Financial Markets and Institutions – BA 441 Monday and Wednesday -- Bexell 320 10:00 to 11:50 p.m.

Chapter 1 – Introduction Definition of Markets Where an economic transaction takes place Example: Car Purchase Example: Swap (Bond swap from fixed to floating rate) Types of Markets Product Factor Labor Capital (Financial Markets) Course Focus -- Financial Markets

Chapter 1 – Introduction Assets – something that has value to the owner Types Real (tangible – physical attributes) Financial (intangible – claim to future cash) Financial Asset Players Issuer Investor Value of Assets Price – arm’s length transaction between buyer and seller Present value of future cash flow (financial asset)

Chapter 1 – Introduction Financial Markets and Risk Expected Cash Flow The future cash flow is not always guaranteed Risk is the uncertainty about the future cash flow Risk -- Types Purchasing Power Risk – Inflation Credit Risk – Probability of Default Foreign Exchange Risk – Currency Changes

Chapter 1 – Introduction Role of Financial Assets Transfer funds from those with “excess” (investors) to those with “needs” or “opportunities” (issuers or borrowers) Issuers use funds to invest in tangible assets This is the end of the transfer process Potential for many intermediate steps before funds are used to purchase tangible assets Transfer risk Some players (agents) can handle more risk and the “risk-averse” players can transfer some risk to the “risk-takers” – example insurance

Chapter 1 – Introduction Financial Markets Where Financial Assets are Bought and Sold Some are physical some are not Function of Financial Markets Price Discovery (set returns) Liquidity Reduction of search and information costs Types or Classifications (See Table 1-1, page 6) Money and Capital (time horizon) Primary and Secondary Cash or Derivative

Chapter 1 – Introduction Classification of Global Markets Internal markets Domestic or national market – issuer is “citizen” of the country Foreign market – issuer is “citizen” of a foreign country Rules for issue are controlled by country where financial assets are sold Foreign market names Yankee (U.S.A.) Samurai (Japan) Bulldog (England) Rembrandt (Netherlands) Matador (Spain) External Markets Issued outside the jurisdiction of a single country simultaneously in multiple countries Offshore or Euromarket

Chapter 1 – Introduction Derivative Markets Financial Assets that derive their value based on some specific underlying asset (real or financial) Forward Contracts Futures Contracts Traded on organized financial market Options Contracts Calls – right but not the obligation to buy Puts – right but not the obligation to sell