Financial Market And Treasury Function Flashcards
What are financial markets?
e.g. stock exchanges, money markets
What are financial institutions?
e.g. banks, building societies, insurance companies and pension funds
What are financial securities?
e.g. mortgages, bonds, bills and equity shares
What does the financial system do?
channels funds from lenders to borrowers
provides a mechanism for payments
creates liquidity and money
provides financial services such as insurance and pensions
offers facilities to manage investment portfolios.
What are securities?
Security is a generic term for a medium of investment, for example a share, a corporate bond or a money market instrument.
Many securities are traded on a market.
What is the role of the finical markets?
Financial markets are mechanisms where those requiring finance (deficit units) can get in touch with those able to supply it (surplus units), i.e. allowing the buyers and sellers of finance to get together.
What are money markets?
Money markets deal in short-term funds (<1 year) and transactions.
They play a key role in:
Providing short-term liquidity to companies, banks and the public sector
Loans, factoring and commercial papers for companies
Inter-bank markets for banks and building societies
Loans to local government authorities
what are capital markets?
Capital markets deal in longer-term finance, mainly via a stock exchange, dealing mainly in:
public sector and foreign stocks
company securities (shares and corporate bonds)
Eurobonds (bonds issued in a currency other than that of the national currency of the issuing company)
What are international financial markets?
An international financial market exists where domestic funds are supplied to a foreign user or foreign funds are supplied to a domestic user.
The currencies need not be those of either the lender or the borrower.
e.g. a local business is looking to build a factory in a foreign country. Instead of borrowing funds in the local currency and exchanging them for the currency of the country of construction to make payments to the construction workers they could borrow the foreign currency directly.
What are stock markets and corporate bond markets?
The role of the stock market is to:
facilitate trade in stocks such as:
– issued shares of public companies
– corporate bonds
– government bonds
– local authority loans
allocate capital to industry (share prices of attractive companies rise making it easier for them to raise cheap capital)
determine a fair price for the assets traded.
Speculative trading on the market can assist by:
smoothing price fluctuations
ensuring shares are readily marketable.
What are market makers?
maintain stocks of securities in a number of quoted companies
continually quote prices for buying and for selling the securities (bid and offer prices)
generate income by the profits they make from the difference (or ‘spread’) between the bid and offer prices.
What are the roles of financial institutions?
Faced with a desire to lend or borrow, there are three choices open to the end-users of the financial system:
Lenders and borrowers contact each other directly (inefficient, risky and costly)
Lenders and borrowers use an organised financial market (e.g. purchase bonds from company (lend money to the company), redeem company bonds or trade bonds to another investor)
Lenders and borrowers use financial institutions as intermediaries (lender obtains an asset which cannot usually be traded but only returned to the intermediary, e.g. bank deposit account, pension fund rights)
What is intermediation?
Intermediation refers to the process whereby potential borrowers are brought together with potential lenders by a third party, the intermediary. Financial intermediaries have a number of important roles: Risk reduction (reducing the risk of a single default by lending to a wide variety of individuals and businesses) Aggregation (pooling small deposits to enable larger advances to be made) Maturity transformation (satisfying the different timescale needs of lenders (generally shorter) and borrowers (generally longer)) Financial intermediation (bringing together lenders and borrowers)
Give some examples of intermediaries
Clearing banks Investment banks Savings banks Building societies Finance companies Pension funds Insurance companies Investment trusts and unit trusts
What is the role of the treasury function?
The treasury function of a firm usually has the following roles:
Short-term management of resources:
short-term cash management – lending/borrowing funds as required
currency management.
Long-term maximisation of shareholder wealth:
raising long-term finance, including equity strategy, management of debt capacity and debt/equity structure
investment decisions, including investment appraisal, the review of acquisitions and divestments and defence from takeover
dividend policy.
Risk management:
assessing risk exposure
interest rate risk management
hedging of foreign exchange risk.
