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Role of Financial Markets and Institutions

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Life Insurance Companies. Property/Casualty Insurance Companies. Pension Funds. Securities Firms ... Finance Companies. Bottomline: Types of Financial Markets ... – PowerPoint PPT presentation

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Title: Role of Financial Markets and Institutions


1
Chapter1
  • Role of Financial Markets and Institutions

2
Outline
  • Financial Institutions
  • Financial Markets

3
The Financial SectorProvides for the efficient
allocation of resources- connects savers and
borrowers
4
Financial Sector
  • Surplus Spending Unit (SSU)
  • Has more inflows than outflows
  • Other terms for surplus unit are saver,
    lender, investor
  • Households are surplus units

5
Financial Sector
  • Deficit Spending Units
  • More outflows than inflows
  • Other terms for deficit spending unit are
  • borrower, demander of loanable funds, seller of
    securities.

6
Transferring Funds from SSUs to DSUs
  • Direct Financing
  • Semi-Direct Financing
  • Indirect Financing (Financial Intermediation)

7
Direct Financing
  • Funds are transferred directly from ultimate
    savers to ultimate borrowers
  • Saver ? Borrower

8
Semi-Direct Financing
  • Ultimate borrowers and savers are brought
    together by a facilitator e.g.
  • Brokers, Dealers, Investment Banks
  • Saver ? Facilitator ? Borrower
  • (No transformation)

9
Indirect Financing or Financial Intermediation
  • A financial "intermediary" transforms financial
    claims with one set of characteristics into
    financial claims with other characteristics e.g.
    deposits are used to make loans.
  • Saver? Intermediary?Borrower
  • (Transformation)

10
Indirect Financing or Financial Intermediation
  • Benefits of Financial Intermediation
  • Economies of scale from specialization
  • Transaction and search costs are lowered for SSUs
    and DSUs.
  • Financial intermediaries may be able to gather
    information more effectively and discreetly.

11
Types of Financial Intermediaries
  • Depository Institutions
  • Commercial Banks
  • Savings and Loan Associations
  • Credit Unions

12
Types of Financial Intermediaries
  • Nondepository Institutions
  • Life Insurance Companies
  • Property/Casualty Insurance Companies
  • Pension Funds
  • Securities Firms

13
Types of Financial Intermediaries
  • Mutual Funds
  • Finance Companies
  • Bottomline

14
Types of Financial Markets
  • Markets may be differentiated by maturity of the
    securities.
  • Long-term (greater than one-year)
  • High quality short-term (less than one-year)

15
Types of Financial Markets
  • Markets may be differentiated by whether
    securities are new or used
  • Primary markets
  • Secondary markets

16
Types of Financial Markets
  • Markets may be differentiated by how or where
    securities are traded.
  • Organized markets
  • Over-the-counter (OTC).

17
Types of Financial Markets
  • Markets may be differentiated by variations in
    timing- now versus later
  • Spot
  • Futures

18
Types of Financial Markets
  • Other differentiations
  • Options markets
  • Foreign exchange markets

19
Market Efficiency
  • Types of efficiency
  • Allocational efficiency
  • Informational
  • Weak form
  • Semi-strong form
  • Strong form
  • Operational

20
Summary
  • Financial institutions facilitate the transfer of
    funds from savers to borrowers
  • On average, households are net savers- business
    and governments are net dissavers
  • Trend is toward financial department stores

21
Summary
  • Financial markets make it easy for borrowers and
    savers to meet their respective needs
  • Financial markets are becoming more global
  • Efficiency is critical to participants in
    financial markets
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