Tunis Business School - Fall 2023

Introduction to Financial Markets

& Financial Assets

Eymen Errais, PhD, FRM

 Financial Markets – Different types

Financial markets

Fixed income markets Equity Market Commodities market Credit market

Debt market Equity market FX market Commodities Credit market

(Fixed Income) market

FX market
Basic Fin Pr

Money and Bonds Shares, preferred Spot currency Softs, Precious Corporate Bonds
markets products shares instruments Metals, Energy,
Power, etc.
Derivatives

IR Futures, Forwards, Futures, options Futures, Forwards, Futures, Forwards, CDS, Futures, CDS
Swaps, Caps, Floors, Swaps, Options Swaps, Options Options, CDOs, CLNs,
Swaptions etc.

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 Financial Markets – Different types

Financial markets

Spot Market Futures Market

Equity market Commodities Credit market
Types of Financial Markets market

• known also as cash market or physical • Contractual agreements: In futures

market markets, trading involves contractual
agreements to buy or sell assets at
• Immediate delivery: Assets are traded a specified price on a future date.
for instant settlement and delivery.
• Price determination: The prices of
• Pricing: The prices in the spot market futures contracts are influenced by
are based on the current market the spot prices of the underlying
demand and supply dynamics. These assets, but other factors like time to
prices are called "spot prices" and expiration and interest rates also
represent the cost of an asset at that play a role.
moment in time.

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 Financial Markets – Different types

Financial markets

Primary Secondary
Market Market
Equity market Commodities Credit market
market

Where new securities are issued and

sold for the first time by companies or
governments to raise capital. Think of it
as the "new issuance" market.
• Public offering: Initial public offering
(IPO)
Where already issued securities are
bought and sold between investors.
Think of it as the "trading" market.
• Call markets (Auctions)

• Public offering: Seasoned offering • Continuous markets (NYSE,

• Private placement NASDAQ)
• Shelf registration
• DRPS or DRIPS
• Rights offering

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 Financial Markets – Different types

Financial markets

Public Equity Private Equity

Equity market Commodities Credit market

market

• Invest in private companies

• Traded in stock exchanges
• Illiquid
• High liquidity
• Limited price transparency
• Price transparency
• Longer investment horizon
• Volatile
• Active involvement
• Minority ownership
• Control/majority ownership

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 The Informational Role of Financial Markets

➢ The informational role

▪ Do markets imply the right stock information?
▪ Do capital markets channel resources to the most efficient use?

➢ Consumption timing
▪ How can you shift your purchasing power from high-earnings periods to low-earnings
periods of life?

➢ Allocation of Risk
▪ Capital markets allow the risk that is inherent to all investments to be borne by the
investors most willing to bear that risk.

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 The Informational Role of Financial Markets

➢ Separation of ownership and management

▪ Agency issues: Do managers really attempt to maximize firm value?

➢ Corporate governance and corporate ethics

▪ Accounting scandals : Enron
▪ Analyst Scandals : Arthur Andersen
▪ Sarbanes-Oxley act : Tighten the rules of corporate governance

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 The Investment process : V-Diamond Model

Sector selection
Top down –
Private
Equity Asset allocation

Security selection Security Analysis

Bottom up – Risk
Capital Analysis
Markets

Fundamental Analysis

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 Markets are competitive

➢ Risk-Return trade-off
▪ How should one measure the risk of an asset?
▪ What should be the quantitative trade-off between risk (properly measured) and
expected return?

➢ Efficient Markets
▪ Active management:
✓ Finding mispriced securities
✓ Timing the market
▪ Passive management:
✓ No attempt to find undervalued securities
✓ No attempt to time the market
✓ Holding a highly diversified portfolio

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 The players

➢ Business Firms– net capital seekers

➢ Households – net capital providers
➢ Governments – can be both borrowers and savers

➢ Financial Intermediaries
▪ Investment Companies
▪ Banks
▪ Insurance companies
▪ Credit unions

➢ Investment Bankers
▪ Perform specialized services for businesses
▪ Markets in the primary market

➢ Venture capital and private equity Capital Markets: Who Are The Key Players

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 Financial Markets – Exchange vs OTC Markets

Financial markets

Exchanges Exchange Traded Over the Counter Inter-dealer

Broker Dealers
Markets (OTC) Markets brokers

• Standardized • Customized
• Higher liquidity • Lower liquidity
• Broker market • Dealer market
• Clearing and • Lower degree of
Settlement regulation and
• Transparency oversight
Derivatives

but loss of • Less transparent

privacy
• Open outcry and
electronic trading

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 Financial Markets – Main types of traders
Trading strategies

Traders

Speculators Hedgers Options Arbitragers

Speculators wish to Hedgers use financial Arbitrageurs take

take a position in the asset to reduce the offsetting positions in
market. Either they risk that they face two or more
are betting that from potential instruments to lock in a
the price of the asset future movements in a profit.
will go up or they are market variable An Arbitrage is a risk
betting that it will go free trade that consists
down. in the purchase and sale
of an asset in order to
profit from a difference
in the asset's price
between markets

Speculators Hedgers Arbitrage

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Wall Street Culture
 Wall Street – How does it look

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 Wall Street – Investment Banks

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 Wall Street – Traders

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 Wall Street – Traders

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 Wall Street – Traders can have fun

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 Wall Street – Traders – what do they eat

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 Wall Street Jargon

Wall Streeters, like any other group of people, have their own language based on what they do
and see every day.
▪ "Long"/"short : Like/dislike
▪ Hit/Lift : Buy/sell
▪ "Sold! : A sarcastic way to say "absolutely not
▪ "Upside"/"Downside : This indicates that there's a lot of (upside), or no (downside) benefit in
a given situation.
▪ "Hunting elephants : You're looking for big deals.
▪ "Buying size : Trading big money or a large number of securities.
▪ "F-You money : The money it would take for you to leave your job and never work again.

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 Wall Street Jargon

▪ "Junked up : This can be in reference to any security, and it means you're super bullish.
▪ "A clowngrade : When a sellside analyst upgrades or downgrades a stock for a stupid
reason.
▪ "Building a book : Traditionally and professionally this means that you're building business, a
portfolio of trades or deals.
▪ "Put it on the tape“ : making an order (food, etc.)
▪ "Stopped out : Meaning you're filled on an order and can take no more requests
▪ "Treat me subject : This means maybe
▪ "I'm doing market research : looking to social media

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 Wall Street Jargon

▪ "Fish : Clients that you can pick them off.

▪ "Uptick : upgrade
▪ "Traded ahead : You beat someone to the punch.
▪ "The staffer's coming.« : This would usually be salted with expletives, and followed by junior
bankers scurrying. The staffer is the usually the very unhappy VP who has to give
assignments to analysts and associates, often at night or on the weekends.
▪ "What is your schedule this weekend?“ : On Wall Street, from the staffer, it means whatever
plans you had are canceled.
▪ "Can you give me some more color on that? : This is a request for additional details,
something that you'll hear analysts ask on earnings calls.

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