Money and Banking L7 PDF

MONEY AND BANKING Ing. Ondrej Ivančo Week 7, 2024/2025  Midterm Test 1. Explain the difference between money and currency. 2. What are five core principles of money and banking? 3. What factors should you consider while using following assets as stores of value? A) gold B) real estate C) stocks...

MONEY AND BANKING Ing. Ondrej Ivančo Week 7, 2024/2025  Midterm Test 1. Explain the difference between money and currency. 2. What are five core principles of money and banking? 3. What factors should you consider while using following assets as stores of value? A) gold B) real estate C) stocks D) government bonds E) cryptocurrencies? 4. Assuming no interest is paid on current accounts, what would you expect to happen to the relative growth rates of M1 and M2 aggregates if short interest rates rose significantly? 5. What are some advantages and disadvantages of a government continuing to issue paper currency in the face of widespread financial innovation?  Financial Instruments Used to Transfer Risk Insurance contracts Edward Lloyd – insurance of ships since 1688, retired captains, underwriters Life and non-life products, implication on investments (Warren Buffet - GEICO) Diversification of risk, statistical methods, actuaries Reinsurance groups (Swiss Re, Lloyds) – wider diversification Price of derivative instruments (time value of money, risk transferred) Futures contracts Agreement to exchange fixed amount of asset or commodity at fixed price on a set future date Derivative exchanges (CBOE Global Markets...), counterparty, initial and variable margin, standardized contracts  Financial Instruments Used to Transfer Risk Options Assymetric position – buyer has a right, seller has a potential obligation Similarities with insurance contracts (variable age and health) Value is linked to probability, non linear profile, complexity, structured notes Swaps – exchange of two specific cash flows in the future Interest rate swap – exchange of variable interest rate for fixed rate (e.g. ABC Co. has a variable 6 months interest rate EUR loan) 6M EURIBOR* * EURIBOR – EUR Financing 6M EURIBOR ABC Co. IR Swap InterBank Offered Rate Bank Bank (LIBOR case) 10Y fixed rate  Financial Instruments Used to Transfer Risk FX swap – European ABC Co. wants to buy components from US (in USD) and sell final product to US client (again in USD) FX swap eliminates (transfers) the risk of FX EUR against USD Interest rate differential between EUR and USD (time value of money) Cost effective solution, FX forward („far leg“ – exporters/importers) 1mln EUR D+0 „near leg“ ABC Co. 1,1mln USD Bank 1mln EUR D+90 „far leg“ 1,12mln USD  Financial Markets The role of financial markets Six Parts of the Financial System Market liquidity – ensure the Money owners of financial instruments can buy and sell them easily and with Financial Instruments low transaction costs Financial Markets Information – communicate information about the issuer and Financial Institutions financial instrument Regulatory Agencies Risk transfer / risk sharing – create for investors a place to buy or sell Central Banks risks  The Structure of Financial Markets Primary markets Market with newly issued securities (stocks, bonds) Arrangers (lead arranger, co – arranger...), market makers Bonds – ARDAL (Slovak agency for managing debt and liquidity), auctions Stocks – IPOs (Initial public offerings) Secondary markets Market with existing securities  The Structure of Financial Markets „Cash“ (spot) markets Financial instruments sold (bought) for immediate cash payment Equity markets Stocks Debt markets Money markets – debt instruments shorter than one year (T-bills...) Bond markets – debt instruments longer than one year Derivative markets Financial instruments linked to underlying asset, traded for payment in future Futures, options, swaps  Characteristics of a Well-Run Financial Market Transaction costs are low Information about financial instruments and prices is transparent and widely available Solid governance enforced by the government (market rules, legal enforcement)  Financial Institutions Financial intermediaries between savers and borrowers Matching interests of savers and borrowers, diversification Diversification versus „di-worse-fication“ The only „free lunch“ (index ETFs, insurance business, banking) Depository institutions Commercial banks, savings banks – universal banks Non-depository institutions Insurance companies, asset managers (funds), private equity and venture capital firms (institution‘s money and client‘s money) Difference between money invested in funds and deposited in bank  Financial Institutions Banking system and its forms. The development and current status of banking system in the Slovak republic. The scope of specialized non-banking institutions (insurance companies, reinsurance, leasing companies, factoring and forfaiting companies, and other). State owned banks e.g. Slovenska sporitelna (savings bank) and VUB (credit bank) privatized within the period 1990-2000 Today modern universal banks – Austrian (Sl.sporitelna, Tatrabanka), Italian (VUB, UniCredit) and Slovak capital (365, Primabanka..) State owned banks – Eximbanka, Slovenska zarucna a rozvojova banka Other: Bratislava Stock Exchange, Central Depository (securities register)  Financial Institutions Special banks – construction savings (Prva stavebna sporitelna...) Insurance companies Socialna poistovna – state owned, pensions provider – first pension pillar Health insurance companies – Vseobecna zdravotna poistovna, Dovera, Union Commercial insurance companies Life insurance Non-life insurance – property, cars, travel... Big players cover both life and non-life insurance (Allianz, Uniqa, Axa...)  Financial Institutions Leasing Contract under which lessor agrees to rent an asset to another party - lessee Financial leasing (asset owned by lessee) – commercial banks Operational leasing (asset owned by lessor) – LeasePlan, Arval Factoring Financing contract under which one party sell its account receivables to a third party (e.g. bank) to meet its short term liquidity needs Forfaiting Form of export financing where exporter sells its claim on medium and long- term receivables to a forfaiter (bank...)  Financial Institutions Pension funds – second and third pillar of the pension scheme Asset management companies – investment funds Stock brokers – execution of orders Private equity and venture capital firms