FINANCIAL MARKETS AND INSTITUTIONS
CHAPTER-1: FUNCTIONS AND ROLES OF FINANCIAL SYSTEM IN GLOBAL ECONOMY
FINANCIAL SYSTEM
A financial system consists of
institutional units and markets that
interact, typically in a complex
manner, for the purpose of
mobilizing funds for investment, and
providing
facilities,
including
payment systems, for the financing
of commercial activity.
FINANCIAL SYSTEM
• Primary task is to move scare loanable funds from who save to those
who borrow.
• Financial System determines both the cost and the quality.
• Global financial system is an integral part of global economic system.
GLOBAL ECONOMIC SYSTEM
• An economic system is a means by which
societies or governments organize and distribute
available resources, services, and goods across
a geographic region or country. Economic
systems regulate the factors of production,
including land, capital, labor.
• The
global
economy
refers
to
the
interconnected worldwide economic activities
that take place between multiple countries. It
refers to the exchange of goods and services
between different countries, and it has also
helped countries to specialize in products which
they have a comparative advantage in.
MARKET
MARKET
• Market is an institution through which buyers and sellers meet to
exchange goods, services and productive resources.
• The exchange in the market determine the “What” goods and services
will be produced and in what “Quantity”.
• Balance demand and supply, thus determine the “Price” also.
MARKET
• Market is “dynamic”
• Competition is there
• Distribute income
TYPES OF MARKET
1. Factor Market
2. Product Market
3. Financial Market
THREE TYPES OF MARKETS IN THE GLOBAL
ECONOMIC SYSTEM
THE FINANCIAL MARKETS AND FINANCIAL SYSTEM:
SAVINGS AND INVESTMENT
• Financial
Market: Financial markets refer broadly to any marketplace
where the trading of securities occurs, including the stock market,
bond market, forex market, and derivatives market, among others.
Savings
Investment
NATURE OF SAVINGS
• Households : Savings= Income- (Consumption Expenditure+ Tax)
• Business Firms: Savings= Retained Earnings
• Government: Savings= Surplus Budget
NATURE OF INVESTMENT
• Household
• Business Firms
• Government
ECONOMIC FUNCTIONS PERFORMED BY THE GLOBAL
FINANCIAL SYSTEM AND THE FINANCIAL MARKETS
• Savings Functions
• Wealth functions
• Liquidity functions
• Credit Functions
• Payment Functions
• Risk protection Functions
• Policy functions
TYPES OF FINANCIAL MARKETS IN GLOBAL
FINANCIAL SYSTEM
• 1. The Money Market Vs. The Capital Market
• 2. Open Market Vs. Negotiated Market
• 3. Primary Market Vs. Secondary Market
• 4. Spot Vs. Future, Forward and Option Market
TYPES OF FINANCIAL MARKETS IN GLOBAL
FINANCIAL SYSTEM
•
•
1. The Money Market Vs. The Capital Market
•
Capital Market: Capital market is a market where buyers and sellers engage in
trade of financial securities like bonds, stocks, etc. The buying/selling is undertaken
by participants such as individuals and institutions.
Money Market: Definition: Money market basically refers to a section of the financial
market where financial instruments with high liquidity and short-term maturities are
traded.
TYPES OF FINANCIAL MARKETS IN GLOBAL
FINANCIAL SYSTEM
• 2. Open Market Vs. Negotiated Market
• Open Market: Open Market an unrestricted market with free access by and
competition of buyers and sellers.
• Negotiated
Market: A negotiated market is a type of market in which the
prices of each security are bargained out between buyers and sellers.
TYPES OF FINANCIAL MARKETS IN GLOBAL
FINANCIAL SYSTEM
•
3. Primary Market Vs. Secondary Market
•
Primary Market: The primary market is where securities are created. It's in
this market that firms sell (float) new stocks and bonds to the public for the first time.
An initial public offering, or IPO, is an example of a primary market.
•
Secondary Market: This is the market wherein the trading of securities is
done. Secondary market consists of both equity as well as debt markets.
TYPES OF FINANCIAL MARKETS IN GLOBAL
FINANCIAL SYSTEM (1)
• 4. Spot Vs. Future, Forward and Option Market
• Spot Market: A spot market is where financial instruments are exchanged for
immediate delivery, such as commodities, currencies, and securities. Delivery,
here, means cash exchange for a financial tool.
• Forward Market: A forward market is a contract entered into between a
buyer and seller for future delivery of stock or currency or commodity.
TYPES OF FINANCIAL MARKETS IN GLOBAL
FINANCIAL SYSTEM (2)
•
•
4. Spot Vs. Future, Forward and Option Market
Future Market: A futures market is an auction market in which participants buy and
sell commodity and futures contracts for delivery on a specified future date. Futures
are exchange-traded derivatives contracts that lock in future delivery of a commodity
or security at a price set today. it comes under regulated organizations in which
members alone are permitted to transact. The futures market will have its own rules
and regulations and will also fix the minimum value for each transaction.
TYPES OF FINANCIAL MARKETS IN GLOBAL
FINANCIAL SYSTEM (3)
• 4. Spot Vs. Future, Forward and Option Market
• Option Market: Option is a contract which conveys
its owner, the holder, the
right, but not the obligation, to buy or sell an underlying asset or instrument at
a specified strike price prior to or on a specified date, depending on the form
of the option.
Call
Option
Put
Option