GROUP LEADER: AMMAD, SAADA S. MEMBERS: AVESTRUZ, QURATUL-AINI A. SANGKA, NUR-HASANA M.

MAHARDIKA INSTITUTE OF TECHNOLOGY, INC
BONGAO, TAWI-TAWI, PHILIPPINES

“FINANCIAL MARKET”

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS IN ECON. 101(ECONOMIC W/ TAXATION & LANDREFORM)

SUBMITTED TO: MR. ANDASIL J. ABUBAKAR, M (PHIL) “Instructor”

SUBMITTED BY:

GROUP 1
STUDENTS

1st semester/ A.Y 2012-2013

PART 1- FINANCIAL MARKET

INTRODUCTION

Throughout his text, Mishkin stresses that the evolution of financial markets, both in the U.S. and throughout the world, has resulted from an intricate interplay of three factors: chance, necessity, and design. In short, history matters, and it matters a lot.
In addition, throughout his text Mishkin consistently stresses the importance of information. He argues that it is impossible to understand the special nature of financial markets relative to markets for real goods and services unless one understands the peculiar types of "asymmetric information problems" intrinsically associated with financial assets. He argues that these asymmetric information problems have largely shaped the structure of financial markets in the past, and that the recent surge of innovations in information technology (IT) -- in particular, Internet-related IT -- is leading to a dramatic restucturing of financial markets today.
The notes, below, provide basic background information on financial markets as covered in Mishkin in Chapters 2 and 4. For a more extensive set of notes relating to these and other Mishkin chapters, visit the home page for Econ 353 (Money, Banking, and Financial Institutions)

IS A MARKET IN W/ PEOPLE AND ENTITIES CAN TRADE FINANCIAL SECURITIES, COMMODITIES, AND OTHER FUNGIBLE ITEMS OF VALUE AT LOW TRANSACTION COSTS AND AT PRICES THAT REFLECT SUPPLY AND DEMAND.

FINANCIAL MARKETS FACILITATE:

* THE RAISING OF CAPITAL(IN THE CAPITAL MARKETS)

* THE TRANSFER OF RISK(IN THE DERIVATIVES MARKETS)

* PRICE DISCOVERY

* GLOBAL TRANSACTIONS WITH INTEGRATION OF FINANCIAL MARKETS

* THE TRANSFER OF LIQUIDITY(IN THE MONEY MARKETS)

* INTERNATIONAL TRADE(IN THE CURRENCY MARKETS)

TYPES OF FINANCIAL MARKETS

* CAPITAL MARKETS W/C CONSIST OF:

* STOCK MARKETS- W/C PROVIDE FINANCING THROUGH THE ISSUANCE OF SHARES OR COMMON STOCK, AND ENABLE THE SUBSEQUENT TRADING THEREOF.

* BOND MARKETS- W/C PROVIDE FINANCING THROUGH THE ISSUANCE OF BONDS, AND ENABLE THE SUBSEQUENT TRADING THEREOF.

* COMMODITY MARKETS- W/C FACILITATE THE TRADING OF COMMODITIES.

* MONEY MARKETS- W/C PROVIDE SHORT TERM DEBT FINANCING AND INVESTMENT.

* DERIVATIVES MARKETS- W/C PROVIDE INSTRUMENTS FOR THE MANAGEMENT OF FINANCIAL RISK.

* FUTURES MARKETS- W/C PROVIDE STANDARDIZED FORWARD CONTRACTS FOR TRADING PRODUCTS AT SOME FUTURE DATE. * INSURANCE MARKETS- W/C FACILITATE THE REDISTRIBUTION OF VARIOUS RISKS.

* FOREIGN RXCHANGE MARKETS- W/C FACILITATE THE TRADING OF FOREIGN EXCHANGE.

FINANCIAL MARKET SLANG

* POISON PILL- WHEN A COMPANY ISSUES MORE SHARES TO PREVENT BEING BOUGHT OUT BY ANOTHER COMPANY.

* QUANT- A QUANTITATIVE ANALYST WITH A LEVEL OF TRAINING IN MATHEMATICS AND STATISTICAL METHODS.

* ROCKET SCIENTIST- A FINANCIAL CONSULTANT AT THE ZENITH OF MATHEMATICAL AND COMPUTER PROGRAMMING SKILL.

