The Financial System - Lezione 2 Monetary Economics

Question 1

DEFINITION OF FINANCIAL INSTRUMENT AND 4 KEY ELEMENTS

Answer 1

A Financial instrument is a written obbligation between 2 parties to transfer a value that has to be paid ad a certain point in the future.
The 4 elements are:
LEGAL: it has to be written so that the parties will feel safe. There must be a contract
FUTURE: there must be a future date established for the payback
PARTIES: can be and in dividual a company or a firm. So the partecipants that will sign the deal
REASON FOR PAYMENT: the circumstances in which the payment will be done (example of insurance)

Question 2

USES OF FINANCIAL INSTRUMENTS

Answer 2

They can be used ad a mean of payment, store of value, transfer risk.
Mean of payment in the case of a loan, a mortgage
Store of value when you mean to have savings
Tranfer the risk is when I am paying a certain amount to be sure that in the case a certain situation will accour, someone else will pay. Same situation is when an individual buys a Bond, and accept the risk that the money will be never given back. In this case the firm is trasnferring the risk to the investor.

Question 3

NAME THE CARACTERISTICS OF FINANCIAL INSTRUMENTS and THEIR EVALUATION

Answer 3

They are
STANDARDIZATION, by having standardized contracts and kind of financial instruments costs and too high fees. We apply kind of Economies of scale.
INFORMATION - this is generally an indicator of trustness. An instruments with an high price generally means is a less risky investment, and that is issued by an healthy company.
To evaluate a financial instruments we take in consideration the how, when, the risk, or the reason why I am willing to make this investment.
So I will take in consideration the interests or the coupon I am going to get and when. At a same given payment I will always be more willing to invest in an instrument that will pay me back more money in the shortest time. The risk depens on my willines to risk.

Question 4

Define the structure of Financial Market

Answer 4

Primary and secondary markets

Question 5

What are the Carachteristics of the financial Market?

Answer 5

LOW TRANSACTION COST
PROTECTION because it is regulated by the law through specialized agencies
INFORMATION with the information you will be able to take your decision about the investment

Question 6

Name some depositary institutions

Answer 6

Commercial banks
Savings banks - like banks but you can’t always ask for the withdrawl your money
Credit unions: that have advantageous rates for members of the cooperative