GROUP MEMBERS:

Name
Snehal Krishna shinde. Prajakta shivaji dadas. Sonali sanjay ghag. Priyanka dharma jadhav. Ankita suresh jadhav.

roll no.
50 05 09 17 16

VIDYAVARDHINIS ANNASAHEB VARTAK COLLEGE OF ARTS, KEDARNATH MALHOTRA COLLEGE OF COMMERCE, E. S. ANDRADES COLLEGE OF SCIENCE VASAI ROAD, DIST. THANE-401 202.

CERTIFICATE
THE FOLLOWING STUDENTS of class f.y.b.b.i. HAVE SUCCESSFULLY COMPLETED PROJECT ON macro economics ON THE TOPIC role of financial system in economic development.

NAME SNEHAL KRISHNA SHINDE. PRAJAKTA SHIVAJI DADAS. PRIYANKA DHARMA JADHAV. ANKITA SURESH JADHAV. SONALI SANJAY GHAG.

ROLL NO. 50 05 17 16 09

SUBMITED TO, MisS. Bharti shukla.

DATE: ( /01/2011)

Acknowledgement
WE WOULD LIKE TO EXPRESS OUR DEEP FELT GRATITUDE IN THE WARRNEST MANNER POSIBLE TOWARDS OUR MISS bharti shukla ASSIGNING US SUCH A MARVELOUS PROJECT ON THE TOPIC role of financial system in economic development. THE TOPIC WAS INTERESTING, IT GAVE US AN

OPPORTUNITY TO HAVE A DETAILED STUDY ON THE TOPIC AND WE COME TO KNOW THAT, what kind of role dose the financial system plays in economic development.

INDEX
Sr. No.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

CONTAINS
Introduction. Constituents of financial services. Elements of financial system. BENEFITS OF FINANCIAL institutions. Services of FINANCIAL institutions. Types of financial market. Categories of financial instruments. types of financial instruments. Conclusion. Bibliography.

PAGE NO.

INTRODUCTION:
THE ROLE OF THE FINANCIAL SYSTEM IS TO GATHER OR POOL MONEY FROM PEOPLE AND BUSINESSES THAT HAVE MORE THAN THEY NEED CURRENTLY AND TRANSMIT THOSE FUNDS TO THOSE WHO CAN USE THEM FOR EITHER CONSUMPTION OR INVESTMENT. THE LARGER THE FLOW OF FUNDS AND THE MORE EFFICIENT THEIR ALLOCATION IS, THE BETTER THE ECONOMIC OUTPUT AND WELFARE OF THE ECONOMY AND SOCIETY. WITHOUT FINANCIAL SYSTEM IT IS QUITE DIFFICULT AND EXPENSIVE TO ALLOCATE RESOURCE AND SHIFT RISKS TO ITS LOWEST LEVEL (LOW ECONOMIC DEVELOPMENT).

Constituents of financial services:

FINANCIAL SYSTEM PLAYS AN IMPORTANT ROLE IN THE ECONOMIC Development IT IS CONSISTS OF FINANCIAL MARKETS, institutions, services AND Instrument.

1) FINANCIAL MARKETS:
FINANCIAL MARKETS ARE WHERE PEOPLE BUY AND SELL, WIN AND LOSE, BARGAIN AND ARGUE ABOUT THE PRICE AND THE PRODUCT/SERVICES. THE ONLY DIFFERENCE BETWEEN FINANCIAL MARKETS AND NORMAL MARKET THAT WE KNOW IS THAT IN THE FINANCIAL MARKETS PEOPLE BUY AND SELL FINANCIAL INSTRUMENTS LIKE STOCKS, MORTGAGE CONTRACTS, AND BONDS AND SO ON. 2) FINANCIAL INSTITUTIONS: AS PART OF FINANCIAL SYSTEM, THEY ALSO PLAY AN IMPORTANT ROLE IN ECONOMIC DEVELOPMENT BY FACILITATING THE FLOW OF FUNDS FROM SURPLUS UNIT (SAVERS) TO THE DEFICIT UNIT (BORROWERS). THEY ARE FIRMS SUCH AS CREDIT UNIONS, COMMERCIAL BANKS, FINANCE INSTITUTIONS, INSURANCE COMPANIES AND ETC.

3) Financial services: a financial service is any service of a financial nature offered by a financial service provider. it includes all insurance and insurancerelated services and all banking and other related services. these services are intangible and invisible there should be proximity between the service provider and the consumer in order to complete a service transaction. financial service is a very wide field. these services cover a wide range of economic activities intangible, and invisible services which cannot be stored. 4) Financial instrument: the financial system deals in financial services and claims which are known as financial instruiments; or financial assets or securities, financial instruments can be classified as primary and secondary instruments.

