Lecture_11_-_Review_6up

Lecture_11_-_Review_6up - 1. Overview Money Markets and...

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Money Markets and Finance Money Markets and Finance Lecture 11: Lecture 11: Final Review Final Review 1. Overview 1. Overview In this week’s lecture, we will review and put together all the concepts we have learnt during the course, namely: – Financial Markets and Instruments; – The time value of money; – Diversification; and, – Arbitrage. 2. Financial Markets and Instruments 2. Financial Markets and Instruments Recall that the primary role of financial markets is to bring together lenders and borrowers, aiding in the transfer of funds from people who wish to lend them to people who wish to borrow them. The flow of funds is as follows: Flow of Funds Within the Financial System Lenders: Have surplus funds and are suppliers of funds Borrowers: Have deficit units and are demanders of funds Examples of Lenders: Individuals (Foreign and Domestic) Companies (Foreign and Domestic) Governments (Foreign and Domestic) Examples of Borrowers: Individuals (Foreign and Domestic) Companies (Foreign and Domestic) Governments (Foreign and Domestic) Financial Markets Give $ Receive financial instruments Is ue financial instruments Receive $ 2. Financial Markets and Instruments 2. Financial Markets and Instruments The range of financial instruments available to borrowers and lenders are not traded within a single market. We can differentiate between financial markets based on the types of instruments traded within them. Financial Markets Money Markets Examples of Money Markets: 1. Intercompany Market 2. Interbank Market 3. Bil s Market 4. Commercial Paper Market 5. Negotiable CD Market Each of these markets can be further broken into the sub-markets below Capital Markets Examples of Capital Markets: 1. Equity Market 2. Corporate Debt Market 3. Government Debt Market Each of these markets can be further broken into the sub-markets below. Primary Money Markets (Maturity to1 year) Secondary Money Markets (Residual Maturity to 1 year) Primary Capital Markets (New Shares and Long- Term Debt Is ues) Secondary Capital Markets (Trading in Existing Securities) Domestic Money Markets International Money Markets Domestic Capital Markets International Capital Markets Derivatives Markets . Examples of Derivatives Markets: 1. Forward Market 2. Futures Market 3. Options Market Foreign Exchange Markets . 2. Financial Markets and Instruments 2. Financial Markets and Instruments Each market can be further broken down on the basis of: – Whether trades involve newly issued instruments (primary markets) or existing instruments (secondary markets); and, – Whether trades relate to instruments in domestic or international markets. 2. Financial Markets and Instruments 2. Financial Markets and Instruments Using the 3 valuation ideas introduced during the course, namely the time value of money, diversification and arbitrage, we can calculate the value of any asset, including those traded within financial markets. We will now consider each of these valuation ideas in turn.
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3. Time Value of Money 3. Time Value of Money The fundamental idea behind the time value of
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Lecture_11_-_Review_6up - 1. Overview Money Markets and...

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