Financial Markets and Treasury Function

Question 1

Financial system

Answer 1

Made up of:
Financial markets - stock exchange, money markets
Financial institutions - banks, insurance companies
Financial securities - mortgages, bonds, equity shares

Purpose:
Channels funds from lenders to borrowers
Allows mechanism for payments
Creates liquidity
Financial services - e.g. management, investement

Question 2

Financial markets

Answer 2

Mechanism whereby those who need finance (DEFICIT UNITS) can get in touch with suppliers (SURPLUS UNITS)

Two types:
Capital markets - stock markets for public sector shares, foreign stocks, company securities, bonds
Money markets - short-term <1 year debt financing and investment (e.g. loans, factoring, loans to local governments, inter-bank markets for banks)

Question 3

Primary and secondary markets

Answer 3

Primary market: first point for borrowers and lenders to meet. Issue of new finance
Secondary market: second-hand trading of securities on the capital markets

Question 4

Role of stock markets

Answer 4

Facilitate stock trading in:
PLC shares
Corporate bonds
Government bonds
Local authority loans
Allocate capital to companies through share prices

Question 5

Speculation

Answer 5

People doing the opposite e.g. selling when most are buying. Smoothing price fluctuations and ensures shares are readily marketable

Question 6

Financial Institutions

Answer 6

Lenders and borrowers contact each other directly
Lenders and borrowers use a financial market
Lenders and borrowers use financial institutions as intermediaries

Question 7

Financial Intermediaries

Answer 7

Reduce risk
Aggregation (small deposits all together)
maturity transformation (lenders shorter, borrowers longer)
Inter-mediation

Question 8

Money market instruments - type of security traded on a money market

Answer 8

Coupon bearing securities: Certificate of deposit, sale and repurchase agreements
Discount instruments: treasury bills, commercial bills, commercial paper, banker’s acceptances
Derivatives: FRAs, Caps and floors, interest rate futures and options
Interest rate swaps
Swaptions

Question 9

Treasury function

Answer 9

Short term cash management - lending/borrowing funds, currency management
Long-term maximisation of shareholder wealth - raising finance, managing dept capacity, investment appraisal, dividend policy
Risk management - hedging forex risk, interest rate, assessing exposure