Management of FinancialInstitution

Financial Environment

Financial Markets

Financial markets could mean:

1.Organizations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the trade in stocks, bonds and warrants.

• Bonds

• Stocks

2.Stocks and shares are traded between buyers and sellers in two ways including:

• use of stock exchanges; • directly between buyers and sellers

etc. The coming together of buyers and sellers

to trade financial products

3.In academia, students of finance will use both meanings but students of economics will only use the second meaning.

Functions of

Financial markets

Financial markets facilitate:

• The raising of capital (in the capital markets);

• The transfer of risk (in the derivatives markets);

• International trade (in the currency markets).

• They are used to match those who want capital to those who have it.

• Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.

Financial Environment Structure

LendersFinancial

IntermediariesFinancial Markets

Borrowers

1. Individuals2. Companies

1. Banks2. Insurance Co3. Pension Funds4. Mutual Funds

1. Inter bank2. Stock Ex3. Money Market4. Bond Market5. Foreign Ex

1. Individuals2. Companies3. Central Govt4. Municipalities5. Public Co

Types of

Financial Markets

Types of Financial Markets

1.Capital MarketsThe capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

1. Capital Markets Contd..

The capital market (securities market) is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market.

1. Capital Markets Contd..

• Financial regulators, such as the. Securities and Exchange Commission of Pakistan, oversee the capital markets in their respective countries to ensure that investors are protected against fraud. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded.

2. Stock Market

The term 'the stock market' is a concept for the mechanism that enables the trading of company stocks (collective shares), other securities, and derivatives. Bonds are still traditionally traded in an informal, over-the-counter market known as the bond market.

2. Stock Market Contd..• Commodities are traded in commodities

markets, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-counter').

• The stocks are listed and traded on stock exchanges which are entities (a corporation or mutual organization) specialized in the business of bringing buyers and sellers of stocks and securities together.

2. Stock Market Contd..

• The stock market in Pakistan includes the trading of all securities listed on the

»KSE 100,

»the LSE 30

»ISE 10,

2. Stock Market Contd..

• European examples of stock exchanges include the Paris Bourse (now part of Euronext), the London Stock Exchange and the Deutsche Börse.

3. Bond Market

The bond market, also known as the debt, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. The size of the international bond market is an estimated $45 trillion of which the size of outstanding U.S. bond market debt is $25.2 trillion

3. Bond Market Contd..

• References to the "bond market" usually refer to the government bond market because of its size, liquidity, lack of credit risk and therefore, sensitivity to interest rates.

• Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.

4. Commodity Markets

• Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized Contracts.

5. Money Market

• The money market is the global financial market for short-term borrowing and lending. It provides short-term liquid funding for the global financial system. The money market is a sector of the capital market where short-term obligations such as Treasury bills, commercial paper and bankers' acceptances are bought and sold.

5. Money Market Contd..

• Money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months.

5. Money Market Contd..

• Money market trades in short term financial instrument commonly called "paper". This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.

6. Derivatives Market

• The derivatives markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

7. Futures exchange “Market”

• A futures exchange is an exchange which provides a marketplace where one can buy and sell futures; that is a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.

8. Insurance market

• Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. Insurer, in economics, is the company that sells the insurance.

8. Insurance market Contd..

• Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

9. Foreign exchange market

• The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions.

Analysis of financial markets

• The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not correlated to the last change.

Culture of The Markets Only negative stories about financial

markets tend to make the news.

1. Enron

2. Barings Scandal

3. Black Wednesday

4. The Story of Tulip Mania

Baring Scandal

• The traders, Mr. Nick Leeson, was employed by Barings to profit from low risk arbitrage opportunities between derivatives contracts on the Singapore Mercantile Exchange and Japan’s Osaka Exchange.

Conclusion

• Betterment of economy

• Uplifting of economy

• Economic growth

• Very useful to us.