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).
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q
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Financial markets provide channels for allocation of savings to investment.
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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