Elements of financial system:

ECONOMIC ELEMENTS OR PARTIES THAT ARE INVOLVED CAN BE DIVIDED INTO HOUSEHOLDS, BUSINESS ORGANIZATIONS, AND GOVERNMENT: 1) BUSINESS OFTEN NEEDS CAPITAL TO IMPLEMENT GROWTH PLANS. 2) GOVERNMENT PROJECTS. REQUIRES FUNDS TO FINANCE BUILDING

3) HOUSEHOLDS FREQUENTLY WANT LOANS FOR EXAMPLE TO PURCHASE HOMES, CARS AND SO ON.

FORTUNATELY, THERE ARE OTHER INDIVIDUALS OR HOUSEHOLDS AND FIRMS WITH INCOMES GREATER THAN THEIR EXPENDITURES (SURPLUS BUDGET POSITION). THEREFORE FINANCIAL MARKETS BRING TOGETHER PEOPLE AND 2 ORGANIZATIONS NEEDING MONEY WITH THOSE HAVING SURPLUS FUNDS. IN OTHER WORDS, THE PURPOSE OF THE FINANCIAL SYSTEM IS TO TRANSFER FUNDS FROM SAVERS TO THE BORROWERS IN THE MOST EFFECTIVE AND EFFICIENT POSSIBLE MANNER. AND THAT JOB CAN BE

DONE BY DIRECT FINANCING OR BY INDIRECT FINANCING. DESPITE THE METHOD OF TRANSFERRING THE RESOURCES THE OBJECTIVE IS TO BRING THE INVOLVING PARTIES TOGETHER AT THE LOWEST POSSIBLE COST.

A. DIRECT FINANCING:
IN DIRECT FINANCING BORROWERS AND SAVERS EXCHANGE MONEY AND FINANCIAL INSTRUMENTS DIRECTLY. BORROWERS OR DEFICIT UNITS ISSUE FINANCIAL CLAIMS (THEY ARE CLAIMS AGAINST SOMEONE ELSES MONEY AT A FUTURE DATE) ON THEMSELVES AND SELL DIRECTLY TO SAVERS OR SURPLUS UNITS FOR MONEY. THE SAVERS HOLD THE FINANCIAL CLAIMS AS INTEREST BEARING INSTRUMENTS AND THEY CAN SELL IT IN FINANCIAL MARKETS. UPON AGREED TIME OR MATURITY DATE BORROWERS HAVE TO GIVE BACK THE SAVERS PRINCIPLE PLUS THE AGREED INTEREST RATE.

B. INDIRECT FINANCING:
A PROBLEM THAT ARISES FROM DIRECT FINANCING BROUGHT THE USAGE OF INDIRECT FINANCING. SOMETIMES THE SAVERS OR SURPLUS UNITS CANT WAIT TO HOLD FINANCIAL CLAIMS TILL MATURITY DATE THEREFORE THEY SELL THE FINANCIAL CLAIMS TO THE FINANCIAL INTERMEDIATION AND TAKE THEIR FUNDS FROM THEM TO DO WHATEVER THEY PLEASE.

Financial institution

BENEFITS OF FINANCIAL INTERMEDIATION (INSTITUTIONS):

FINANCIAL INTERMEDIARIES HAVE THREE MAIN SOURCES OF PROPORTIONAL ADVANTAGE COMPARE TO OTHERS. 1. FINANCIAL INSTITUTIONS CAN ACHIEVE ECONOMIES OF BALANCE THROUGH SPECIALIZATION OF WHAT THEY OFFER AND DO, BECAUSE THEY HANDLE LARGE NUMBERS OF TRANSACTIONS, THEY ARE ABLE MINIMIZE THE FIXED COST THROUGH SPREADING BETWEEN THEM. 2. FINANCIAL INSTITUTIONS SEARCHING AND TRANSACTION COST FOR CREDIT INFORMATION CAN BE MINIMIZED. 3. FINANCIAL INSTITUTIONS HAVE THE ABILITY TO GET IMPORTANT INFORMATION CONCERNING THE BORROWERS FINANCIAL POSITION BECAUSE THEY HAVE A HISTORY OF EXERCISING DISCRETION WITH

THIS TYPE OF INFORMATION, AND THEY ALSO CAN REDUCE UNRELIABLE INFORMATION CONCERNING ABOUT THE BORROWER.

SERVICES OF FINANCIAL INSTITUTIONS:

IN TRANSFERRING RESOURCE ALLOCATION FROM DIRECT FINANCING TO INDIRECT FINANCING, FINANCIAL INSTITUTIONS PROVIDE THE FOLLOWING FIVE BASIC SERVICES:

A. CURRENCY ALTERATION:
BUYING FINANCIAL CLAIMS DENOMINATED IN ONE CURRENCY AND SELLING FINANCIAL CLAIMS DENOMINATED IN ANOTHER CURRENCIES.

