Introduction to the Financial World Corporate Finance 2
The financial world Explain the role of the financial manager Detail the value of financial intermediaries Show an appreciation of the function of the major financial institutions and markets
Primitive and modern economies Exhibit 1.14 Flows within a simple economy – production level Exhibit 1.15 Flows within a simple economy – production level plus money
Flows within a modern economy Exhibit 1.16 Flows within a modern economy
The role of the financial manager Exhibit 1.17 The flow of cash between capital markets and the firm’s operations
The financial manager plays a pivotal role in the following: Interaction with the financial markets Investment Treasury management Risk management Strategy
The flow of funds and financial intermediation Exhibit 1.20 The flow of funds and financial intermediation
The flow of funds and financial intermediation Primary investors Ultimate borrowers Conflict of preferences
Savings into investment in an economy without financial intermediaries
The introduction of financial intermediaries Brokers Asset transformers Risk transformation Maturity (liquidity) transformation Volume transformation Intermediaries’ economies of scale (a) Efficiencies in gathering information (b) Risk spreading (c) Transaction costs Financial markets
Savings into investment in an economy with financial intermediaries and financial markets
Growth in the financial services sector Reasons for growth of financial services in the UK 1 High income elasticity 2 International comparative advantage Exhibit 1.24 Main features of change in financial services
The financial system: the banking sector Retail banks Wholesale banks Raising external finance for companies Broking and dealing Fund management (asset management) Assistance in corporate restructuring Assisting risk management using derivatives International banks Foreign banking Eurocurrency banking Building societies Finance houses
The financial system: long-term savings institutions Pension funds The long time horizon of the pension business means that large sums are built up and available for investment – currently over £800bn Insurance funds General insurance Life assurance Term assurance, whole-of-life policies, Endowment policies, annuities Life assurance companies have over £900bn under management
The financial system: the risk spreaders Unit trusts Investment trusts Open-ended investment companies (OEICs)
The financial system: the markets The money markets The bond markets The foreign exchange markets (Forex or FX) The share markets The derivative markets
Lecture review 1 Financial institutions and markets Financial managers Asset transformation Intermediaries and economies of scale Secondary markets Financial services sector
Lecture review 2 The financial system The banking sector Long-term savings institutions The risk spreaders The markets