* WHITE KNIGHT-A FRIENDLY PARTY IN A TAKEOVER BID.

* ROUND TRIPPING

* SMURFING

* SPREAD- THE DIFFERENCE BETWEEN THE HIGHEST BID AND THE LOWEST OFFER.

ROLE (FINANCIAL SYSTEM AND THE ECONOMY)

* SAVING MOBILIZATION: OBTAINING FUNDS FROM THE SAVERS OR SURPLUS UNITS SUCH AS HOUSEHOLD INDIVIDUALS, BUSINESS FIRMS, PUBLIC, SECTOR UNITS, CENTRAL PLAYED BY FINANCIAL MARKETS.

* INVESTMENT: FINANCIAL MARKETS PLAY A CRUCIAL ROLE IN ARRANGING TO INVEST FUNDS THUS COLLECTED IN THOSE UNITS W/C ARE IN NEED OF THE SAME.

* NATIONAL GROWTH: AN IMPORTANT ROLE PLAYED BY FINANCIAL MARKET IS THAT, THEY CONTRIBUTED TO A NATIONS GROWTH BY ENSURING UNFETTERED FLOW SURPLUS FUNDS TO DEFICIT UNITS.

* ENTERPRENEURSHIP GROWTH: FINANCIAL MARKET CONTRIBUTE TO THE DEVELOPMENT OF THE ENTERPRENEURIAL CLAW BY MAKING AVAILABLE THE NECESSARY FINANCIAL RESOURCES.

* INDUSTRIAL DEVELOPMENT: THE DIFFERENT COMPONENTS OF FINANCIAL MARKETS HELP AN ACCELERATED GROWTH OF INDUSTRIAL AND ECONOMIC DEVELOPMENT OF A COUNTRY, THUS CONTRIBUTING TO RAISING THE STANDARD OF LIVING AND THE SOCIETY OF WELL-BEING.

FUNCTIONS OF FINANCIAL MARKETS

* INTERMEDIARY FUNCTIONS: THE INTERMEDIARY FUNCTIONS OF A FINANCIAL MARKETS INCLUDE THE FOLLOWING:

* TRANSFER OF RESOURCES: FINANCIAL M ARKET FACILITATE THE TRANSFER OF REAL ECONOMIC RESOURCES FROM LENDERS TO ULTIMATE BORROWERS.

* ENHANCING INCOME: FINANCIAL MARKETS ALLOW LENDERS TO EARN INTEREST OR DIVIDEND ON THEIR SURPLUS INVISIBLE FUNDS, THUS CONTRIBUTING TO THE ENHANCEMENT OF THE INDIVIDUAL AND THE NATIONAL INCOME.

* PRODUCTIVE USAGE: FINANCIAL MARKET ALLOW FOR THE PRODUCTIVE USE OF THE FUNDS BORROWED. THE ENHANCING THE INCOME AND THE GROSS NATIONAL PRODUCTION.

* CAPITAL FORMATION: FINANCIAL MARKET PROVIDE A CHANNEL THROUGH W/C NEW SAVINGS FLOW TO AID CAPITAL FORMATION OF A COUNTRY.

* PRICE DETERMINATION: FINANCIAL MARKETS ALLOW FOR THE DETERMINATION OF PRICE OF THE TRADED FINANCIAL ASSETS THROUGH THE INTERACTION OF BUYERS AND SELLERS. THEY PROVIDE A SIGN FOR THE LOCATION OF FUNDS IN THE ECONOMIC BASED ON THE DEMAND AND SUPPLY THROUGH THE MECHANISM CALLED PRICE DISCOVERY PROCESS.

* SALE MECHANISM: FINANCIAL MARKETS PROVIDE A MECHANISM FOR SELLING OF AFINANCIAL ASSET BY AN INVESTOR SO AS TO AFTER THE BENEFIT OF MARKETABILITY AND LIQUIDITY OF SUCH ASSETS.

* INFORMATION: THE ACTIVITIES OF THE PARTICIPANT IN THE FINANCIAL MARKET RESULT IN THE GENERATION AND THE CONSEQUENCE DISSEMINATION OF INFORMATION TO THE VARIOUS SEGMENTS OF THE MARKET. SO AS TO REDUCE AND COST OF TRANSACTION OF FINANCIAL ASSETS.

