Financial Markets PDF

Instructor: Beatriz Balbás Aparicio [email protected] CONTENTS 1. Financial Markets 2. Financial instruments: fixed income, equity and derivatives 3. Market Efficiency Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-6...

Instructor: Beatriz Balbás Aparicio [email protected] CONTENTS 1. Financial Markets 2. Financial instruments: fixed income, equity and derivatives 3. Market Efficiency Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 2 1. Financial Markets  Financial market: allows economic agents to exchange financial assets.  Stocks: Endesa, GM, Telefónica, etc.  Fixed Income Securities: Treasury bills, bonds, obligations, etc. (public or private).  Derivatives: options, futures, etc.  They are used to bring together those who need financial resources (MONEY) with those who have them. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 3 CHARACTERISTICS OF THE STOCK MARKETS 1. Official markets:  Exclusive negotiation of the member agents.  Non-member agents must carry out transactions through an intermediary. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 4 2. Regulated markets:  In all countries there is at least one public institution that supervises and inspects the financial markets and ensures:  Transparency  The correct price formation  Investor protection  How?  Through legal measures that ensure:  The solvency of the participants (minimum capital requirements)  Prohibition of the use of privileged information  Spain: Banco de España and CNMV  http://www.bde.es/webbde/es/ Instructor: Beatriz Balbás Aparicio 5  In Europe: European System of Central Banks (ESCB).  Composed of the European Central Bank and the national central banks of the Member States of the European Union (EU).  Functions:  Design and execution of monetary policy (manipulate interest rates using macroeconomic variables) of the countries that make up the Euro Area.  Main objective:  To maintain price stability, without prejudice to "supporting the general economic policies of the Community" (each country is different). https://www.bde.es/wbe/es/sobre-banco/actividad- europea/eurosistema-sebc/ Instructor: Beatriz Balbás Aparicio 6 3. Markets that facilitate negotiation:  Information diffusion:  Members Specialized public General public  Normally non-free information on trading prices, volumes, number of trades crosses, etc.  They facilitate the settlement process:  The stock market is the counterpart of any transaction (the Stock Exchange always complies with the one it contracts).  They minimize agency problems:  The non-member investor - the principal - must necessarily act through an agent which will be an intermediary.  Markets oblige intermediaries to provide book prices to clients who request them. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 7 TYPES OF FINACIAL MARKETS  For the assets transferred:  Money Market: It is traded with money or with financial assets with short-term maturity and with high liquidity, generally assets with a term of less than one year (Euribor).  Capital markets: Financial assets with medium and long-term maturity are traded.  Stock Markets: provide financing through the issue of shares and allow their subsequent exchange.  Fixed Income Markets: provide financing through the issue of bonds and allow their subsequent exchange.  Derivatives Markets allows the issue and purchase/sale of derivatives. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 8  All countries with developed financial markets have created Derivatives Markets where they are traded:  Futures/Forwards contracts on interest rates, currencies and stock indices.  Option contracts on currencies, interest rates, stock indices, stocks.  EXAMPLE: The Official Futures and Financial Options Market in Spain called “Mercado Oficial de Futuros y Opciones Financieros” (MEFF). https://www.meff.es/esp/ It is an organized market regulated, controlled and supervised by the CNMV and the Ministry of Economy of Spain in which different financial derivatives are traded. The products traded are:  Futures and Options on the IBEX-35 stock index.  Futures and Options on the most important Spanish shares (Iberdrola, Telefónica, Repsol, Iberia, BBVA, Santander, Ferrovial, Inditex). Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 9  Depending on their structure, they can be:  Organized Markets  Many assets are traded simultaneously.  Usually in one place.  Following a certain regulation.  EXAMPLE: the Stock Market.  Non-organized Markets or OTC (Over-The-Counter) Markets  Transactions take place outside the stock exchanges and organized markets.  Without submitting to a specific regulation.  Between agents or intermediaries who exchange assets directly, without defining a physical place where to carry out the transaction.  EXAMPLE: SG Warrants Spain, NASDAQ. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 10  According to the trading phase of financial assets:  Primary markets:  Financing for the issuing agent (company or Government).  It always involves creating a new title or increasing the number of titles in circulation from existing ones.  EXAMPLE: new government bond issues (Treasury Market).  Secondary Markets:  Only existing financial assets are exchanged, which were issued at an earlier time.  