FMO CHAPTER 1_PART 1 PDF

DPF30033 Chapter 1 Financial Market Environment  1.1 Explain financial Content ! market environment 1.2 Explain roles of Central Bank 2 1.1 Financial Market Environment Let’s start with the first set of slides Financial Ma...

DPF30033 Chapter 1 Financial Market Environment  1.1 Explain financial Content ! market environment 1.2 Explain roles of Central Bank 2 1.1 Financial Market Environment Let’s start with the first set of slides Financial Market DEFINITION A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, and precious metals. Financial markets also refers to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others. 4 Features of Financial Market ✔ Capital / Fixed Income Market ✔ Money Market ✔ Foreign Exchange ✔ Derivative market 5 Capital Markets ✔ A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. ✔ Capital market consist of: ○ Stock market : Issuance of shares or common stock ○ Bond market : Issuance of bonds 6 Money Markets ✔ The money market refers to trading in very high quality of short-term debt investments. ✔ Deals in short-term loans : For a period of less than or equal to 365 days. ✔ Money market consist of: ○ Deposits ○ Bankers acceptance ○ Commercial paper ○ Treasury bills 7 Foreign Exchange ✔ A market whereby sellers and buyers transact in foreign currencies for an exchange of a specific amount of one currency for another currency at an agreed rate and to be delivered at a certain agreed date. ✔ Traded foreign currencies : US Dollar, Euro, Japanese Yen etc. 8 Derivative Market ✔ A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. ✔ The derivative itself is a contract between two or more parties based upon the asset. Its value is determined by fluctuations in the underlying asset. ✔ The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes ✔ Market that traded financial instruments such as financial futures, options, interest rates and currency. 9 Main Participant in Global Financial Market ✔ Participant comprises of commercial banks, non-bank financial institutions, corporations, individuals, central banks and brokers. ✔ 3 financial zones : Asian, European and North American ✔ London is the main financial centre followed by New York and Tokyo ✔ The market takes place in dealing rooms of commercial banks, financial institutions, corporations, government and related bodies, central banks and international money brokers 10