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What is the primary role of financial markets?
What is the primary role of financial markets?
Which of the following is considered a function of financial markets?
Which of the following is considered a function of financial markets?
What characterizes debt markets compared to equity markets?
What characterizes debt markets compared to equity markets?
Which of the following financial assets is NOT a type of equity?
Which of the following financial assets is NOT a type of equity?
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What is one main difference between primary and secondary markets?
What is one main difference between primary and secondary markets?
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How do financial markets reduce transaction costs?
How do financial markets reduce transaction costs?
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Which of the following is true regarding the risk characteristics of debt and equity instruments?
Which of the following is true regarding the risk characteristics of debt and equity instruments?
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What does liquidity refer to in financial markets?
What does liquidity refer to in financial markets?
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What characterizes spot FX transactions?
What characterizes spot FX transactions?
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Which of the following is NOT a type of financial institution?
Which of the following is NOT a type of financial institution?
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Which type of financial institution typically specializes in one type of loan?
Which type of financial institution typically specializes in one type of loan?
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Which of the following statements is true about commercial banks?
Which of the following statements is true about commercial banks?
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What type of insurance protects against claims resulting from injuries and damage to people or property?
What type of insurance protects against claims resulting from injuries and damage to people or property?
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How do thrifts differ from commercial banks?
How do thrifts differ from commercial banks?
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What is the primary function of the financial system in any economy?
What is the primary function of the financial system in any economy?
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Which of the following is a privately owned commercial bank in Egypt?
Which of the following is a privately owned commercial bank in Egypt?
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Which of the following is NOT considered a type of risk faced by financial institutions?
Which of the following is NOT considered a type of risk faced by financial institutions?
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Which of the following is NOT a basic player in the financial system?
Which of the following is NOT a basic player in the financial system?
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What type of loan is classified as a consumer loan?
What type of loan is classified as a consumer loan?
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What do mutual funds primarily do?
What do mutual funds primarily do?
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Which of the following is NOT a common service provided by commercial banks?
Which of the following is NOT a common service provided by commercial banks?
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What financial institution primarily assists in the buying and selling of securities?
What financial institution primarily assists in the buying and selling of securities?
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How does the central bank influence economic stability?
How does the central bank influence economic stability?
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What is one of the key functions of financial systems related to investors?
What is one of the key functions of financial systems related to investors?
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Which of the following describes foreign exchange risk?
Which of the following describes foreign exchange risk?
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Which entity sets the regulations that govern the activities of the financial system?
Which entity sets the regulations that govern the activities of the financial system?
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What is the effect of an increase in short-term interest rates on commercial banks?
What is the effect of an increase in short-term interest rates on commercial banks?
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Which group acts both as suppliers and borrowers of funds in the financial system?
Which group acts both as suppliers and borrowers of funds in the financial system?
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Which fund is mandated to provide saving plans specifically for retirement?
Which fund is mandated to provide saving plans specifically for retirement?
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Which of the following types of insurance is designed to hedge against default by borrowers?
Which of the following types of insurance is designed to hedge against default by borrowers?
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What main economic challenge does the financial system help address?
What main economic challenge does the financial system help address?
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What role does the central bank NOT fulfill in the financial system?
What role does the central bank NOT fulfill in the financial system?
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What is the primary purpose of issuing short-term debt instruments by a government or corporation?
What is the primary purpose of issuing short-term debt instruments by a government or corporation?
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Why are money market instruments regarded as less risky than capital market instruments?
Why are money market instruments regarded as less risky than capital market instruments?
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What characterizes the foreign exchange market?
What characterizes the foreign exchange market?
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What does 'foreign exchange rate risk' refer to?
What does 'foreign exchange rate risk' refer to?
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Which currency is considered a free float currency?
Which currency is considered a free float currency?
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How does a change in interest rates impact long-term debt instruments compared to short-term ones?
How does a change in interest rates impact long-term debt instruments compared to short-term ones?
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Which of the following entities is NOT a part of the foreign exchange market?
Which of the following entities is NOT a part of the foreign exchange market?
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What determines the value of free float currencies?
What determines the value of free float currencies?
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What characterizes debt instruments compared to equity instruments in terms of price fluctuations?
What characterizes debt instruments compared to equity instruments in terms of price fluctuations?
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What role do investment bankers play in the primary market?
What role do investment bankers play in the primary market?
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Which of the following is not a function of the secondary market?
Which of the following is not a function of the secondary market?
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What is an example of a secondary market?
What is an example of a secondary market?
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Which institution can act as an investment banker in Egypt?
Which institution can act as an investment banker in Egypt?
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What distinguishes money markets from capital markets?
What distinguishes money markets from capital markets?
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What is a characteristic of the over-the-counter (OTC) market?
What is a characteristic of the over-the-counter (OTC) market?
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How does the secondary market influence the pricing of existing securities?
How does the secondary market influence the pricing of existing securities?
