M.SC.

, ACCOUNTNG AND FINANCE

FINANCIAL MARKETS AND INSTITUTIONS

CHAPTER: ONE
OVERVIEW OF THE FINANCIAL SYSTEM

DEPARTMENT OF ACCOUNTING AND FINANCE

SAMARA UNIVERSITY, SAMARA

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 COURSE OBJECTIVE
 To know the difference between different financial
markets and different financial institutions.
 To Understand that how the economic and regulatory
environments affect the morphology of financial markets
and the operation of financial intuitions
 To Examine that how and why domestic financial markets
and instuitions have changed through time
 To Identify major contemporary issues which challenge
managers with in financial intuitions
 To Acquire a working knowledge of how financial
managers are responding to these contemporary issues
 To know that how managerial response are likely to
change the nature of financial markets and institution in
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the future
INTRODUCTION TO FINANCIAL SYSTEM
A financial system (within the scope of
finance) is a system that allows the
exchange of funds between lenders,
investors, and borrowers. 
Financial systems operate at national,
global, and firm-specific levels.
Money, credit, and finance are use as
medium of exchange in financial
systems 3
 Features of Financial Management System
Management of general accounting
procedures
Management of expense
Manage the budget
Efficient management of time and work
Advanced reporting
Ensure data security
Reduced the paperwork
Complete Audit
Data Integrity 4
 FINANCIAL SYSTEM - DEFINITION

The processes and procedures used by

an organization's management to
exercise financial control and
accountability.
These measures include recording,
verification, and timely reporting of
transactions that affect revenues,
expenditures, assets, and liabilities.
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 Definition of Global Financial System

This is the interplay of financial

companies, regulators and institutions
operating on a supranational level.  
The global financial system can be divided
into regulated entities (international banks
and insurance companies), regulators,
supervisors and institutions like the
European Central Bank or the International
Monetary Fund.
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 Conti…

The system also includes the lightly

regulated or non-regulated bodies -
this is known as the shadow banking
system.  
Mainly, this covers hedge funds,
private equity and bank sponsored
entities such as off-balance-sheet
vehicles that banks use to invest in the
financial markets.
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 Basic Components of Financial System

Financial Institutions.
Financial Markets.
Financial Instruments (Assets or
Securities)
Financial Services.
Money.

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 Chart
Basic Components of Financial System

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 Basic Features of Financial System

Efficiency
• Operational efficiency
• Allocate efficiency
• Dynamic efficiency
Resilience
Fair treatment

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 Participants in Financial System
The individuals
The Firms or corporate
Government
Regulators
Market Intermediaries

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Market Intermediaries
•Lead Managers
•Bankers to the Issue
•Registrar and Share Transfer Agents
•Depositories
•Clearing Corporations
•Share brokers
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•Credit Rating Agencies

•Custodians
•Portfolio Managers
•Mutual Funds
•Investment Companies
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 FINANCIAL MARKETS
Financial markets are markets in
which securities, commodities,
and fungible items are traded at prices
representing supply and demand.
The term market typically means the
institution of aggregate exchanges of
possible buyers and sellers of such
items.
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 Primary Markets

The primary market (or initial

market) generally refers to new
issues of stocks, bonds, or other
financial instruments.
The primary market is divided in
two segment, the money market
and the capital market.

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 Secondary Markets

The secondary market refers to
transactions in financial instruments
that were previously issued.

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 FINANCIAL INSTRUMENTS

• Financial instruments
are tradable financial assets of any
kind.

• They include money, evidence of

ownership interest in an entity, and
contracts.
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Cash instruments
• A cash instrument's value is determined
directly by markets.
• They may include securities, loans,
and deposits.

