ECONOM 3229 Lecture Notes - Lecture 3: Underlying, Market Liquidity, Financial Instrument
6 Apr 2015
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Document Summary
Key components of the financial system: financial instrument, financial market, financial institutions. It moves funds from savers (investors) to borrowers (firms) This channeling of funds is done by transfer of financial instruments through market and institutions. Financial instrument: written obligation of one party to transfer something of value to another party at some future date under specified conditions. Characteristics: standardization, provision of key information, and goal is to lower transaction and informational costs. Types: used as a store of value. Bank loans, bonds (underlying instrument), home mortgages, stocks, abs (asset. All of these are used to transfer risk, insurance the contract, future contracts, options. Market liquidity (where they sell and buy financial instruments) Centralized exchanges (buyers and sellers meet directly) and over the counter (buyers and sellers meet indirectly) Primary and secondary (already issued instruments are resold from seller to buyer), investment banks buy the instruments. Money (short term, and very liquid) and capital (long term, risky and not liquid)