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Study Notes
Lectures in Financial Markets and Institutions
- Course offered by Dr. Wessam Mohsen Abdel Aziz
- Academic year: 2024-2025
- Business Administration Section
Chapter 1: Introduction to Financial Markets and Institutions
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Objectives: Students will be able to understand the financial system concept, determine the functions of the financial system, identify major players, differentiate between financial markets and institutions, and understand risks faced by financial institutions.
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Financial System: An intermediary facilitating funds flow from surplus to deficit parties. Scarcity of economic resources drives economic system development.
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Functions of Financial Systems:
- Efficient/effective distribution of economic resources to achieve economic growth
- Achieving higher returns on investment (ROI) for investors
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Basic Players: Individuals, corporations, government, central bank, financial markets and institutions (the cornerstone of the financial system).
The Basic Players
- Individuals: Act as suppliers or borrowers of funds.
- Corporations: Act as suppliers or borrowers of funds.
- Government: Can act as a supplier or borrower of funds. Sets rules and regulations for financial system activities.
- Central Bank: Represents the regulatory authority for national monetary policy. Controls money supply, stabilizes currency valuation, influences interest rates, and acts as a lender of last resort to commercial banks.
- Financial Markets and Institutions: Vital for funds flow and risk management (cornerstone of the financial system).
Financial Markets
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Definition: Markets where financial assets are traded.
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Role: Provide a platform for buyers and sellers of financial assets (buy and sell).
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Assets: Intangible assets representing claims to future income (dividends, capital gains, interest payments, principal).
- Examples: Bank loans, Government bonds, Corporate bonds, Municipal bonds, Foreign bonds, Common stocks, Preferred stocks and Foreign Stocks
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Functions:
- Determine financial asset prices
- Provide liquidity (ease of converting to cash)
- Reduce transaction costs
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Classification: Debt vs. equity markets, Primary vs. secondary markets, Money vs. capital markets, Foreign exchange markets.
1- Debt Market Vs Equity Market
- Debt Market: Where debt/loan instruments are traded and bought/sold. Bonds (issued by governments and corporations) are common instruments and offer fixed periodic payments (interest).
- Equity Market (Stock Market): Often termed as the stock market for its association with common and preferred stocks, that provide variable returns linked to corporate income streams.
2- Primary Vs Secondary Markets
- Primary Market: Where newly issued securities are sold to initial investors.
- Secondary Market: Where existing securities are traded among investors. U.S. primary markets rely on investment bankers.
- Example of secondary markets (as presented in the context): NYSE, AMEX, EGX
3- Money Market Vs Capital Market
- Money Market is for short-term debt instruments. (NCDs, T-Bills – Over The Counter Market (OTC) , Direct exchange between buyer and seller).
- Capital Market is for long-term debt and equity instruments (bonds and stocks). Interest rate changes affect capital market instruments more than short term.
4- Foreign Exchange Markets
- Definition: Markets for exchanging one currency for another ("FX" or "Forex"). Currencies are traded in pairs.
- Structure: Over-the-counter market, crucial for global trade.
- Participants: Central banks, commercial banks and forex dealers.
- Foreign Exchange Rate Risk: Risk in investment due to currency value fluctuations. Currency value tied to free versus fixed float systems.
- Spot FX Transactions: Immediate currency exchange at current rates.
- Forward FX Transactions: Currency exchange at a future date and predetermined rate.
Financial Institutions
- Role: Channels for funds moving from surplus to shortage entities. Funds movers, bridging borrowers and investors.
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Types:
- Commercial banks
- Thrifts (savings associations, credit unions)
- Finance companies
- Insurance companies
- Securities firms
- Mutual funds
- Pension funds
Risks Faced by Financial Institutions
- Types: Interest rate risk, foreign exchange risk, market risk, credit risk, off-balance sheet risk, technology risk, operational risk, country/sovereign risk, insolvency risk, liquidity risk
- Interest rate risk: Risk due to changes in interest rates affecting asset values/earnings. Increased interest rates impact profitability (higher funding costs limit borrowing and hurt profits). Decrease will encourage borrowing.
- Foreign exchange risk: Risk from fluctuations in currency exchange rates. Impacting assets/liabilities for businesses operating internationally
- Market risk: Risk from unpredictability of equity, commodity, and interest rate markets. Fluctuations on commodities influence investment returns negatively.
- Credit risk: Risks of loan defaults impacting income/profitability for lenders. Loan portfolio diversification/credit history checks limit credit risk.
- Off-balance sheet risk: Risk associated with contingent assets/liabilities not shown on balance sheet. Securitized loans excluded to be considered assets of the bank may affect profitability.
- Technology risk: Risks associated with technological investments not meeting the expected benefits.
- Operational risk: Losses through human error, process failures, or systemic interruptions.
- Country/sovereign risk: Risk of payment problems due to political/economic instability in foreign countries.
- Insolvency risk: Risk of being unable to meet financial obligations.
- Liquidity risk: Risk of being unable to convert assets into cash quickly enough to meet liabilities.
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Description
This quiz covers the fundamental concepts of financial markets and institutions as introduced in Chapter 1. Students will explore the financial system's functions, major players, and the risks associated with financial institutions. Prepare to test your knowledge on how these elements interact to support economic growth.
