Amaro, Trixie M.

(A and B)
Dela Paz, Dylan Frances F. (C and D)
Dionisio, Chelou Rylie O. (H, I and J)
Zabala, Jensen Angel C. (E, F and G)

Integrated Case
HIJ FINANCIAL SERVICES CORPORATION

2-11 Financial Markets and Institutions

Hayley, Irene, and Jimmy recently graduated with a degree in finance and were trying to
find jobs. They applied for jobs offered by the HIJ Financial Services Corporation but are
interested in working in different institutions: a commercial bank, an investment bank,
and a specialized fund, respectively. In their job interviews, the interviewers asked them
the following questions. Please help them answer these questions.

All three were asked:

A. Differentiate between the following types of markets: physical asset markets

versus financial asset markets, spot markets versus futures markets, money
markets versus capital markets, primary markets versus secondary markets, and
public markets versus private markets.

1. Physical asset markets vs. financial asset markets

- Physical asset markets has a distinctive physical presence, it is visible and

tangible. When an entity liquidates its interest, it is referred to as “Physical
assets”. Physical assets can be sold when they reach the end of their useful
economic life. And physical asset markets are for products that has a physical
substance such as cars, real estate, computers, machineries, and etc. While
financial asset markets deal with financial securities which means that they
cannot be seen or felt. It is essential to keep in mind that the documents and
certificates that represent theses financial assets such as stocks, bonds,
mortgage, derivative and etc. does not possess any intrinsic value, since it’s just
a document certifying ownership and does not have any value.

2. Spot markets vs. future markets

- Spot market is a type of financial market in which securities such as stocks,

currencies and commodities are bought and sold for immediate delivery. It
contrasts with the future market where delivery occurs at a later date, spot
markets will operate wherever there is infrastructure that enables the transaction.
And spot market prices are the current prices of the asset. On the other hand,
 future market contracts for futures and derivatives that can be traded on the
exchange and guarantee a certain price for the delivery of a security or
commodity in the future. And it is where the participants buy and sell commodity
and future contracts for delivery on a specific future date in an auction market.

3. Money markets vs. capital markets

- Money market basically refers to a position of the financial market where short-
term maturities and high liquidity financial instruments are traded. The treasury
bills and commercial papers, among other securities with short-term maturities of
one year or less, are now traded on the money market as part of the financial
market. On the contrary, the capital market is a coordinated market where the
two people and business elements trade obligation, protections and value
protections. This market is a critical wellspring of assets for a substance whose
protections are allowed by an administrative position to be exchanged since it
can promptly offer its obligation commitments and value to financial markets.

4. Primary markets vs secondary markets

- Primary market’s primary function is to facilitate capital raising for businesses,

governments, and others by using new securities on an exchange. The first time
securities are sold directly from the issuer. In order to raise capital, brand new-
securities are offered for the first time for sale in the primary market. While
secondary markets can also be an auction business. A dealer market or a stock
exchange, more commonly referred to as an “over-the-counter” exchange, can
server as the secondary market for bonds. Secondary market does not provide
any kind of financing. And the price level varies with variations in demand and
supply.

5. Public markets vs. private markets

- Public markets are monetary business sectors where ventures are exchanged on
trades and effortlessly put resources into the market by the general population.
Bonds, mutual funds, exchange-traded funds, and company stocks are all
examples of traditional asset classes. Companies go to public markets to get
money from a lot of investors and give private investors a chance to make money
and their initial investment. On the other hand, private markets allows buyers and
sellers to trade assets through desired negotiation with one another rather than
through an intermediary. Investment managers and their client benefits from
private markets as well as companies, including start-ups looking to expand, can
benefit from private investments ability to provide crucial capital.

B. Differentiate between commercial and investment banks.

Investment banks vs commercial banks

 - Investment banks frequently raise capital by offering securities such as stocks
and bonds for sale. Among other things, investment banking comprises advising
on mergers and acquisitions and underwriting new securities offering.
Commercial banks, on the other hand, employ consumer deposits to finance
loans and mortgages, and the bank makes money from the interest on those
loans. Additionally, taking deposits and disbursing loans are the main aspects of
commercial banking.