CONSTITUENTS OF FINANCIAL MARKET

* PRIMARY MARKET: IS A MARKET FOR NEW ISSUES OR NEW FINANCIAL ITEMS. * SECONDARY MARKET: IT’S A MARKET FOR SECONDARY SALE OF SECURITIES. * MONEY MARKET: IS A MARKET FOR DEALING W/ FINANCIAL ASSETS AND SECURITIES W/C HAVE A MATURITY PERIOD OF UP TO ONE YEAR. * CAPITAL MARKET: IS A MARKET FOR FINANCIAL ASSETS W/C HAVE A LONG OR INDEFINITE MATURITY. * DEBT MARKET: THE MARKET WHERE FUNDS ARE BORROW AND LENT IS KNOWN A DEBT MARKET. * EURO-BOND MARKET: THE MARKET WHERE BONDS ARE DENOMINATED IN CURRENCY OTHER THAN THAT OF THE COUNTRY IN W/C THEY ARE ISSUED IS CALLED EURO BOND MARKET. * EQUITY MARKETS: A MARKET WHERE OWNERSHIP OF SECURITIES ARE ISSUED AND SUBSCRIBE IS KNOWN AS EQUITY MARKET. * FINANCIAL SERVICE MARKET: A MARKET THAT COMPRISES PARTICIPANTS SUCH AS COMMERCIAL BANKS THAT PROVIDE VARIOUS FINANCIAL SERVICES LIKE ATM. * DEPOSITORY MARKET: A DEPOSITORY MARKET CONSIST OF DEPOSITORY INSTITUTIONS THE ACCEPT DEPOSIT FROM INDIVIDUALS AND FIRMS AND USES THESE FUNDS TO PARTICIPATE IN THE DEBT MARKET, BY GIVING LOANS PURCHASING OTHER DEBT INSTRUMENTS SUCH AS TREASURE BILLS. * NON-DEPOSITORY MARKETS: CARRY OUT VARIOUS FUNCTIONS IN FINANCIAL MARKETS RANGING FROM FINANCIAL INTERMEDIARY TO SELLING, INSURANCE ETC.

THE FOLLOWING TABLE ILLUSTRATES WHERE FINANCIAL MARKETS FIT IN THE RELATIONSHIP BETWEEN LENDERS AND BORROWERS: RELATIONSHIP BETWEEN LENDERS AND BORROWERS LENDERS | FINANCIALINTERMEDIARIES | FINANCIAL MARKETS | BORROWERS | INDIVIDUALSCOMPANIES | BANKSINSURANCE COMPANIESPENSION FUNDSMUTUAL FUNDS | INTERBANKSTOCK EXCHANGEMONEY MARKETBOND MARKETFOREIGN EXCHANGE | INDIVIDUALSCOMPANIESCENTRAL GOVERNMENTMUNICIPALITIESPUBLIC CORPORATIONS |

* LENDERS * WHO HAVE ENOUGH MONEY TO LEND OR TO GIVE SOMEONE MONEY FROM OWN POCKET AT THE CONDITION OF GETTING BACK THE PRINCIPAL AMOUNT OR W/ SOME INTEREST OR CHARGE, IS THE LENDER.

INDIVIDUALS AND DOUBLES

MANY INDIVIDUALS ARE NOT AWARE THAT THEY ARE LENDERS, BUT ALMOST EVERYBODY DOES LEND MONEY IN MANY WAYS. A PERSON LENDS MONEY WHEN HE OR SHE:

* PUTS MONEY IN A SAVINGS ACCOUNT AT A BANK; * CONTRIBUTES TO A PENSION PLAN; * PAY PREMIUMS TO AN INSURANCE COMPANY;

