CHAPTER 1

Overview of Financial
Markets
COURSE LEARNING OUTCOMES
o Student to appreciate the importance of financial markets in the overall
economy, and how it affects them.
o Student to differentiate money and capital markets.
o Student to understand foreign exchange markets.
o Student to understand equities markets.
OUTLINE
1. Financial Markets (its definition, use, and importance)
2. Primary Markets vs Secondary Markets
3. Money Markets vs Capital Markets
4. Foreign Exchange Markets
5. Derivative Security Markets
6. Financial Market Regulation
OUTLINE
1. Financial Markets (its definition, use, and importance)
2. Primary Markets vs Secondary Markets
3. Money Markets vs Capital Markets
4. Foreign Exchange Markets
5. Derivative Security Markets
6. Financial Market Regulation
Financial Markets (its definition, use, and importance)
• Financial markets
• are structures through which funds flow.
• refer to a place or system where trading of financial instruments occurs.
• Financial markets can be distinguished along two major dimensions:
• Primary versus secondary markets
• Money versus capital markets
Why Study Financial Markets and Institutions?
• Markets and institutions are primary channels through which capital is
allocated in our society
• Investment and financing decisions require managers and individual
investors to understand the flow of funds throughout the economy
• Managers and individuals must also understand the operation and
structure of domestic and international financial markets
OUTLINE
1. Financial Markets (its definition, use, and importance)
2. Primary Markets vs Secondary Markets
3. Money Markets vs Capital Markets
4. Foreign Exchange Markets
5. Derivative Security Markets
6. Financial Market Regulation
Primary Markets vs Secondary Markets
• Primary markets
• Markets in which users of funds (e.g., corporations) raise funds through
new issues of financial instruments, such as stocks and bonds
• Include issues of equity by firms initially going public, referred to as initial
public offerings (IPOs)

• fund users issue securities in the external primary markets to raise

additional funds

• are arranged through financial institutions called investment banks, which

serves as intermediaries or underwriter between the issuing corporations
(fund users) and investors (fund suppliers).
Primary Markets vs Secondary Markets
Primary Markets vs Secondary Markets
Primary Markets vs Secondary Markets
• Primary markets
• Primary market financial instruments include issues of equity by firms
initially going public (e.g., allowing their equity—shares—to be publicly
traded on stock markets for the first time).
• These first-time issues are usually referred to as initial public offerings
(IPOs).
• Primary market securities also include the issue of additional equity or debt
instruments of an already publicly traded firm.
Primary Markets vs Secondary Markets
Initial Public Offerings (IPOs)
Primary Markets vs Secondary Markets
Additional debt instrument of an already publicly traded firm

Indicative Terms of the Offer

Issuer Aboitiz Equity Ventures, Inc. (AEV) Series D (5 years)
2 years from Issue Date and every Interest Payment Date thereafter before the 3rd
PHP-denominated fixed rate bonds in two series year from of the Issue Date @ 101.50%
Issue 3 years from Issue Date and every Interest Payment Date thereafter before the 4th
year from of the Issue Date @ 101%
Up to Php10.0Bn with an overallotment option of up to Php7.45Bn 4 years from Issue Date and every Interest Payment Date thereafter before the
Issue Size Maturity Date @ 100.25%
(i) To refinance the Series C 2.8403% Bonds maturing in November 2023;
Use of Proceeds and, (ii) for general corporate purposes
Series E (10 years)
Call Option
Series C 2 years 5 years from Issue Date and every Interest Payment Date thereafter before the 6th
Tenor year from of the Issue Date @ 102.50%
Series D 5 years
6 years from Issue Date and every Interest Payment Date thereafter before the 7th
Series E 10 years year from of the Issue Date @ 102%
Series C 6.4120% to 6.7620% gross pa 7 years from Issue Date and every Interest Payment Date thereafter before the 8th
2 years 4.8796% to 5.1596% net pa year from of the Issue Date @ 101.50%
8 years from Issue Date and every Interest Payment Date thereafter before the 9th
Series D 6.5420% to 6.8920% gross pa year from of the Issue Date @ 101%
Coupon Rate 9 years from Issue Date and every Interest Payment Date thereafter before the
5 years 4.9836% to 5.2636% net pa
Maturity Date @ 102.25%
Series E 6.9575% to 7.4075% gross pa
10 years 5.3160% to 5.6760% net pa Rating PRS Aaa with a Stable Outlook
Coupon Payment Quarterly

New IMA Account - Php 1M, increments of 10k

Minimum
Existing IMA Account - Php 500k
Primary Markets vs Secondary Markets
Additional debt instrument of an already publicly traded firm