HAYLEY WAS ASKED (C AND D)

C. What are the three primary ways in which capital is transferred between savers
and borrowers?

-Transfers of capital can be made by:

Direct transfer of money and security

Without using any kind of institution, a corporation offers its stacks or bonds
directly to investors or savers. Moneys are given to the business borrower by the
investors or savers and in exchange, the savers obtain securities ( bonds or
shares )

Investment banks

It acts as a middleman. The company sells its securities to an investment bank,

which then sells them to investors. In the main market, despite the fact that the
securities are sold twice, the two sales together make up the whole transaction.

Financial intermediary

Savings are invested with a financial intermediary, which then issues its own
securities in return. Banks are one form of middleman, taking money from
numerous small savers and lending it to borrowers like enterprises and
governmental entities. Other categories of intermediaries include mutual fund,
insurance providers and pension funds.

D. What is securitization? Is it important for a bank?

- Securitization, in the context of banking, is the process of transferring a pool of

loans into units of secured marketable securities and selling the pooled loans to
investors to satisfy bank’s demand for capital. The process of securitizing
involves combining several income – generating assets into a single investable
 security. The interest and principal payments from those securitized assets go to
the investors. Liquidity and credit availability are improved by securitization.

- Securitization’s advantages for a bank can utilize their money more effectively by
lowering their risk and debt loads. Collateralized debt obligations (CDOS) are the
securitized products produced by pooling the debt. For debt instruments, the
securitization process increases available liquidity.

IRENE WAS ASKED (E, F AND G)

E. What are the two leading markets in the United States? How much do you
know about East Asian stock markets?

- The two leading markets in the United States are the New York Stock Exchange
and National Association of Securities Dealers Automated Quotations or
NASDAQ. NASDAQ is an electronic stock exchange where investors can buy
and sell on automatic computer while the New York Stock Exchange is an
auction market that uses specialist. Asian stock exchanges bring together the
financial centres of several Asian countries including China which is currently the
second largest economic power in the world.

F. What is an Initial Public Offering (IPO)? One of your customers read a number
of newspaper articles about a huge IPO being carried out by a leading technology
company. She wants to get as many shares in the IPO as possible and would
even be willing to buy the shares in the open market immediately after the issue.
What advice so you have her?

- Initial Public Offering or IPO is the selling of securities to the public in the primary
market audit is a public offering in which shares of a company are sold to
institutional investors and usually also to retail investors. The best advice in my
opinion is to thoroughly investigate a firm before investing and to never invest
more money than you can afford to use. IPO can be highly risky investments
because they can be outright rip-offs or legitimate start up businesses that one
slip-up, collapse and leave you with nothing. But with great danger comes to get
great reward; if they are successful in getting rid of you stand to gain a lot.

G. If Applesauce computer decided to issue additional common stock from the

under writer, would this transaction be primary or secondary market tradition?

- If the customers purchased newly issued Applesauce stock, this would constitute
a primary market transaction. If the customer purchased “used” stock, then the
 transaction would be in the secondary market. Since new shares of stock are
being issued, this is a primary market transaction.

JIMMY WAS ASKED (H, I AND J)

H. What are Pension Funds, Mutual Fund, Exchange traded Funds, Hedge Funds
and Private Equity Companies?

- Pension Funds are any plan, fund or scheme that provides retirement income.
- Mutual Funds is an investment program funded by shareholders that trades in
diversified holdings and is managed by a professional fund manager.
- Exchange traded Funds is an open-end investment company that tracks stock
market index.
- Hedge Funds are financial partnership that use pooled funds and employ
different strategies to earn active returns for their investors.
- Private Equity Companies refers to capital investment made into companies that
are not publicly traded.

I. What is an efficient market? How can we explain the events that are
inconsistent with the Efficient Market Hypothesis (EMH)?

- Efficient market refers to the degree to which market prices reflect all available,
relevant information. While EMH argues that markets are efficient, leaving no
room to make excess profit by investing since everything is already fairly and
accurate.

J. What are derivatives? What is a credit default swap? Illustrate how derivatives
can be used to reduce risk?

- Derivatives is any securities, whose value is derived from the price of some other
“underlying” asset. Derivatives can be reused either to reduce risk or to
speculate.
- A credit default swap is a contract that offers protection against the default of a
particular security.
- For an example of risk reduction using derivatives, a wheat processors costs
price and its net income falls when the price of wheat rises the processor could
reduce risk by purchasing derivatives. Wheat futures whose value increasing
when the price of wheat rises.