* INVESTS IN GOVERNMENT BONDS; OR * INVESTS IN COMPANY SHARES. * COMPANIES * TEND TO BE BORROWERS OF CAPITAL. WHEN COMPANIES HAVE SURPLUS CASH THAT IS NOT NEEDED FOR A SHORT PERIOD OF TIME, THEY MAY SEEK TO MAKE MONEY FROM THEIR CASH SURPLUS BY LENDING IT VIA SHORT TERM MARKET CALLED MONEY MARKETS. * BORROWERS * INDIVIDUALS BORROW MONEY VIA BANKERS’ LOANS FOR SHORT TERM NEEDS OR LONGER TERM MORTGAGES TO HELP FINANCE A HOUSE PURCHASE. * GOVERNMENTS * OFTEN FIND THEIR SPENDING REQUIREMENTS EXCEED THEIR REVENUES. * MUNICIPALITIES AND LOCAL AUTHOROTIES * MAY BORROW IN THEIR OWN NAME AS WELL AS RECIEVINGFUNDING FROM NATIONAL GOVERNMENTS. * PUBLIC CORPORATIONS * TYPICALLY INCLUDE NATIONALIZED INDUSTRIES. THESE MAY INCLUDE THE POSTAL SERVICES, RAILWAY COMPANIES AND UTILITY COMPANIES. * DERIVATIVES PRODUCTS * DURING THE 1980s AND 1990s, A MAJOR GROWTH SECTOR IN FINANCIAL MARKET IS THE TRADE IN SO CALLED DERIVATIVES PRODUCTS, OR DERIVATIVES FOR SHORT. * IN THE FINANCIAL MARKET, STOCK PRICES, BOND PRICES, CURRENCY RATES, INTEREST RATES AND DIVIDENDS GO UP AND DOWN, CREATING RISK. DERIVATIVE PRODUCTS ARE FINANCIAL PRODUCTS W/C ARE USED TO CONTROL RISK PARADOXICALLY EXPLOIT RISK. IT IS USUALLY CALLED FINANCIAL ECONOMICS.

* DERIVATIVES PRODUCTS OR INSTRUMENTS HELP THE ISSUERS TO GAIN AN UNUSUALPROFIT FRON ISSUING THE INSTRUMENTS FOR USING THE HELP OF THESE PRODUCTS A CONTRACT HAS TO BE MADE. DERIVATIVE CONTRACTS ARE MAINLY: * FUTURE CONTRACTS * FORWARD CONTRACTS * OPTION CONTRACTS
CURRENCY MARKETS MAIN ARTICLE: FOREIGN EXCHANGE MARKET * SEEMINGLY, THE MOST OBVIOUS BUYERS AND SELLERS OF CURRENCY ARE IMPORTERS AND EXPORTERS OF GOODS.
THE PICTURE OF FOREIGN CURRENCY TRANSACTIONS TODAY SHOWS: * BANKS/INSTITUTIONS * SPECULATORS * GOVERNMENT SPENDING(FOR EXAMPLE, MILITARY BASES ABROAD) * EMPORTERS/EXPORTERS * TOURISTS
FINANCIAL ASSET MANAGEMENT SYSTEM * ASSET MANAGEMENT SYSTEMS- ARE DESIGNED FOR THE PURPOSE OF PROVIDING A DAILY PLAN DESIGNED TO HELP CLIENTS MAINTAIN FINANCIAL BENEFITS FROM INVESTMENTS.

* RECOGNIZING A FINANCIAL BENEFIT REQUIRES THAT A PERTSON IS AWARE OF THE THREE CHARACTERISTICS OR TRAITS THAT ARE COMMON TO ALL ASSETS.

* THE FIRST IS THAT THE OWNER OF AN ASSET, OR BENEFIT, IS ABLE TO SEE A PROFITABLE FUTURE EITHER BY THE ASSET ALONE OR IN COMBINATION W/ OTHER RESOURCES.

* SECONDLY, A FINANCIAL BENEFIT IS SUBJECT TO THE CONTROL OF THE ONE WHO HAS THE RIGHTS TO THE INVESTMENT, THE WHO LAYS CLAIM TO THE BENEFIT, OCCASIONALLY REFERRED TO AS THE ENTITY. THE ENTITY SHOULD BE ABLE TO MAINTAIN A SEMBLANCE OF CONTROL SO THAT THEY CAN CONTINUE TO BENEFIT FOR AS LONG AS POSSIBLE.

* THE THIRD CHARACTERISTICTO BE AWARE OF IS THE FACT THAT THE ENTITY’S RIGHT TO AN ASSET IS DUE TO A PAST EVENT OR OCCURRENCE.