AC5030 Session 1 PDF

PLACE AC5030 - which involves seller & buyer - products, goods, & services Financial products/ financial instruments (shares, bonds, - pe...

PLACE AC5030 - which involves seller & buyer - products, goods, & services Financial products/ financial instruments (shares, bonds, - people trade / exchange goods or services forex etc.) - purpose is to generate more money Financial Markets eg, Differences between Finance and Accounting Finance: Stock (shares) [in acc stock = inventory] Finance: Preference shares = debt [but in acc record under equity Sri Tellapragada Finance: Financial securities (financial instrument) [bonds, commodities etc.] Finance: Security (guarantee) Cone of Experience 2 People Generally Remember 10% - 30% Read /Hear 30% View Images/ Watch Videos 50% Watch a demonstration 70% Participate in workshop Simulate or model a real Analyse Design create and 90% experience/Do the real thing Evaluate the learning outcomes AC5030 Class Expectations for the session Please ensure you are following classroom etiquettes Break every 1:15 minutes Keep mobile phones on silent mode Seek permission to ask questions or to talk Attendance taken at the end of the session Do not speak on top of others 3 Session Learning Outcomes Learning outcomes Understand contemporary operations of financial markets and intermediation Identify and explain the characteristics of the various financial instruments and be able to value them (Financial intermediary) Eg, banks Understand the role of financial institutions in enhancing the activities of financial markets and the supervisory roles of central banks in regulating the financial markets and institutions to preserve financial market integrity 4  Session 1 & 2 Finance Function: Learning Outcomes What we discussed during the session Module Guide and Financial Economic Assessment System: Need for Intermediation Activity Finance Markets Hollistic Approach Seminar : c# coding AC5030 5  normally not tested in exam Emergence of Money History of Money bce = before common era Non-Monetary exchange [Barter 9000 – 6000 BCE] Every object has two uses: the original purpose for which the object was designed, and as an item to sell or barter. Aristotle Standardized coinage [1000 BCE – 400 CE] It has survived not only five centuries, the leap. Bronze Age [3000 BCE] The world developed the use of commodity money gold, silver, copper, agriculture products (coffee, soil etc.) Cryptocurrencies [After 2008] Medieval coins and moneys of account [400–1450] Banknotes 15 – 19th Century Bitcoin, blockchain, litecoin Issued by banks until their centralization It has survived not only five centuries, the leap. took place in 1694 AC5030 6 Economic System Complaint tablet to Ea-nasir [1750 BCE] When you came, you said to me as follows : "I will give Gimil-Sin (when he comes) fine quality copper ingots." You left then but you did not do what you promised me. You put ✓Banking? ingots which were not good before my ✓Copper Smith? messenger (Sit-Sin) and said: "If you want to take them, take them; if you do not want to ✓Transaction? take them, go away!" First recorded customer complaint and 1000 ingots evidence of a business relationship gone very sour. The letter is 4.6 inches high, 2.0 inches wide, 1.0 inch in thickness. AC5030 7  Parable of the Bags of Gold.. Matthew 25:14-30 [AD 80 – 90] 14 “Again, it will be like a man going on a journey, who called his servants and entrusted his wealth to them. 15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey. Stewardship 16 The man who had received five bags of gold went at once and put his money to work and gained five bags more. - third servant forgot that he is a steward for the master 17 So also, the one with two bags of gold gained two more. 18 But the man who had received one bag went off, dug a hole in the ground and hid his master’s money. 19 “After a long time the master of those servants returned and settled accounts with them. 20 The man who had received five bags of gold brought the other five. ‘Master,’ he said, ‘you entrusted me with five bags of gold. See, I have gained five more.’ 21 “His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master’s happiness!’ 22 “The man with two bags of gold also came. ‘Master,’ he said, ‘you entrusted me with two bags of gold; see, I have gained two more.’ 23 “His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master’s happiness!’ 24 “Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. 25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’ 26 “His master replied, ‘You wicked, lazy servant! So, you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned, I would have received it back with interest. 