Tentative Timelines
Initial Deadline for
September 01, 2023
Reservation

Interest Rate Setting September 04, 2023

Final Deadline for September 12, 2023

Reservation
Should there be volume available after initial deadline
Settlement Date September 12, 2023
Issue Date September 21, 2023
*gross rate is subject to 20% tax and 0.25% Trust Fee
*indicative terms
*as of 25-Aug-23
Primary Markets vs Secondary Markets
• Secondary markets
• Markets that trade financial instruments once they are issued in primary
markets, they are then traded—that is, rebought and resold
• Sellers of secondary market financial instruments are economic agents in need of
funds.
• Secondary markets provide a centralized marketplace where economic agents
know they can transact quickly and efficiently.
• These markets therefore save economic agents the search and other costs of
seeking buyers or sellers on their own.
• Secondary markets offer buyers and sellers liquidity—the ability to turn an asset
into cash quickly—as well as information about the prices or the value of their
investments.
• It also offers Information about the prices or the value of investments and
trading with low transaction costs
Primary Markets vs Secondary Markets
OUTLINE
1. Financial Markets (its definition, use, and importance)
2. Primary Markets vs Secondary Markets
3. Money Markets vs Capital Markets
4. Foreign Exchange Markets
5. Derivative Security Markets
6. Financial Market Regulation
Money versus Capital Markets
• Money markets trade debt securities or instruments with maturities of one
year or less
• Economic agents with short-term excess supplies of funds can lend funds
(i.e., buy money market instruments) to economic agents who have short-
term needs or shortages of funds (i.e., they sell money market
instruments).
• Fluctuations in their prices in the secondary markets in which they trade
are usually quite small (the shorter the duration, the lesser impact to
prices)
• Duration ≠ tenor
Money versus Capital Markets
• Money Market Instruments
• issued by corporations and government units to obtain short-term funds
• Treasury bills —short-term obligations issued by the U.S. government.
• Commercial paper —short-term unsecured promissory notes issued by a
company to raise short-term cash.
• Negotiable certificate of deposit —bank-issued time deposit that
specifies an interest rate and maturity date and is negotiable, (i.e., can
be sold by the holder to another party).
• Banker’s acceptance —time draft payable to a seller of goods, with
payment guaranteed by a bank.
Money versus Capital Markets
• Capital markets trade debt (bonds) and equity (stocks) instruments with
maturities of more than one year
• Given their longer maturity, these instruments experience wider price
fluctuations in the secondary markets in which they trade than do money
market instruments (the longer the duration, the bigger impact to prices)
Money versus Capital Markets
• Capital Market Instruments
• issued by corporations and government units to obtain medium to long-
term funds
• Corporate stock —the fundamental ownership claim in a public
corporation.
• Corporate bonds —long-term bonds issued by corporations.
• Treasury bonds —long-term bonds issued by the U.S. Treasury.
• Government securities —long-term bonds collateralized by a pool of
assets and issued by agencies of the government.
• Bank and consumer loans —loans to commercial banks and individuals.
Money versus Capital Markets
Money Market Instruments Outstanding
Money Market Instruments Outstanding
OUTLINE
1. Financial Markets (its definition, use, and importance)
2. Primary Markets vs Secondary Markets
3. Money Markets vs Capital Markets
4. Foreign Exchange Markets
5. Derivative Security Markets
6. Financial Market Regulation
Foreign Exchange Markets
• Gold standard as the basis of FX rate determination from 1880 – 1933
• Bretton Woods Agreement - Value at which currencies were pegged to the
USD is called the parity or par value and this new system of fixed parities
were officially set by the government or the central bank
CHAPTER 1.1 | INDIVIDUAL READINGS & DIGEST
• Read and digest the articles uploaded about BRICS
• https://www.investopedia.com/terms/b/brics.asp#:~:text=BRICS%20was%2
0created%20by%20Goldman,economic%20ties%20with%20each%20other.
• https://edition.cnn.com/2023/08/24/business/saudi-arabia-brics-invitation-
intl/index.html#:~:text=The%20BRICS%20group%20currently%20includes,%
2C%202024%2C%E2%80%9D%20Ramaphosa%20said.
• https://www.reuters.com/markets/currencies/what-is-brics-currency-could-
one-be-adopted-2023-08-23/
Foreign Exchange Markets
• Foreign exchange risk is the sensitivity of the value of cash flows on foreign
investments to changes in the foreign currency’s price in terms of dollars
• U.S. dollars received on a foreign investment depends on the exchange
rate between the U.S. dollar and the foreign currency when the non-dollar
cash flow is converted into U.S. dollars.
• While foreign currency exchange rates are often flexible—they vary day to
day with demand and supply of foreign currency for dollars—central
governments sometimes intervene in foreign exchange markets directly or
affect foreign exchange rates indirectly by altering interest rates.
• The sensitivity of the value of cash flows on foreign investments to changes
in the foreign currency’s price in terms of dollars is referred to as foreign
exchange risk
OUTLINE
1. Financial Markets (its definition, use, and importance)
2. Primary Markets vs Secondary Markets
3. Money Markets vs Capital Markets
4. Foreign Exchange Markets
5. Derivative Security Markets
6. Financial Market Regulation
Derivative Security Markets
• A derivative security is a financial security (e.g., future, option, swap, or
mortgage-backed security) whose payoff is linked to another, previously
