INTRODUCTION

AND OVERVIEW
OF FINANCIAL
MARKETS
Financial Markets
The arenas through which funds flow

Types of Financial Markets

▸Primary Markets
▸Secondary Markets
▸Money Markets
▸Foreign Exchange Markets
▸Derivative Markets

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Financial Markets can be distinguished in two
major dimensions:
PRIMARY MARKETS
 Markets in which corporations raise funds
through new issues of securities

SECONDARY MARKETS
A market that trades financial instruments once
they are issued.

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Primary Market Transfer of Funds Timeline

Users of Funds Underwriting with Initial Suppliers of

Investment Bank Funds

Corporation issuing Investors

debt/equity instrument

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Secondary Market Transfer of Funds Timeline

Economic Agents Economic Agents

wanting to sell Financial Markets wanting to buy
securities securities

Investors
Investors

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Money Markets vs Capital Markets
MONEY MARKETS CAPITAL MARKETS
▸Market that trades debt ▸Market that trades debt
securities or instruments and equity instruments
with maturities of one with maturities of more
year or less. than one year.

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Money Market Instruments
• Treasury Bills
• Federal Funds
• Repurchase Agreements
• Commercial Paper
• Negotiable Certificate of Deposit

Capital Market Instruments

• Corporate Stock
• Mortgages
• Corporate Bonds
• Treasury Bonds
• Bank and consumer loans
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Foreign Exchange Markets
markets in which cash flows from the sale of products
or assets denominated in foreign currency are
transacted.

• Foreign currency exchange rates are often

flexible.

• The sensitivity value of cash flows on foreign

investments to changes in foreign currency’s
price in terms of dollares is referred to as foreign
exchange risk.

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Derivative Security Markets
markets in which derivative security trades

Derivative Security is a financial security whose

payoff is linked to another, previously issued
security traded in capital or foreign exchange
markets.

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Financial Institutions
Institutions that perform the essential function of
channelling funds from those with surplus funds to those
with shortages of funds.

Further discussion on Financial Institutions

1. Types (Size, Structure, and Composition)
2. Balance sheet and recent trends
3. Financial Institution’s performance
4. The regulators

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Types of Financial Institutions
• Commercial Banks
• Thrifts
• Insurance Companies
• Securities Firms and Investment Banks
• Finance Companies
• Investment Funds
• Pension Funds

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 Flow of funds without financial institutions

Price Risk

Users of Funds Supplier of Funds

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 Flow of funds with financial institutions
Manage to
diversify Asset
funds Transformer

Users of Funds Brokers Supplier of Funds

or
Financial Institutions

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Services Performed by
Financial Institutions
Services benefiting the supplier of
Funds:
•Monitoring Cost
•Liquidity and Price Risk
•Transaction Cost Services
•Maturity Intermediation
•Denomination Intermediation

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Services Performed by
Financial Institutions
Services benefiting the overall economy:
•Money supply transmission
•Credit Allocation
•Intergenerational wealth transfers
•Payment Services

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Risks Incurred by Financial
Institutions
•Credit Risk
•Foreign Exchange Risk
•Interest Rate Risk
•Price Risk
•Technology Risk

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 Regulation of
1
Financial
Institutions