Finance (Basic) Ludek Benada Department of Finance Office 533 75970@mail.muni.cz Financial markets … system of institutions (instruments) that ensures the movement of money and capital from SSU to DSU. The movement is based on supply and demand. (Channels for allocation of savings to investment). q q q Financial markets provide channels for allocation of savings to investment. q Functions of FM qBorrowing and Lending qPrice determination qInformation Aggregation and Coordination qRisk Sharing qLiquidity qEfficiency Interest rate Type of interest: Simple interest x Compound interest Inflation Nominal x Real IR • Major components of FM qMoney market (T-Bills, ….) short-term up to one year qCapital market (Stocks, Bonds…) more then one year Practical examples The client saved to the bank from 08/03/2011 to 05/05/2011 an amount of 15,000.00 to an annual interest rate of 8%. How much was the interest during this period? The client saved for two years 10,000.00 to the bank. The interest rate was 6% per annum. The inflation was in this period 2%. How much got the client from the bank in two years? What was his real gain? Subtypes of FMs qCapital Markets (Stocks, Bonds) qForeign Exchange Markets (FOREX) qInsurance Markets qFutures Markets (standardized derivative qDerivative Markets (Options, Swaps, Forwards) qCommodity Markets qMoney Markets Capital markets qPrimary markets – IPO (matching of quantity) qSecondary markets – trading with issued securities (matching of price, quantity is already given) Secondary market qSpot market (Closing the transaction and the delivery of goods take place simultaneously or within a few days) qForward market (Transaction closed in present, settlement and delivery in the future) The major players in FMs qBrokers qDealers qInvestment Banks qFinancial Intermediaries Financial market structures qOver-The-Counter (The largest market structure, includes FOREX as well). qCentralized Exchanges (Stock Exchange, e.g. NYSE). qElectronic Communication networks (buyers and sellers can directly interact with each other, then costs are minimalized). Index … barometer for investors, a statistical measure for economy or financial markets. Stock Exchange Index – portfolio value of traded stock on the market (PSE, DAX, DJIA, S&P 500, NIKKEI 225). qTypes of indices: -Global (MSCI World) -National (FTSE 100, PSE,…) -Specialized (Morgan Standley Biotech Index) Efficient-market hypothesis FMs are informationally efficient. qThree version of the hypothesis: q Weak q Semi-strong q Strong Asymmetric Information in FMs … difference or asymmetry in information available to buyers and sellers. Two types of AI Adverse selection is a problem that arises for a buyer of goods, services, or assets when the buyer has difficulty assessing the quality of these items in advance of purchase. (Loan Markets) Moral Hazard exists in a market if, after the signing of a purchase agreement between the buyer and seller (of asset) the seller changes his behavior in such a way that the probabilites (risk) used by the buyer to determine the terms of the purchase agreement are no longer accurate. Thank you for your attention