Financial Institution

Assignment#1
Submitted by: Mariam Fatima Burhan 24727

1. Discuss the bases for classification of financial markets. Explain and

justify each basis.
Ans. There are five bases for classification of financial markets and are as
follows:
 Nature of financial claim: this consists of fixed claims and variable
claims. Fixed claims are a debt market instrument which means
their claim in the assets of the entity is restricted to a certain
amount whereas variable claims are part of equity market meaning,
whatever is left in the business after paying off the fixed liabilities
belongs to the shareholders.
 Maturity of financial claims: is based on either within a year or
beyond one year. Within a year of maturity of claim belongs to
money market where the investors who intend to invest for not
longer than a year enter into a transaction and this market deals
with monetary assets like T-bills, commercial paper etc whereas
beyond a year maturity of claims is an instrument for capital
market where the maximum interchange of money happens and it
helps companies get access to money through equity capital,
preference share capital and provides them access to invest in the
equity share capital of the company.
 Seasoning of financial claims: includes new claims and old and
outstanding claims. New claims are offered by primary markets
where the securities are launched for the first time. This market
involves shareholders who pay the amount for primary issue is
received by companies and its major product is IPO. Old and
outstanding claims are part of secondary market where when once
a company gets the security listed, the security becomes available
to be traded over the exchange between the investors. In Primary
market transactions one party is deficit and another is a surplus
where as in secondary market both the parties are surplus.
 Delivery of financial claims: includes on the spot delivery and
future delivery. On the spot delivery is an instrument for cash
market where transactions are settled in real-time and it requires
the total amount of investment to be paid by the investors either
through their funds or through borrowed capital. Future delivery is
an instrument for future market where the settlement or delivery of
security or commodity takes place at a future date.
  Structure of market: includes formal and informal claims. Formal
claims are instruments for Exchange Traded Market is a centralized
market, that works on pre-established and consistent procedures. In
this market, the buyer and seller don’t know each other and
transactions are made with the help of intermediaries, who ensure the
payment of the transactions between buyers and sellers. Informal
claims are instruments for OTC market which is decentralized
allowing customers to trade in customized products based on the
requirement and buyers and sellers interact with each other.
2. Briefly explain the core elements of the financial structure.
 Financial markets: refers to a marketplace, where creation and
trading of financial assets, such as shares, debentures, bonds,
derivatives, currencies, etc. take place. It provides a platform to the
buyers and sellers, to meet, for trading assets at a price determined by
the demand and supply forces.
 Financial instruments: are assets that can be traded. Most types of
financial instruments provide efficient flow and transfer of capital all
throughout investors. Financial instruments may be divided into two
types: cash instruments and derivative instruments.

 Financial institutions: are involved in the business of dealing with

financial and monetary transactions such as deposits, loans, investments,
and currency exchange. Financial institutions include a broad range of
business operations within the financial services sector including banks,
trust companies, insurance companies, brokerage firms, and investment
dealers.

 Regulators: are established by governments or other organizations to

oversee the functioning and fairness of financial markets and the firms
that engage in financial activity. The goal of regulation is to prevent and
investigate fraud, keep markets efficient and transparent, and make sure
customers and clients are treated fairly and honestly.

 Flow of funds: are financial accounts that are used to track the net
inflows and outflows of money to and from various sectors of a national
economy. This FOF analysis can then be used to measure economic
activity and predict changes in GDP. They can also be used to help
inform fiscal and monetary policy.

3. Why do we have over the counter (OTC) financial markets?

 Ans. An over-the-counter (OTC) market is a decentralized market in which
market participants trade stocks, commodities, currencies or other instruments
directly between two parties and without a central exchange or
broker. OTC markets are primarily used to trade bonds, currencies, derivatives
and structured products. They can also be used to trade equities. OTC trading
helps promote equity and financial instruments that would otherwise be
unavailable to investors. Companies with OTC shares may raise capital through
the sale of stock.

4. Why do we need to have secondary markets?

Secondary markets are an important part of an economy. Through immense
series of independent yet interconnected trades, the secondary market directs
the price of an asset toward its actual value through the natural mechanisms
of supply and demand. It is also an indicator of a nation's economic health. The
increase or decrease in prices signals a growing economy or an economy
heading towards a recession. Secondary markets create additional economic
value by allowing more beneficial transactions to occur and create a fair value
of an asset. They also provide liquidity to the economy as sellers can sell
quickly and easily due to a large number of buyers in the market.