issued security, such as a security traded in capital or foreign exchange
markets
• Derivative securities generally involve an agreement between two parties
to exchange a standard quantity of an asset or cash flow at a
predetermined price and at a specified date in the future.
• Derivatives are traded in derivative security markets
• Generally involves agreement between two parties to exchange a standard
quantity of an asset or cash flow at a predetermined price and at a
specified future date
• Derivative markets are the newest of financial security markets and are
also potentially the riskiest security
Derivative Security Markets
• Derivative activity:
• Tremendous growth between 1992-2013
• Large drop from 2013 to 2019, due largely to the 2014 implementation of
the Volcker Rule
Derivative Security Markets
• Volcker Rule
• The Volcker rule generally prohibits banking entities from engaging in
proprietary trading or investing in or sponsoring hedge funds or private
equity funds.
• The regulations have been developed by five federal financial regulatory
agencies, including the Federal Reserve Board, the Commodity Futures
Trading Commission, the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, and the Securities and Exchange
Commission.
CHAPTER 1.2 | INDIVIDUAL READINGS & DIGEST
• Read and digest the articles uploaded about derivatives market’s contribution
to the Global Financial Crisis of 2008
• https://www.managementstudyguide.com/role-of-derivatives-in-causing-
global-financial-crisis.htm
• https://www.investopedia.com/terms/d/derivativestimebomb.asp#:~:text=T
he%202008%20financial%20crisis%20was,the%20derivative%20moves%20a
gainst%20them
• https://www.thebalancemoney.com/role-of-derivatives-in-creating-
mortgage-crisis-3970477
OUTLINE
1. Financial Markets (its definition, use, and importance)
2. Primary Markets vs Secondary Markets
3. Money Markets vs Capital Markets
4. Foreign Exchange Markets
5. Derivative Security Markets
6. Financial Market Regulation
Financial Market Regulation
• Financial instruments are subject to regulations imposed by regulatory
agencies, such as the Bangko Sentral ng Pilipinas (BSP), Philippine Deposit
Insurance Corporation (PDIC), Anti-Money Laundering Council (AMLC), and
Securities and Exchange Commission.
• Bangko Sentral ng Pilipinas (BSP) is the central monetary authority in
charge of regulating money, banking and credit in the Philippines.
• The BSP is governed by the Monetary Board, composed of seven
members appointed by the president of the Philippines, with the
governor as its chair.
• Through the Monetary Board, the BSP issues rules and regulations in
the exercise of its regulatory powers and directs the management,
operations and administration of the BSP.
Financial Market Regulation
• Under the New Central Bank Act, the BSP performs the following functions,
all of which relate to its status as the Philippines’ central monetary
authority:
• Liquidity management –formulates and implements monetary policy
aimed at influencing money supply consistent with its primary objective
to maintain price stability
• Currency issue – exclusive power to issue the national currency. All notes
and coins issued by the BSP are fully guaranteed by the government and
are considered legal tender for all private and public debts
• Lender of last resort – extends discounts, loans and advances to banking
institutions for liquidity purposes
• Financial supervision –supervises banks and exercises regulatory powers
over non-bank institutions performing quasi-banking functions
Financial Market Regulation
• Management of foreign currency reserves seeks to maintain sufficient
international reserves to meet any foreseeable net demands for foreign
currencies in order to preserve the international stability and
convertibility of the Philippine peso
• Determination of exchange rate policy –determines the exchange rate
policy of the Philippines. Currently, the BSP adheres to a market-oriented
foreign exchange rate policy, principally to ensure orderly conditions in
the market
• Other activities - functions as the banker, financial advisor and official
depository of the government, its political subdivisions and
instrumentalities, and of government-owned and -controlled
corporations
Financial Market Regulation
• Philippine Deposit Insurance Corporation (PDIC) has the power to conduct
examination of banks with the prior approval of the Monetary Board and
within terms and conditions determined by law. All banks are obligated to
insure deposit liabilities with the PDIC up to a maximum amount of PHP
500,000 or its foreign equivalent.
Financial Market Regulation
• Anti-Money Laundering Council (AMLC) has the power to conduct
investigations of money laundering and other violations of Republic Act
No. 9160 or the Anti-Money Laundering Act for the protection of the
integrity and confidentiality of bank accounts and to prevent the
Philippines from being used as money laundering site for the proceeds of
any unlawful activity.
• It monitors and receives covered or suspicious transaction reports from
covered institutions under the law, investigates suspicious transactions
and covered transactions deemed suspicious after an investigation.
Financial Market Regulation
• Securities and Exchange Commission (SEC)
• Main emphasis of SEC regulations is on full and fair disclosure of
information on securities issues to actual and potential investors
• SEC monitors trading on the major exchanges to ensure stockholders and
managers do not trade on inside information about their own firms
COURSE LEARNING OUTCOMES
o Student to appreciate the importance of financial markets in the overall
economy, and how it affects them.
o Student to differentiate money and capital markets.
o Student to understand foreign exchange markets.
o Student to understand equities markets.