Documentos de Académico
Documentos de Profesional
Documentos de Cultura
1
Lecture 1
2
Why Study Financial Markets?
The evening news features a segment about
interest rates, the Fed Chairman Janet Yellen
(not Norman Chan Tak-Lam of HKMA), and
liquidity in credit markets.
What is the Fed? Why not HKMA?
Why do I care about interest rates?
Will this impact my ability to get a bank loan?
Will this affect the value of my stock portfolio?
Will this affect the Japanese yen price?
Will this affect my grade for FINA3010?
3
Debt Markets & Interest Rates
4
Debt Markets & Interest Rates
6
Bond Market and Interest Rates
7
The Stock Market
The stock market is the market where
common stock (or just stock), representing
ownership in a company, are traded.
Companies initially sell stock (in the primary
market) to raise money. But after that, the
stock is traded among investors (secondary
market).
Of all the active markets, the stock market
receives the most attention from the media,
probably because it is the place where
people get rich (and poor) quickly.
8
Stock Market
https://www.bloomberg.com/quote/INDU:IND
9
The Stock Market
10
The Foreign Exchange Market
11
The Foreign Exchange Market
12
Foreign Exchange Market
https://www.bloomberg.com/quote/DXY:CUR
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The Foreign Exchange Market
14
How We Study Financial Markets
Basic Analytic Framework
1. Concept of equilibrium
2. Search for profits
3. Basic supply and demand approach
to understand behavior in financial
markets
4. Transactions cost and asymmetric
information approach to financial
structure
15
Function of Financial Markets
16
Financial Markets Funds Transferees
Lender-Savers Borrower-Spenders
Households Business firms
Business firms Government
Government Households
Foreigners Foreigners
17
Segments of Financial Markets
1. Direct Finance
Borrowers borrow directly from lenders in
financial markets by selling financial
instruments which are claims on the
borrowers future income or assets
2. Indirect Finance
Borrowers borrow indirectly from lenders via
financial intermediaries (established to source
both loanable funds and loan opportunities)
by issuing financial instruments which are
claims on the borrowers future income or
assets
18
Function of Financial Markets
19
Importance of Financial Markets
Financial markets are critical for
producing an efficient allocation of capital,
which contributes to higher production
and efficiency for the overall economy
Financial markets also improve the lot of
individual participants by providing
investment returns to lender-savers and
profit and/or use opportunities to
borrower-spenders
20
Structure of Financial Markets
1. Debt Markets
Short-Term (maturity < 1 year)
Long-Term (maturity > 10 year)
Intermediate term (maturity in-between)
Represented $38.2 trillion at the end of
2012
2. Equity Markets
Pay dividends, in theory forever
Represents an ownership claim in the firm
Total value of all U.S. equity was $18.7
trillion at the end of 2012
21
Characteristics of Debt Markets
Instruments
Debt instruments
Buyers of debt instruments are suppliers (of
capital) to the firm, not owners of the firm
Debt instruments have a finite life or maturity
date
Advantage is that the debt instrument is a
contractual promise to pay with legal rights to
enforce repayment
Disadvantage is that return/profit is fixed or
limited
22
Characteristics of Equity Markets
Instruments
23
Classifications of Financial Markets
1. Primary Market
New security issues sold to initial
buyers
2. Secondary Market
Securities previously issued are
bought and sold
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Classifications of Financial Markets
1. Exchanges
Trades conducted in central locations
(e.g., New York Stock Exchange,
HKEx)
2. Over-the-Counter Markets
Dealers at different locations buy and
sell
25
Classifications of Financial Markets
26
Internationalization of Financial
Markets
27
Internationalization of Financial
Markets
Eurocurrency Market
Foreign currency deposited outside of home
country
Eurodollars are U.S. dollars deposited, say,
London.
Gives U.S. borrows an alternative source for
dollars.
28
Global perspective
Relative Decline of U.S. Capital Markets
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Function of Financial
Intermediaries: Indirect Finance
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Function of Financial
Intermediaries: Indirect Finance
Instead of savers lending/investing
directly with borrowers, a financial
intermediary (such as a bank) plays
as the middleman:
the intermediary obtains funds from
savers
the intermediary then makes
loans/investments with borrowers
31
Function of Financial
Intermediaries: Indirect Finance
32
Function of Financial Intermediaries
Transactions Costs
1. Financial intermediaries make profits
by reducing transactions costs
2. Reduce transactions costs by
developing expertise and taking
advantage of economies of scale
33
Function of Financial Intermediaries
34
Function of Financial Intermediaries
35
Function of Financial
Intermediaries : Indirect Finance
36
Function of Financial
Intermediaries : Indirect Finance
Another reason FIs exist is to reduce the
impact of asymmetric information.
One party lacks crucial information about
another party, impacting decision-making.
We will discuss this problem along two
fronts: adverse selection and moral hazard.
37
Asymmetric Information:
Adverse Selection and Moral Hazard
Adverse Selection
1. Before transaction occurs
2. Potential borrowers most likely to produce
adverse outcome are ones most likely to seek
a loan and be selected
38
Asymmetric Information:
Adverse Selection and Moral Hazard
Moral Hazard
1. After transaction occurs
2. Hazard that borrower has incentives to
engage in undesirable (immoral) activities
making it more likely that won't pay loan
back
Again, with insurance, people may
engage in risky activities only after
being insured
Another view is a conflict of interest
39
Asymmetric Information:
Adverse Selection and Moral Hazard
40
Economies of Scope and
Conflicts of Interest
FIs are able to lower the production cost of
information by using the information for
multiple services: bank accounts, loans, auto
insurance, retirement savings, etc. This is
called economies of scope.
But, providing multiple services may lead to
conflicts of interest, perhaps causing one
area of the FI to hide or conceal information
from another area (or the economy as a
whole). This may actually make financial
markets less efficient!
Types of Financial Intermediaries
42
Types of Financial Intermediaries
43
Regulation of
Financial Markets
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