FINANCIAL MARKETS

Prelims Activity
Name: LAILA R. CAMILLO Section: BSAIS 501
Part I. Overview of Financial Systems and Markets
Question: In your own perspective, how significant are the seven (7) elements of the financial system? Discuss each
element with at least three (3) sentences each.
 The financial system plays a critical role in the economy. It enables the financial intermediation process which
facilitates the flow of funds between savers and borrowers, thus ensuring that financial resources are allocated
efficiently towards promoting economic growth and development.
Financial stability describes the condition where the financial intermediation process functions smoothly and there
is confidence in the operation of key financial institutions and markets within the economy.
Financial instability and its effects on the economy can be very costly due to its contagion or spillover effects to
other parts of the economy. Indeed, it may lead to a financial crisis with adverse consequences for the economy.
Hence, it is fundamental to have a sound, stable and healthy financial system to support the efficient allocation of
resources and distribution of risks across the economy.
7 ELEMENTS OF THE FINANCIAL SYSTEM

o Lenders and borrowers

 The relationship between the borrower and lender has always been known to be an integral factor
in the loan approval process. As the lender gains more information on the borrower through a
longer relationship, the terms of the loan will change. This can come in the form of reduced
interest rates when the trust between the borrower and lender grows, or it can come in the form
of a quicker approval process
o Financial intermediaries
 A financial intermediary is an institution or individual that serves as a middleman among diverse
parties in order to facilitate financial transactions. Common types include commercial banks,
investment banks, stockbrokers, pooled investment funds, and stock exchanges. They reallocate
uninvested capital to productive sectors of the economy through debts and equity.

o Financial Instrument
 Financial instruments are assets that can be traded, or they can also be seen as packages of
capital that may be traded. Most types of financial instruments provide efficient flow and transfer
of capital all throughout the world's investors. These assets can be cash, a contractual right to
deliver or receive cash or another type of financial instrument, or evidence of one's ownership of
an entity.
o Financial Markets
 Financial markets refer broadly to any marketplace where the trading of securities occurs. There
are many kinds of financial markets, including (but not limited to) forex, money, stock, and bond
markets. These markets may include assets or securities that are either listed on regulated
exchanges or else trade over-the-counter (OTC).

o Regulatory Environment
 A regulated environment is basically any controlled environment. Rules state which conditions
must be met by a company to produce valid results or goods of a guaranteed level of quality. Part
of the firm's external marketing environment on which legal and political forces act to change
 regulations which affect the marketing effort; regulation changes can pose threats or present
opportunities.
o Creation of money
 Money creation is the process of adding more money into circulation by banks. This process
leads to the creation of new cash resources. There is a distinction between primary and secondary
creation of money. At present, money creation is handled by the Central Bank and commercial
banks
o Price discovery
 Price discovery is a process which determines market prices, mostly through interactions
between buyers and sellers. Price discovery is a method for determining the spot price of a
commodity through interactions between sellers and buyers – often referred to as a price
discovery process or price discovery mechanism. Typically, the balance between sellers and
buyers is an essential predictor of a market's demand and supply; and demand and supply are
major drivers of price changes.

Part II. Philippines Financial System

Question: Do you think that the current financial regulatory agencies of our country are enough to monitor the
financial institutions here in the country. Support and prove your answers. (Explain in at least 5 sentences)
 Yes, The Philippines is not spared, its economy plunged into recession in the second quarter. Yet, we're
confident that the economy will bounce back strongly within the near term, amid the uncertainty,
countries with decisive leadership and the right policy responses to the pandemic will be the economic
champions in the post-COVID era. Based on what we have done so far, I am confident the Philippines
will be among them. There are three prerequisites for an economy to post a strong recovery. First is the
ability to craft and implement measures that squarely address the crisis and its impact, second is
adoption of a unified and coordinated approach among concerned entities and third is the recognition
and seizing of opportunities behind the challenges.
Part III. Managing Credit Risk
Question: Choose only one (1) among the three (3) identified theories in setting interest rates. In your own
perspective, which one will get the most rate of return in anticipation of the interest rate in restructuring their
investments leading to the various theories? (Explain in at least 5 sentences)
 In my own perspective Real interest rate is the most return rate, the real interest rate is useful when
considering the impact of inflation on nominal interest rates. In essence, the real interest rate deducts the
rate of inflation from the nominal interest rate. This means that if the nominal interest rate is 5% and the
inflation rate is also 5%, the real interest rate is effectively 0%. There are a number of factors that
determine the interest rates offered by banks in return for your investment. These include; the chance of
default by the borrower, the residual term, the payback currency, the respective country credit rating, the
number of commercial banks in the country, and the national projections of savings vs. credit. 

Good luck!

“Trust yourself, you know more than you think you do” – Benjamin Spock