Week 8 notes

Topic 8: The Australian Financial Markets

- What are financial Markets
 Complex of institutions, procedures & arrangements that facilitate a transfer of funds
from 1 entity in economy to another
 Typical transaction in financial market involves 1 party, investor, transferring funds to
another party, net user of funds. & in exchange receiving a financial asset that entitles
the investor to receive some cash flows in the future
 ‘Financial markets’ gen term describes sub markets
- 3 Players in financial markets
 Borrowers (inds & buses)
 Savers (mostly inds)
 Financial intermediaries (e.g. commercial banks)
o Institution assists transfer of savings from economic units w/ excess savings to
those w/ shortage of savings. Intermediary between saver/borrower
- Why would economy suffer w/out developed financial system
 Wealth of economy would be less w/out financial markets. Rate of capital formation
would not be as high if financial markets didn’t exist.
- Types of Assets
 Real Assets
o Tangible assets; houses, equipment. inventory
 Financial Assets
o Represents claims for future payments (shares, debentures, bills, notes)
o Owners anticipate earning a future rate of return


 Financial Intermediaries
o Offer own financial claims (indirect securities), to economic units w/ excess
savings/ When financial intermediaries sell financial claims, they are effectively
borrowing money, as they receive money from investors in exchange for promise
to pay back in future w/ some interest payments
o Proceeds from selling their indirect securities then used purchase financial claims
of – or invest in – other economic units (latter claims; direct securities)
o Bank might sell fixed term deposits (IS) & purchase debentures (DS) of some
major companies.
o IS: small denominations, large volumes & short maturity, whereas direct securities
are larger denominations & smaller volumes & of longer maturity
- What do financial intermediaries do?
 Expert advice / expertise in channelling funds / transmitting payments
 Asset / Maturity / Risk Transformation
 Financial Intermediaries
o Facilitate movement of money from savers to borrowers:
 Commercial & investment banks
 Non-bank authorised deposit-taking institutions
  Insurance & investment companies
 Superannuation funds
 Private Equity firms
Commercial banks
 Authorised by Australian Prudential Regulation Authority (APRA) to take deposits from
public. CB; e.g. ANZ, CBA, NAB, WESTPAC
 Collect savings of inds & buses & lend pooled savings to other inds & buses. Earn
money by charging rate of interest to borrowers that exceeds rate pay to savers
Non-bank authorised deposit-taking institutions
 Building societies (e.g. Newcastle Permanent BS) & credit unions (Police CU); mutual orgs
owned by their members, taking deposits, & providing mortgage & personal loans
 ADIs: Approved Deposit-Taking Institutions. Authorised by APRA
 Unlisted not-for-profit orgs
 Since deregulation of financial system in Aus 1983, building societies sector contracted
significantly
Investment Banks
 Specialised FI help companies & gov raise money & provide advisory services to client
firms
 Major source of revenue is fees for financial services rendered E.g.
Bank of America Merrill Lynch Australia & Macquarie Group
Insurance Companies
 Sell insurance to inds & buses to protect their investments
 Collect premiums & hold premiums in reserve until there is insured loss, then pay out
claims to holders of insurance contracts. E.g. GIO & AAMI
Superannuation Funds
 Designed to provide funds for retirement through gov taxation incentives & compulsory
contributions by employers on behalf of their employees. By law most AUS employer’s
obligation contribute min 9% of employee’s income to super funds. (Superannuation
Guarantee SG)
 Employees can choose make additional contributions. Long-term as ind don’t have
access to money until reach preservation age.
 Due to regular contributions, super funds have large amount money invested in bond &
share markets, domestic & internationally
 Exception exists for inds, who have defined benefit fund
Investment Companies
 Pool savings of inds & invest money, purely for investment purposes, in securities issued
by other companies
 Managed fund (inds can invest virtually all of securities offered in financial markets
 When inds invest in MF, receive shares in fund that’s professionally managed according
to statement investment objective or goal
MF
o Listed or unlisted
o Unlisted managed funds; investments made by buying ‘units’ in fund at net asset
value (NAV) – unlisted (open or closed) no* units closed fixed/open add
o MF listed on stock exchange ETPs (Exchange-traded products), gen closed.
o Significant components of ETPs referred to ETFs (Exchange-traded funds)
o MF & ETFS provide cost-effective way diversify & reduce risk
Hedge Funds
o Less regulated & take more risk
o Open to limited range wealthy investors
 o Management fees typically higher than other managed funds w/ most funds.
Incentive fee (typically 20% of profits) based on fund’s overall performance
Private Equity Firms
 Invest in equities not traded on public capital markets (Prvt companies)
 2 types: Venture Capital Firms & Bus angels
 Mvmt funds (direct transfer funds & indirct transfer using either commercial banks or
other financial intermediaries)
- Companies of Australian Financial Markets
 Type of financial asset being traded
 Maturity of financial asset
 Way in which financial assets created
- Stock Market
 Public market company shares traded.
 Organised Security Exchanges
o Orgs provided for buying & selling of securities
 Over-the-counter-market
o Network dealers trade securities directly between 2 parties
Bond Market
 Firms borrow money by selling debt securities in debt market. If debt must be repaid in
less than year, these securities typically called notes.
 Debt longer than yr called bond
Foreign-exchange markets
 Mechanism for transfer of purchasing power from 1 currency to another by facilitating
exchange of currencies.
 Not physical entity
 Very efficient
 2 type transactions; spot, forward
Derivatives markets
 Financial instruments derived from or based on value underlying asset. (Future, options,
swaps)
 Future: where future contracts traded, legally binding
 Options: agreement gives holder right to buy or sell specified commodity or financial
instrument on or before specified date. (Call – right buy asset / put – right sell option)
 Swaps
Money Markets
- Short
Capital Markets
- Long
Public offerings & private placements

Primary & Secondary Markets

ASX