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Chapter 2

FINA 2201 Chapter Notes - Chapter 2: Economic Equilibrium, Financial Industry Regulatory Authority, Bid Price


Department
Finance & Insurance
Course Code
FINA 2201
Professor
Ma Linlin
Chapter
2

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FINA 2201 Chapter 2: Financial Markets and Institutions
1
Diagram of the Capital Formation Process
Types of Markets
Physical Asset Markets versus Financial Asset Markets
Physical/Tangible/Real asset markets: are for products such as wheat, autos, real estate, computers, and machinery
Financial asset markets: deal with stocks, bonds, notes, and mortgages and derivative securities whose values are
derived from changes in the prices of other assets.
Spot Markets versus Future Markets
Spot Markets: The markets in which assets are bought or sold for “on-the-spot” delivery.
Futures Markets: The markets in which participants agree today to buy or sell an asset at some future date. Such a
transaction can reduce, or hedge, the risks faced by both the farmer and the food processor.
Money Markets versus Capital Markets
Money Markets: The financial markets in which funds are borrowed or loaned for short periods (less than one year).
Capital Markets: The financial markets for stocks and for intermediate (1-10 years) or long-term debt (10+ years)
NY Stock exchange
Primary Markets versus Secondary Markets
Primary Markets: Markets in which corporations raise capital by issuing new securities.
Secondary Markets: Markets in which securities and other financial assets are traded among investors after they have
been issued by corporations.
Private Markets versus Public Markets
Private Markets: Markets in which transactions are worked out directly between two parties.
Public Markets: Markets in which standardized contracts are traded on organized exchanges.
Globalization: exposed the need for greater cooperation among regulators at the international level, but the task is not
easy. Factors that complicate coordination include
(1) Different structures in nations’ banking and securities industries
(2) Trend toward financial services conglomerates, which obscures developments in various market segments
(3) Reluctance of individual countries to give up control over their national monetary policies.
Regulators are unanimous about the need to close the gaps in the supervision of worldwide markets.
Derivative: Any financial asset whose value is derived from the value of some other “underlying” asset.
An option to buy IBM stock is a derivative, a contract to buy Japanese yen 6 months from now or a bond backed by
subprime mortgages. Value of the IBM depends on price of IBM’s stock, value of the Japanese yen “future” depends
on the exchange rate between yen/dollars, & value of the bond depends on value of the underlying mortgages.
Hedging operation: its purpose is to reduce risk exposure
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