28 “ ‘So take the bag of gold from him and give it to the one who has ten bags. 29 For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them. 30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’ Was Jesus trying to educate people in finance? AC5030 8  Parable of the Bags of Gold.. Matthew 25:14-30 [AD 80 – 90] Financial Concepts Scenario: A (SSU) put money in Bank, Bank take the money to lend to other DSU, and they earn interest. Interest To lenders Lenders (SSU) - they have money to lend to others Borrowers (DSU) - they take loan to borrow money Investment Income (Government), Expenses (Households, business etc.) Indirect Financing: SSU -> Intermediary -> DSU (Intermediaries) Direct Financing: SSU -> DSU Tax Banks and Financial Institutions SSU (Surplus Spending Unit) - Meaning: those who (Income > expenditure) Savings - Eg: Household, business, some governments (inflation) Dividend Time Value of Money DSU (Deficit Spending Unit) Scenario: - Meaning: those who (Income < expenditure) Shares - Eg: Household, business, slow developing governments Earnings SSU (buy shares) DSU (sell shares) Intermediary (aka Middle person) - households, individuals - Company - Eg: Financial institution Give dividend (profit earnings) A fully functional financial eco-system AC5030 9 Gold Reserves MYR in (gold) - RM350+ Top gold reserves (this is in tonnes) Country Gold U.S.A 8133 Germany 3355 Italy 2452 France 2437 Russia 2299 Malaysia is like 30+ AC5030 10 What is the central currency of the World? And Why US Dollars Discuss? Share your knowledge with the class AC5030 11  Why Dollar? Global stability: The US dollar is considered a stable currency, with a Economic dominance: The United relatively low rate of inflation and a States has the largest economy in the strong government backing it. This world, which gives the US dollar a lot of weight in the global economy. This 1 2 stability makes it a popular choice for international transactions and for makes it a natural choice as a central countries to hold as a reserve currency currency for international transactions. Financial market size: The Widespread use: The US dollar is United States has one of the widely used and accepted around largest and most developed the world, particularly in international trade and finance. This means that many countries hold US dollars as a reserve 3 $ 4 financial markets in the world, (physical) including the New York Stock Exchange and the NASDAQ. This (online) attracts international investment currency, further increasing its and contributes to the importance as a central currency dominance of the US dollar. 5 6 Military power: The United States has a powerful military, which gives it significant global influence and contributes to the Federal Reserve: The US dollar perceived stability and security of the US is a central currency is due to dollar. This, in turn, makes it more the role of the US Federal attractive as a central currency. Reserve AC5030 12 What does the reserve hold? Typically, a central bank's foreign exchange reserves consist of a mix of different currencies, with the US dollar being the most widely held. Other assets that may be held as part of a central bank's foreign exchange reserves include Special Drawing Rights Gold Sovereign bonds (SDRs) Gold has long been seen as a safe haven Central banks may hold government SDRs are a type of international reserve asset and is still held by many central bonds, particularly those issued by asset created by the International banks as a component of their foreign stable, developed countries, as part of Monetary Fund (IMF). They can be exchange reserves. their foreign exchange reserves exchanged for other currencies and are held by central banks as part of their foreign exchange reserves The exact composition of a central bank's foreign exchange reserves can vary depending on a variety of factors, including the country's monetary policy objectives and its economic and political situation. 13 AC5030  Highest Currencies in the Sr.No. Value of World 1 Kuwaiti Dinar 1 KWD 2 Bahraini Dinar 1 BHD 3 Omani Rial 1 OMR Are there 4 Jordanian Dinar 1 JOD 5 British Pound 1 GBP stronger 6 Gibraltar Pound 1 GIP currencies? 7 Cayman Island Dollar 1 KYD Top 10 Currencies 8 Swiss Franc 1 CHF 9 Euro 1 EUR 10 United States Dollar 1 USD AC5030 14 Highest Dollar Currency Reserves Countries Reserve (millions) Global rank China 3427.93 1 Japan 1405.75 2 Switzerland 1109.82 3 USA 716.15 4 India 638.48 5 Russia 632.24 6 Hong Kong 496.87 7 Saudi Arabia 473.89 8 South Korea 463.28 9 Singapore 425.1 10 Highest Interest Rates Countries Countries Latest available value Global rank Argentina 70.42 1 Venezuela 36 2 Turkey 20.98 3 Moldova 15.19 4 Suriname 13.58 5 Colombia 13.42 6 Belarus 13.21 7 Kazakhstan 13.2 8 Kyrgyzstan 13.18 9 Ghana 12.73 10 Rank Country GDP in billion $ 1 United States 23,315.1 2 China 17,734.1 3 Japan 4,940.9 4 Germany 4,259.9 Biggest 5 India 3,176.3 economies in 6 7 United Kingdom France 3,131.4 2,957.9 2021 by GDP Top 10 Currencies 8 Italy 2,107.7 9 Canada 1,988.3 10 South Korea 1,811.0 AC5030 17 Highest Government Debt Countries Government debt Global rank Japan 245.12 1 Greece 193.3 2 Singapore 159.87 3 Cape Verde 156.69 4 Italy 150.4 5 Barbados 136.3 6 Bhutan 134.94 7 Suriname 128.77 8 Portugal 127.4 9 USA 124.3 10 Financial ecosystem participants Financial ecosystem is comprised of a variety of different players Commercial Banks Central Banks Payment Service Investment Banks Providers The eco-system Insurance Asset Managers creating a complex and Regulators Stock Exchanges interconnected network of participants and institutions AC5030 19 There are more participants Much more complex undertakings Hedge Funds Credit Rating Agencies Financial Advisors Hedge funds are investment funds that use a Credit rating agencies, such as Moody's and Financial advisors provide individuals and variety of strategies to generate returns for Standard & Poor's, assess the creditworthiness businesses with advice on financial matters, their investors. They often take on more risk of borrowers and issue ratings