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The External Environment for Financial Markets

The External Environment for Financial Markets - EXTERNAL...

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1 EXTERNAL ENVIRONMENT FINANCIAL MARKETS Stony Brook College of Business BUS 330 V. Giardini
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2 Flow of Funds in the Financial Markets Financial Markets Borrowers Parties Whose Spending Exceeds Their Income Savers Parties Whose Income Exceeds Their Spending Cash Cash Financial Assets
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3 Functions of the Financial Markets Mobilize savings and allocate these funds to borrowers Facilitate risk transfer Provide a source of liquidity Provide a mechanism for valuing financial assets
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4 Flow of Funds Through Financial Intermediaries Financial Intermediaries Banks Insurance Companies Mutual Funds Finance Companies Borrowers Parties Whose Spending Exceeds Their Income Savers Parties Whose Income Exceeds Their Spending Cash Cash Secondary Claims Primary Claims
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5 Functions of Financial Intermediaries Reduce the cost of bringing borrower and saver together Bridge borrower’s and lender’s maturity preferences Reduce investment risk through diversification Some services of intermediaries provide a payments mechanism
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