CAT / FIA FFM Syllabus C. Managing Cash Balances - Financial Markets - Notes ^{2 / 13}

Financial Markets

allow people to buy and sell

1. Financial securities (such as stocks and bonds)

2. Commodities (such as precious metals)

General markets (many commodities) and specialised markets (one commodity) exist.

Markets work by placing interested buyers and sellers in one "place", thus making it easier for them to find each other.

Direct Finance

• This is where borrowers borrow funds directly from lenders (people who saved money) in financial markets by selling them securities (financial instruments).

• 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

• As the financial markets are normally direct and no financial intermediaries used, this is called financial disintermediation

Indirect finance

• Borrowers obtain funds through financial intermediaries (banks, stock exchanges).

So, Financial markets facilitate

1. The raising of capital (in the capital markets)

2. The transfer of risk (in the derivatives markets)

3. International trade (in the currency markets)

4. Match those who want capital to those who have it

An overall term for international capital markets dealing in offshore currency deposits held in banks outside their country of origin

Euro means external in this context. For example, eurodollars are dollars held by banks outside the United States

It allows large companies with excellent credit ratings to raise finance in a foreign currency. This market is organised by international commercial banks

Key Features

• Size

  Much bigger than the market for domestic bonds / debentures

• Cheap debt finance

  Can be sold by investors, and a wide pool of investors share the risk

• Unsecured

  Only issued by large companies with an excellent credit rating

• Long-term

  Debt in a foreign currency Typically 5-15 years, normally in euros or dollars but possible in any currency

• Less regulation

  By using Euromarkets, banks and financiers are able to avoid certain regulatory aspects such as reserve requirements and other rules

  However, the reduction in domestic regulations have made the cost savings much less significant than before

  As a result, the domestic money market and Eurocurrency markets are closely integrated for most major currencies, effectively creating a single worldwide money market for each participating currency.