EXAMPLE 1: Annotated Debt Market (“Mercado de Deuda ANotada”). Market governed initially by the Bank of Spain, and now integrated into the SENAF platform, in which bonds, obligations and Treasury bills are traded, as well as debt issued by the Autonomous Communities and some public organisms.  EXAMPLE 2: Stocks are traded on the secondary stock market. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 11  Another Markets:  Markets for raw materials and merchandise (“commodities”):  EXAMPLES OF GOODS: Metals (gold, silver, copper), energy (oil, natural gas), food (sugar, cotton, cocoa, coffee), grains (corn, wheat, chickpeas) and livestock (pork, beef ).  The merchandise can be negotiated directly (in cash), but it is not the usual thing. Or if not, in commodity markets.  EXAMPLE: El Corte Inglés can buy electricity in a “traditional” way or at OMIE (OMIE is the designated electricity market operator (NEMO, according to European terminology) for managing the daily and intraday electricity market in the Iberian Peninsula).  In practically all such organized markets, commodity futures and futures options are traded.  EXAMPLES:  OMIE: Iberian Electricity Market: https://www.omie.es/es  OMIP: https://www.omip.pt/es  New York Mercantile Exchange (NYMEX)  London Metal Exchange: mostly aluminum, iron, copper are traded: http://www.lme.com  NORDPOOL: Most important market for electrical derivatives in the world: http://www.nordpool.net/ (now it's embedded in the NASDAQ https://www.nasdaq.com/solutions/european-commodities) Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 12  Currency Market: (Money Market and Capital Market)  EXAMPLE (Money market): centralized markets in London and NY (concentration of banks).  EXAMPLE (Capital Market): Forex: Foreign Exchange.  It is traded for cash and many currency futures and options on futures.  It exists wherever a currency is traded with another one (like an exchange house).  It is the largest market in the world in terms of cash value traded.  It includes trading between large banks, central banks, large or small speculators, multinational corporations, governments, and other financial markets and institutions. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 13 FUNCTIONING OF THE STOCK MARKET (SPAIN)  Spanish Stock Market Interconnection System, “Sistema de Interconexión Bursátil Español” (SIBE)  It is the electronic trading platform for the four Spanish stock exchanges (Madrid, Barcelona, Bilbao and Valencia). The SIBE interconnects the four exchanges, allowing them to operate as a single market (Spanish Continuous Market)  The Continuous Market allows a security to be listed on the Madrid, Barcelona, Bilbao and Valencia markets at the same time.  How?  Thanks to the modern computer system that allows to centralize in real time the different orders to buy and sell securities: Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 14  Two trading systems are distinguished in the Spanish Stock Exchanges:  “Corro” system (extinguished):  The negotiation is carried out by voice.  https://www.youtube.com/watch?v=ExW5uycYv7s  SIBE (present):  Electronic trading system through which more than 95% of the total effective volume of shares is contracted on the Spanish Stock Market. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 15  The Continuous Market was created in 1989, replacing the previous trading systems of the Stock Exchange. place.  Computer technologies used:  1st. CATS or Computer Assisted Trading System: acquired by the Madrid Stock Exchange from the Toronto Stock Exchange in 1989.  2nd. SIBE or Spanish Stock Market Interconnection System: it was developed by the Madrid Stock Exchange in 1995. https://www.youtube.com/watch?v=THpXovjy7Bc Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 16  What are the advantages?  Continuous negotiation of the shares of the most representative companies of the Spanish economy and with the highest volume of contracts.  Provides real-time information on the activity and trend of each security (transparency for investors)  Who manages the SIBE?  The “Sociedad de Bolsas” (BME Group company), whose capital is distributed equally among the Governing Companies of the four Spanish Stock Exchanges.  It is also the owner of the IBEX 35 index and in charge of its management, calculation, dissemination as well as the revision of its composition.  http://www.sbolsas.es/ Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 17  BME: “Bolsas y Mercados Españoles”:  What is it?  It is the operator of all the securities markets and financial systems in Spain.  It has been listed on the Stock Exchange since July 14, 2006.  It has been part of the IBEX 35® index since July 2007.  How it is organized?  It consists of seven business units that represent the widest and most varied offer of products and services that a company in this sector can currently offer to the financial community:  Equities, Public and Corporate Debt, Derivatives, Clearing and Settlement, Information Dissemination, Consulting, New Technologies and Training. Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 18  Subsidiary companies:  Madrid Stock Exchange, Barcelona Stock Exchange, Bilbao Stock Exchange, Valencia Stock Exchange, AIAF Fixed Income Market, MEFF, IBERCLEAR, MAB, Visual Trader BME Consulting, BME Innova, BME Market Data and Infobolsa.  http://www.bolsasymercados.es/ Instructor: Beatriz Balbás Aparicio I.S.B.N: 978-84-695-9456-8 DEPÓSITO LEGAL: M-36714-2013 19 Instructor: Beatriz Balbás Aparicio [email protected]