Derivative instruments
• A derivative instrument is a contract that
derives its value from one or more underlying
entities (including an asset, index, or interest
rate). 18
 Financial Services

Financial services are offered by a

large number of businesses that
encompass the finance industry.
These include
Credit unions, banks, credit card
companies, insurance companies, stock
brokerages, and investment funds

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 Financial Institutions

Financial institutions provide financial services for

members and clients.
Banks
Banks are financial intermediaries that lend money to
borrowers to generate revenue. Banks include
 Public banks
 Commercial banks
 Central banks
 Cooperative banks
 State-managed cooperative banks
 State-managed land development banks 20
 Non-Bank Financial Institutions

Non-bank financial institutions facilitate

financial services like investment, risk
pooling, and market brokering.
•  Non-bank financial institutions include:
• Finance and loan companies
• Insurance companies
• Mutual funds
• Commodity traders

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 FINANCIAL INSTRUMENTS
Money market instruments are the
investment vehicles that allow banks,
businesses, and the government to meet
large, but short-term, capital needs at a
low cost.
The duration is overnight, a few days,
weeks or even months, but always less
than a year.
Meeting longer-term cash needs is fulfilled
by the financial or capital markets. 
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TYPES OF MONEY MARKET INSTRUMENTS

Treasury Bills. Treasury bills (T-bills)
are short-term notes issued by the
government.
Federal Agency Notes.
Short-Term Tax Exempts.
Certificates of Deposit.
Commercial Paper.
Bankers Acceptances.
Repurchase Agreements 23
 Conti…

Money market functions are 

Transfer of large sums of money
Transfer from parties with surplus
funds to parties with a deficit
Allow governments to raise funds
Help to implement monetary policy
Determine short-term interest rates

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 Capital Market Instruments

Capital market instruments are

longer term financial instruments in
the form of debt or equity that are
traded either on a securities exchange
or directly between investors and
borrowers.

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The capital market itself can be divided

into equity and debt markets
Equity markets
• Equity securities represent an ownership
claim to the assets of a company.
Longer term fixed-income debt markets
• Debt securities, in contrast to equity
securities, accrue interest and are
redeemed (paid out) on a set maturity
date. 26
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Equity markets
• Common shares
• Preferred shares
• Primary and secondary market

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Longer Term Fixed-Income Capital Markets

Bonds
Domestic, foreign and Eurobonds
Government bond market
Corporate bonds
• Short-term notes
• Medium-term notes
• Long term bonds

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Different Types of Bonds/Bond

Structures
Floating rate note (FRN)
Index-linked bonds
Zero-coupon bonds
Strips
Perpetual bonds
Convertible bonds
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Collateralization
Asset-backed securities (ABS)
Calls and puts
Medium-term note (MTN)
Other securities
Warrants
Hybrid securities

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 Hybrid Instruments
In the United Kingdom, a hybrid
instrument (or hybrid bill) is a public
bill proposing a law which affects the private
interests of a particular person or
organization.
It is generally initiated by the government on
behalf of non-parliamentary bodies such as
local authorities and is treated like a private
bill for the beginning of its passage through
the Parliament of the United Kingdom.
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 Derivative Market Instruments
The Derivatives Market is meant as
the market where exchange of
derivatives takes place. 
Derivatives are one type of securities
whose price is derived from the
underlying assets.
Value of these derivatives is
determined by the fluctuations in the
underlying assets. 32
 Conti…

The Derivative Market can be classified

as:
Exchange Traded Derivatives Market
Over the Counter Derivative Market

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 Foreign Exchange Market Instruments
All the diversity of world currencies, as
well as various derivative instruments
of currencies existing today can be
attributed to the instruments of Foreign
Exchange market.
The main trading instruments of
Foreign Exchange market are the
currencies of various countries. 
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The instruments of Foreign Exchange market can be

divided into the following two categories:
Currency Agreements
 Spot
 Outright forwards
 Currency swap
Derivatives
 Synthetic Agreement for Foreign Exchange
(SAFE)
 Currency futures
 Interest Rate Swap
 Currency Options 35
 International Financial Market
Instruments
International financial markets consist of
mainly international banking services
and international money market.
The banking services include the services
such as trade financing, foreign
exchange, foreign investment, hedging
instruments such as forwards and
options, etc.
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 Conti….

International Financial Markets in the

following parts
International Banking
• Trade Financing
• Foreign Exchange
• Foreign Investments
• Hedging Exchange Rate Risk
International Money Market
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Function of Financial Markets

Mobilization of Savings and their

Channelization into more Productive
Uses
 Facilitates Price Discovery
 Provides Liquidity to Financial Assets
Reduces the Cost of Transactions

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Thank
You 39