financial markets Flashcards
what are financial markets
Financial markets= where financial assets or securities are traded.
· The purpose is to channel funds from those who have surplus funds to those who have a shortage of funds
· Channelling funds can take place through financial intermediary, like a bank, or directly thorough financial markets i.e when a company issues new shares or the Debt Management Office of the Treasury issues gilts
What is the money market
- For short dated financial assets
- raise ST finance for individuals, firms (commercial bills) and govs (T-bills)
- ST debt maturity from 24h to 12m
how doe money market maintain employment and real incomes
- provides short-term credit facilities
- improves firms liquidity
- finances working capital requirements and operational expenses of trade and industry
- e.g. paying bills, wages and raw materials
- facilitates smooth functioning of businesses
- maintains employment and real incomes
how does money market achieve macroeconomic objectives using QTM
- enables gov to raise ST funds using treasury bills
- reduces need to print new money for expenditure
- reduces excessive growth of money supply
- via MV=PQ
- limits inflationary pressure whilst facilitating fiscal and supply side policies
- fulfils macroeconomic objectives
how does the money market reduce systemic risk
- enables commercial banks to temporarily employ surplus funds profitably and easily in realisable assets
- economising their cash balances at hand
- enables them to meet their statutory requirements of cash reserve ratio and liquidity ratio
- without resorting to central banks funds
- reduces systemic risk
- stable economic growth
how does money market shift LRAS
- interest rates prevailing in money amrket
- influence long term interest rates in capital market
- cost of major borrowing for firms
- investment
- demand for capital goods
- productive capacity
- LRAS
what is the capital market
- For long dated and short dated financial assets
- Companies issues shares or corporate bonds or borrow from banks
- Banks issue bonds
- Governments issue gilts
- primary or secondary
what is the primary capital market
Newly issued securities sold by companies and govs
what is the secondary capital market
- Trade previously issued securities i.e London Stock Exchange
- Increase liquidity of second-hand securities so those with surplus funds will be willing to buy new issues of shares and bonds
- Helps economy allocate resources between competing users
how does capital market channel funds
- provides links between savers and investors
- brings together international buyers and sellers of securities
- channels funds of profitability from surplus to deficit economic agent
- productive investment (including FDI)
- increases AD and productive capacity
- short and long run econ growth
how does capital market encourage saving
- provides higher rewards for long-term household savings
- increases savings within developing economies
- reducing unproductive and wasteful spending on conspicuous consumption or real estate
- increased productive investment
- positive multiplier effects on macroeconomy
what is the FOREX market
Foreign exchange market
- where currencies are bought and sold
- facilitates growth of international trade and cross-border capital investment
- sport and forward
what is the spot market
- facilitates instant conversion of one currency into another
- transfers purchasing power between countries
- enables international payments and debt clearance between nations
- facilitates FDI, trade and exploitation of comparative advantage
- trade creation and its benefits
- global cross-borer investment
- macroeconomic objectives
what is the forward market
- three month contracts to buy/sell FOREX at a fixed date in the future at a fixed rate
- hedging against unanticipated or unfavourable moments
- increased certainty and security
- increased foreign credit (ST trade) and increased foreign capital transfer (LT investment)
- increased globalisation, trade and development
