Types of Markets Flashcards
Equity
purpose of ownership and raise capital for funding
traded on central/spec. places (NYSE/Nasdaq)
Example: ordinary, preferred, convertible stocks
Finance by sharing Ownership and trading/selling stock
Equity benefit
positive - lenders (banks) will be more readily if subst. equity available
Interest (right) on your ownership
Equity disadvantages
volatile/riskier due to change in share value
firm´s profit must be divided
managers have to ensure they follow strategies which increase profit (agency problem)
dividends paid after debt payment
Money Market
purpose –> ST debt (finance WC & ope. expenses)
not for growth in capital (less risky)
ST capital/credit –> ST liquidity transaction
EX: government tries meeting payroll in face of big seasonal fluctuation in tax receipt
EX: commercial paper, Tbills, Interbank Loan, CDS, Repos, OI Rates
Money Market Evolution
past: banks as main source pf credit (supply of low cost money)
now: MM - mechanism (technology) brings buyers & investors together without need of intermediary
no specific place (web, linked via telephone/computers)
but central bank as centre –> determine IR for currency
MM Trade
investor to be highly risk averse (financial crisis)
related to bond Market (LT debt instruments)
both extend credit without taking ownership but MM is rather cash management and PF financing
IR of MM as benchmark for LT financial instruments
Interbank Market
banks & financial institutions borrow funds with longer period (overnight - 1 week- 1 yr)
loan made on “interbank rate”
intermediary between counterparts (dealer) announces bid & offer prices
FX market
unique market with relevant characteristics
largest & most liquid (all currencies)
greatest turnover (5.088 billns. $)
any individual, company, country can participate
24/7 open
low capital consumption - money is exchange for money
mature market (vs fixed income)
easy to understand (plain vanilla)
variety of factors affecting exchange rate
eFX business/developments (Ecommerce due to liquidity)
Regulation
FX Market - functions/importance
favour exchange of funds among diff. countries
let foreign exchange risk to be hedged
- export / import of product
- pay salary in diff. countries with diff. currencies
- match revenues & costs
Finance International Trade (globalisation)
fix foreign Exchange Currency Prices (relative values)
FX M - characteristic
(NY, Chicago, Toronto --> London, frankfurt, zurich --> Tokyo, HK, Singapore, Sydney, Melbourne) 48 % - FX Swap 36 % - FX Spot 8 % - FX Forwards (incl. NFDs) 6 % - FX Options & other products 2 % - Currency Swaps
FX - Currency
Market Share: US Dollar --> Euros --> japanese Yeng --> b. pound Curency Pair Market Share: EUR - USD --> USD - YPY --> GPB - USD AUD - USD -- > USD-CAD
Derivative Markets
purpose - manage risk & facilitate trading
Exchange T - uniform institutions requires initial deposit & settled through clearing house (“referee” - remove risk (Counter-party/ Default)
OTC - privately negotiated, directly, tailor-made contract
no intermediary service (mor flexible - unregulated)
Fwds, Swaps, FRA, exotic options
Others…
Commodity - manage trading in primary products
a) hard Commodity ( Raw Materials)
b) soft Commodity (grown agriculture Products)
Insurance - helps relocate risk (transfer risk in return for payment)
Fixed Income Market
Fixed Income Security
provides return in form of fixed periodic payments & return of principal at maturity
Fixed Income Valuation
benefits - stable, regular income, lower risk
disadvantage - low return, IR risk / fluctuations (depends on type of bond), low capital appreciation, no OS/control of issuer
not able to invest in other securities if Principal is tied for long time