B. QUANTITY DIVISIBILITY:
FINANCIAL INSTITUTIONS ARE CAPABLE IN PRODUCING A BROAD RANGE OF QUANTITY FROM ONE DOLLAR TO MANY MILLIONS, BY GATHERING FROM DIFFERENT PEOPLE.

C. LIQUIDITY:
EASY TO LIQUIDATE THE INSTRUMENTS BY BUYING DIRECT FINANCIAL CLAIMS WITH LOW LIQUIDITY AND ISSUING INDIRECT FINANCIAL CLAIMS WITH MORE LIQUIDITY.

D. MATURITY FLEXIBILITY:
CREATING FINANCIAL CLAIMS WITH WIDE RANGE OF MATURITIES SO AS TO BALANCE THE MATURITY OF DIFFERENT INSTRUMENTS SO AS TO REDUCE THE GAP BETWEEN ASSETS AND LIABILITIES.

E. CREDIT RISK DIVERSIFICATION (PORTFOLIO INVESTMENT):

BY PURCHASING A BROAD RANGE OF INSTRUMENTS, FINANCIAL INSTITUTIONS ARE ABLE TO DIVERSIFY THE RISK.

Financial market

TYPES OF FINANCIAL MARKETS:

THERE ARE MANY DIFFERENT TYPES OF FINANCIAL MARKETS. EACH MARKET EXISTS TO SERVE A DIFFERENT REGION OR DEALS WITH A DIFFERENT TYPE OF SECURITY. HERE ARE SOME OF THE MAJOR TYPES OF MARKETS:

1. PHYSICAL ASSET MARKETS:

PHYSICAL ASSET MARKETS ALSO CALLED TANGIBLE OR REAL ASSET MARKETS ARE THOSE MARKET THAT ARE TRADED FOR SUCH PRODUCTS AS WHEAT, AUTOS AND REAL ESTATE.

2. FINANCIAL ASSET MARKETS:

FINANCIAL ASSET MARKETS DEAL WITH STOCKS, BONDS, NOTES, MORTGAGES, AND OTHER CLAIMS ON REAL ASSETS.

3. SPOT MARKETS AND FUTURES MARKETS:

SPOT MARKETS AND FUTURES MARKETS ARE TERMS THAT REFER TO WHETHER THE ASSETS ARE BOUGHT OR SOLD FOR ONTHE-SPOT DELIVERY OR FOR TRANSFER AT SOME UPCOMING DATE.

4. MONEY MARKETS:
MONEY MARKETS ARE THE MARKETS FOR DEBT SECURITIES WITH MATURITIES OF LESS THAN ONE YEAR.

5. CAPITAL MARKETS:
CAPITAL MARKETS ARE THE MARKETS FOR LONG-TERM DEBT (MORE THAN A YEAR) AND CORPORATE STOCKS.

6. PRIMARY MARKETS:
PRIMARY MARKETS ARE MARKETS IN WHICH CORPORATION RAISE NEW CAPITAL SUCH AS INITIAL PUBLIC OFFERING (IPO).

7. SECONDARY MARKETS:
SECONDARY MARKETS ARE MARKETS IN WHICH EXISTING OR ALREADY OUTSTANDING, SECURITIES ARE TRADED AMONG INVESTORS.

Financial instrument

Categorize of Financial instruments:

Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

1) Cash instruments:
Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

2) Derivative instruments:
Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying assets. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.

TYPES OF FINANCIAL INSTRUMENTS:

Financial instruments are divided into two types primary and secondary: 1) Primary:
Bonds: A bond is a certificate of debt issued by the government or a company with a promise to pay a specified sum of money at a future date and carries interest at a fixed rate. Bond terms can range from a few months to 30 years. Bonds are tradable.

2) secondary:
CDs (Certificates of Deposit): A CD is a special type of deposit account that typically offers a higher rate of interest than a regular savings account. Just like savings accounts, CDs are also insured up to $100,000. When you purchase a CD, you invest a fixed sum of money for fixed period of time. Usually, the longer the period, higher is the interest rate. There are penalties for early withdrawal.

CONCLUSION:
FINANCIAL SYSTEM PLAYS A SIGNIFICANT ROLE IN THE ECONOMIC DEVELOPMENT OF A COUNTRY. FINANCIAL MARKETS PRESENT THREE MAJOR EFFICIENCIES FOR THE SAKE OF DEVELOPMENT AND THEY ARE ALLOCATION, INFORMATION, AND OPERATIONAL EFFICIENCY. FINANCIAL INSTITUTIONS ARE PROFIT MAXIMIZING BUSINESSES THAT EARN PROFITS BY ACQUIRING FUNDS AT INTEREST RATES LOWER THAN THEY EARN ON THEIR ASSETS.

BIBLIOGRAPHIE:

Web site: www.google.com

Text book:
Environment and management of

financial services.