Finance

 

 ▶What is Finance?

Monetary resources comprising debt and ownership funds of the State, company or person.

▶What is Financial System?

 This system deals with the financial transactions and the exchange of money between savers, investors, leaders and borrowers.

 Financial systems are made of different intricate and complex models that link financial institutions and markets to provide financial services for various stakeholders operating in the financial system like depositors, lenders, borrowers, government and others.

****Savers: the household sector, who wants to saver their money for specific reasons.

Investors:  who wants to use those particular savings to generate certain profits.

 Lenders: the financial institutions or the banks who lends the money for specific reasons

Borrowers: the individuals as well as some other financial institutions, who wants to borrow the money from the financial system.

 ▶What are the functions of a financial system?

·         It basically helps for the capital formation.

·         The financial system tries to integrate, to make a relationship between these stakeholders for the transaction purpose and to exchange the money between them.

·         To provide the financial services (to provide certain kind of service to maximize their return or to fulfill their requirements in terms of the financial aspects)

·         It provides the mechanism to pull the funds in terms of households savings for corporate investments.

·         It provides the financial capital for long- term capital formation for the government and business organizations.

·         It facilitates the investors and other market participants to liquidate their investment alternatives like stocks and bonds, etc.

·         Financial system provides the avenues for managing the risks faces by the market participants.

·         It takes care of both short- term and long-term needs of the market participants.

·         It supplies the required financial capital to government for public expenditure on the social welfare activity, infrastructure development, etc.

·         The flow of the particular money comes to the system which helps in the different kind of growth activities economy at the large.

·         It provides the price information which helps to coordinate the decentralized decision making process in the various sectors.

·         It helps in reduction of the asymmetric information and moral hazard problems which in turn facilities in reducing the transaction costs.

·         It creates different investment opportunities for the investors to maximize their return.

·         It helps in efficient allocation of financial resources.

·         It plays a significant role for economic growth as it helps to create the demand and supply of the funds through which the interest rates are determined in various markets. Changes in interest rates affect the money supply, inflation rate and also the possibility of the foreign investments.

 ▶ How are the main types of financial institutions categorized? Describe each one.

.

BANKING AND NON-BANKING

INTERMEDIARIES VS. NON- INTERMEDIARIES

®        Banks provide transactions services          ®        Create deposits or credit          ®        Subject to legal reserve requirements          ®        Can advance credit by creating claims against themselves          ®        Other institutions can lend only out of resources put at their disposal by the savers          ®        Examples of non-baking financial institutions are LIC, MFIs, NBECs          ®        According to Sayers are “creators” of credit, and non-banking institutions are “purveyors” of credit.

®        Intermediaries intermediate between savers and investors          ®        The lend money as well as mobilize savings          ®        Their liabilities are towards the ultimate savers, while their assets are from the investors or borrowers.          ®        Non. Intermediary institutions do the loan business but their resources are not directly obtained from the savers.

 

Money market	Capital Market
®   This conventional distinction is based on the differences in the period of maturity of financial assets issued in these markets.                     While the money markets deal in the short- term claims (one year or less), the capital market does so in the long-term (above 1 year) claims.

Primary and Secondary Markets

Primary markets deal in the new financial claims or new securities. Secondary markets deal in securities already issued or existing or outstanding.

 

 ▶Which are the main classes of financial instruments issued in a financial system? Describe them in detail.

Money market Money market instrument is an investment mechanism that allows banks, businesses, and the government to meet large, but short-term capital needs at a low cost. They serve the dual purpose of allowing borrowers meet their short-term requirements and providing easy liquidity to lenders. It has treasury bills, certificates of deposits, commercial papers, banker’s acceptance, repurchase agreements, etc.

Capital Market Capital markets refer to the places where savings and investments are moved between suppliers of capital and those who are in need of capital.   Capital markets consist of the primary market, where new securities are issued and sold, and the secondary market, where already-issued securities are traded between investors.   The long term securities are traded, we have stock market, debt market (the bond mkt), the derivatives market.

Foreign exchange market Foreign exchange instruments comprise a third, unique type of financial instrument.

 

**A financial instrument is a real or virtual document representing a legal agreement involving any kind of monetary value.

***Financial instruments may also be divided according to an asset class, which depends on whether they are debt-based or equity-based

Referencies

Investopedia. (s.f.). Capital Markets . Obtenido de https://www.investopedia.com/terms/c/capitalmarkets.asp

Investopedia. (s.f.). Financial Intrument Defintion . Obtenido de https://www.investopedia.com/terms/f/financialinstrument.asp

 

 ▶What are the distinctions between various types of financial markets according to their function? Explain them.

There are many kinds of financial markets, including (but not limited to) forex, money, stock, and bond markets. Markets exchange a variety of products to help raise liquidity. Each market relies on each other to create confidence in investors.

The differences to play into the distinctions of the financial markets are: amounts of capital, safety, liquidity, discounted prices, the way of the investments move, securities, long or short- term. All of them work according of the person, company or State. Each one of them function better in a specific market.

 ▶What does the “flow of funds” refer to? Explain in detail.

Flow of funds (FOF) are national financial accounts that track the movement of money among industries or sectors of the economy.

*The FOF accounts are used primarily as an economy-wide performance indicator.

Figures measuring the scale and scope of flow of funds in a nation's economy are collected and disseminated by the central bank for economic analysis.

"Fund flows" is used to denote the amount of assets moving in and out of different types of mutual funds, e.g. among equity and fixed income funds.

Reference

Investopedia. (2021). Flow Of Funds (FOF). Obtenido de https://www.investopedia.com/terms/f/fof.asp