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Chapter II

The document discusses different types of financial markets including physical versus financial asset markets, spot versus futures markets, money versus capital markets, primary versus secondary markets, and private versus public markets. It also discusses derivatives and how their values are derived from underlying assets but can be used for hedging risks or speculation.

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Kyla De Mesa
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© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
28 views

Chapter II

The document discusses different types of financial markets including physical versus financial asset markets, spot versus futures markets, money versus capital markets, primary versus secondary markets, and private versus public markets. It also discusses derivatives and how their values are derived from underlying assets but can be used for hedging risks or speculation.

Uploaded by

Kyla De Mesa
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter II

Financial Market and


Institutions
Agenda
• Financial Market and Institutions
• Financial Statements, Cash Flow, and Taxes
• Analysis of Financial Statement
• Time Value of Money
The Capital Allocation
Process
Diagram of the Capital Formation
Process
Financial Markets
Types of Markets
1. Physical asset markets versus financial asset markets.
2. Spot markets versus futures markets.
3. Money markets versus capital markets.
4. Primary markets versus secondary markets.
5. Private markets versus public markets.
Physical asset markets versus financial
asset markets.
- (also called “tangible” or “real” asset markets) are for products such as wheat,
autos, real estate, computers, and machinery.
- Financial asset markets, on the other hand, deal with stocks, bonds, notes, and
mortgages.
- Financial markets also deal with derivative securities whose values are derived
from changes in the prices of other assets.
Spot markets versus futures markets
- Spot markets are markets in which assets are bought or sold for “on-the-spot” delivery
(literally, within a few days).
- Futures markets are markets in which participants agree today to buy or sell
an asset at some future date.
Example:
a farmer may enter into a futures contract in which he agrees today to sell 5,000
bushels of soybeans 6 months from now at a price of $5 a bushel.
(To continue that example, a food processor that needs soybeans in the future
may enter into a futures contract in which it agrees to buy soybeans 6 months from now)
Money markets versus capital markets
- Money markets are the markets for short-term, highly liquid debt securities.
- Capital markets are the markets for intermediate- or long-term debt and
corporate stocks.

but in a description of debt markets, short-term generally means less than 1


year, intermediate-term means 1 to 10 years, and long-term means more than
10 years
Primary markets versus secondary
markets.
- Primary markets are the markets in which corporations raise new capital.
- Secondary markets are markets in which existing, already outstanding
securities are traded among investors.
- Secondary markets also exist for mortgages, other types of loans, and other
financial assets.

The corporation whose securities are being traded is not involved in a secondary
market transaction and thus does not receive funds from such a sale.
Private markets versus public markets
- Private markets, where transactions are negotiated directly between two
parties, are differentiated from public markets, where standardized contracts
are traded on organized exchanges.
- Private Markets - Markets in which transactions are worked out directly
between two parties.
- Public Markets - Markets in which standardized contracts are traded on
organized exchanges.
Example
Bank loans and private debt placements with insurance companies are examples
of private market transactions. Because these transactions are private, they may
be structured in any manner to which the two parties agree. By contrast,
securities that are traded in public markets (for example, common stock and
corporate bonds) are held by a large number of individuals. These securities
must have fairly standardized contractual features because public investors do
not generally have the time and expertise to negotiate unique, non-standardized
contracts. Broad ownership and standardization result in publicly traded
securities being more liquid than tailor-made, uniquely negotiated securities.
A healthy economy is dependent on efficient funds transfers from people who
are net savers to firms and individuals who need capital. Without efficient
transfers, the economy could not function
Factors that complicate coordination
1. the different structures in nations’
banking and securities.
2. the trend toward financial services
conglomerates, which obscures
developments in various market
segments.
3. the reluctance of individual
countries to give up control over
their national monetary policies.
Derivative
Any financial asset whose value is
derived from the value of some other
“underlying” asset
- A derivative is any security whose - Derivatives can be used to reduce
value is derived from the price of some risks or to speculate.
other “underlying” asset.
- The values of most derivatives are
- The market for derivatives has grown subject to more volatility than the
faster than any other market in recent values of the underlying assets
years, providing investors with new
opportunities, but also exposing them
to new risks.
Question
If a bank or any other company reports that it invests
in derivatives, how can one tell if the derivatives are
held as a hedge against something like an increase in
the price of wheat or as a speculative bet that wheat
prices will rise? Answer on your notebook.
Thank you

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