to help investors including investments, retirement planning, than traditional investment funds. make informed decisions. and tax planning. FinTech Companies Microfinance Institutions Sovereign Wealth Funds FinTech companies are companies that use Microfinance institutions provide small loans and Sovereign wealth funds are investment funds technology to provide financial services and other financial services to individuals and owned by a government, often used to products, such as mobile banking and digital businesses in low-income communities who may invest a country's surplus wealth for the payments. not have access to traditional financial services. benefit of future generations. AC5030 20 Financial Eco- System Role of intermediaries in economic growth (indirect financing) Intermediaries Government, Corporations, Individuals DSU Seek securities based on their earning potential (direct financing) SSU Offer shares, bonds and bills to raise capital with prospectus to generate interest in the investors Eg, savers, lenders, investors AC5030 21  Why do they interact? To exchange goods and services To manage risk Agents in a financial ecosystem interact with Agents in a financial ecosystem also interact to manage and each other to trade goods and services, such as transfer risk. For example, insurance companies provide buying and selling stocks, bonds, commodities, policies to protect individuals and businesses against financial and currencies. losses. To access capital To transfer and store value Agents in a financial ecosystem also interact to access Agents in a financial ecosystem also interact to transfer and capital. For example, businesses may issue bonds to raise store value. For example, individuals may deposit their funds for investments and expansion, while individuals money in banks to earn interest and ensure the safety of may take out loans to finance large purchases or to start their savings, while businesses may use financial institutions a new venture AC5030 to process payments and manage their cash flow. 22  Some characteristics of Financial Products Risk - In finance, always have risks (high or low) - Shares are high risk lead market, ace market, main market - OSC is higher risk, PSC is lower risk (because paid first when company bankrupt, and is also fixed return) - Security Bonds (is a guarantee, so lower risk), Bonds without security (higher risk) Liquidity - the ability to buy and sell very fast - Expected Return Term of Maturity - bonds have maturity date (because its something like loan, shares dont have) Currency Denomination - financial products will be liase with currency Divisibility - diversify AC5030  Type of instrument: Financial instruments can be categorized into various types such as equities (stocks), bonds, derivatives (options and futures), currencies, commodities, and others. (agriculture, mining products eg, gold, silver, copper) Issuer: Financial instruments can be issued by corporations, governments, and other entities. Nature of claims: Some Financial instruments can represent either debt or equity claims on the issuer. Debt instruments are characteristics obligations that must be repaid by the issuer, while equity instruments represent ownership in the issuer. Risk and return: (osc) of Financial Financial instruments offer varying levels of risk and return. Some instruments, such as bonds, are considered relatively low-risk and offer modest returns, while others, such as equities, offer higher products potential returns but also come with higher levels of risk. Marketability: eg, gold eg, building (compared to gold) Financial instruments can be either highly liquid or illiquid. Highly liquid instruments can be easily bought and sold in the market, while illiquid instruments are more difficult to trade. Regulation: Financial instruments are subject to varying levels of regulatory oversight. Some instruments, such as stocks, are highly regulated, while others, such as derivatives, are less so. Complexity: Financial instruments can vary in their level of complexity. Some, such as stocks and bonds, are relatively simple to understand, while others, such as complex derivatives, may require specialized knowledge to fully comprehend. Purpose: Financial instruments can serve a variety of purposes, including raising capital, managing risk, and speculating.  Regulation of Stock Exchanges The attractiveness of the Exchange's markets is maintained by providing an efficient and well regulated market place. Securities and Exchange Commission (SEC) LSE (governing listed companies) Organisation; Conduct and Ethics; Information and Requests. Listed securities are those which have been Rules of Practice. admitted to the Official List by the UK Listing Authority The conduct of investment business in the UK is the Financial Services and Markets Act 2000 (FSMA) Statutory Authority responsible for enforcing the In Malaysia - SC (Securities Commission) [govern both] legislation is Financial Conduct Authority (FCA) - Bursa SE [govern lead, ace, main markets] AC5030 25 Financial Markets: Learning Outcomes Discussions summary for session Understanding the financial eco system Financia Eco-System Homework: Collect the stock Key Terminologies price for your chosen company and critique about the pricing Financial Markets Role of securities exchanges in financial Investment Analysis economic system AC5030 26