Lesson 1 - Money and Payments System Flashcards
Elements of the financial system
6 elements:
MONEY - daily transactions
FINANCIAL INSTRUMENTS - Transfer of resources lender to borrower and to transfer risk (insurances)
FINANCIAL MARKETS - places where financial intruments are bought and sold (primary and secondary market)
FINANCIAL INSTITUTIONS - they perform services to the financial system to access to the market (banks)
GOVERNAMENTAL REGULATORY AGENCIES - agencies that have the role to control the functioning of the financial system
CENTRAL BANKS - the control and regulate the money supply
Which are the principales of Money and Banking
There are 5 principlas:
TIME HAS VALUE - your opportuinity cost. when you decide to buy goods and service you renounce to use this money for another purpose. If you use the money to make investiments, you are renouncing to the opportunity cost so you have the right to be compensated for it (interests)
RISK REQUIRE COMPENSATION - also like insurance
INFORMATION IS THE BASIS OF DECISIONS
MARKETS DETERMINE PRICE AND ALLOCATE RESOURCES - trust in the companies to decide the risk worthness and risks
STABILITY IMPROVES WELFARE - sometimes governments are necessary to keep the balance and the stability of the economic system. (moentary policiy and fiscal policy)
What function perform the Financial Markets? And who are the principales actors?
The Financial Markets perform the function to move funds from those that saved a surplus of money by spending less than the income and those who instead wish to spend more than the income. The principal actors are Government (saving money for a possible future investment or issuing bonds to collect money, Firms (make a reserve or make and investment, Housholds (make a loan or saving or invest for the future), Foreigners (investments or borrowing money in case there are better conditions) in both cases but with difference intentions and necessity. …(Make examples)
In which way can funds flow from lender to savers?
In Direct finance (direct finance market) / with financial intermediaries (indirect finance market)
What are the advantages of using intermediaries for moving funds?
Cost tranasctions - a specialized company can use economy of scale and reducing costs of transactions
Managing risk - the intermediary knows what the borrower is looking for so you can better allocate funds
Efficiency - intermediaries can match the best investors with the best borrowers.
Information: the intermediaries have information that lenders and borrowers do not have and use them.
What’s the structure of the financial market?
Financial markets can be classified as:
Debt Vs Equity - mortgage or Bonds Vs Dividend. In the debit contract there is a fixed or unfixed periodical payment and is more for Risk averse individual. Equity is mostly for risk lovers individual because they will might get payed if thigs runs well but they can also lose money as weel
Primary Vs Secondary - new security issued (stock or bond) normally sold through banks (better garanty of placement) - Secondary is a replacement of securities.
Regulated Vs OTC - standardized rules to all financial trnsactions and this brings also to reducing the overall riks, instead OTC (over the counter) - each transaction is trade directly. No standard rules. This normally can work in case of very big transactions.
Money Vs Capital - Money market is normally related to short therm debts (less than 1 year) and they are meant to cover liquidity needs. Money market has smaller fluctuations and tend to be more liquid and well traded, so the are generally safar too. Instead Capital markets are made for longer term debts (more than 1 year), are generally subjected on more price fluctuations.
Who are the financial intermediaries in the Secondary Market?
Brokers and Dealers
Brokers are generally agents of specific investors while dielars work mostly on their own directly in the market and since they use no standardized contracts but they will trade each transaction, they tent to invest big capitals and make big transactions. So small savers should not look for a dealer to invest in the standard market.
Who are and how can be classified the financial intermediaries?
They are 3
DEPOSITARY INSTITUTIONS - that collect money from individuals and small savers to find the more suitable wat to invest their money (Commercial banks, mutual banks, savings and lonas),
CONTRACTUAL SAVINGS - they are offering a service in case a specific event occures (Life insurance, Pension Funds),
INVESTMENT INTERMEDIARIES are intermediaries offering qualified stock that have the knowladge and the information to help the investors to create the better investments that suits the necessities and the interest of the investors providing the service of consulting (Finance companies, Mutual funds, Money markets in the case is a short term investment)
How can be these financial investment intermediaries controlled?
RESTRICTIONS AND RULES given by some supervisiors like form laws that give some rules in term of capital, reputation
DISCLOUSRE RULES means that a minimum of amount of informations has to be provide to the market
INSURANCE made by the insititutions so that in case of big mistakes or crysis they can be covered
COMPETITION CONTRAINTS - insures a minimum of competition in order to avoid monopoly or oligopoly
RESTRICTIONS OF PRICES AND INTERESTS RATES that are regulated
Give a definition of Money
it is an asset that is generally accepted as a payment for goods and services for the repayment of a debit.
Money can be used:
As Payment - classic transaction that substituted the payments through god, metals (innefficient and slow method)
Unit of account - to mesure the value of something
Store of Value - which is nearly true if we don’t consider the inflation
Give some examples of payment system
COMMODITY MONEY - baratto
FIAT MONEY - Cash printed by governments
CHECKS
ELECTRONIC PAYMENTS - credit cards, debit cards, e-money (criptovalute), Direct transaction
