (Netherlands)Matador (Spain)External MarketsIssued outside the jurisdiction of a single country simultaneously in multiple countriesOffshore or EuromarketChapter 1 – IntroductionDerivative MarketsFinancial Assets that derive their value based on some specific underlying asset (real or financial)Forward ContractsFutures ContractsTraded on organized financial marketOptions ContractsCalls – right but not the obligation to buyPuts – right but not the obligation to
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