Financial Markets &

Institutions
Vivek Joshi
Department of Business
Manipal University
Dubai
Introduction
Why study Financial Markets and
Institutions?
They are the cornerstones of the overall
financial system in which financial
managers operate
Individuals use both for investing
Corporations and governments use both
for financing
Overview of Financial Markets
Primary Markets versus Secondary
Markets
Money Markets versus Capital
Markets
Foreign Exchange Markets
Primary Markets versus Secondary Markets
Primary Markets
markets in which users of funds (e.g.
corporations, governments) raise funds
by issuing financial instruments (e.g.
stocks and bonds)
Secondary Markets
markets where financial instruments are
traded among investors (e.g. NYSE,
NASDAQ)
Money Markets versus Capital Markets
Money Markets
markets that trade debt securities
with maturities of one year or less
(e.g. CDs, U.S. Treasury bills)
Capital Markets
markets that trade debt (bonds)
and equity (stock) instruments
with maturities of more than one
year
Foreign Exchange Markets
FX markets deal in trading one currency
for another (e.g. dollar for yen)
The spot FX transaction involves the
immediate exchange of currencies at the
current exchange rate
The forward FX transaction involves the
exchange of currencies at a specified date
in the future and at a specified exchange
rate
What is a financial Institution?
a financial institution acts as an agent
that provides financial services for its
clients or members. Financial institutions
generally fall under financial regulation
from a government authority. Common
types of financial institutions include
banks, building societies, credit unions,
stock brokerages, asset management
firms, and similar businesses.
Overview of Financial Institutions
Institutions that perform the
essential function of channeling
funds from those with surplus funds
to those with shortages of funds
(e.g. banks, thrifts, insurance
companies, securities firms and
investment banks, finance
companies, mutual funds, pension
funds)
Flow of Funds in a World without FIs:
Direct Transfer
Users of Funds
(Corporations)
Suppliers of
Funds
(Households)
Financial Claims
(Equity and debt
instruments)
Cash
Example: A firm sells shares directly to investors without going
through a financial institution
Flow of Funds in a world with FIs:
Indirect transfer
Users of Funds
FI
(Brokers)


FI
(Asset
transformers)
Suppliers of Funds
Financial Claims
(Equity and debt securities)
Financial Claims
(Deposits and Insurance policies)
Risks Faced by Financial Institutions
Interest Rate Risk
Foreign Exchange Risk
Market Risk
Credit Risk
Liquidity Risk
Off-Balance-Sheet Risk
Technology Risk
Operation Risk
Country or Sovereign Risk
Insolvency Risk
Types of FIs
Commercial banks
Investment Banks
Credit Unions
Insurance companies
Securities firms
Finance companies
Mutual Funds
Credit Rating Agencies
Pension Funds


Regulation of Financial Institutions
FIs provide vital financial services to all
sectors of the economy; therefore, their
regulation is in the public interest
In an attempt to prevent their failure and
the failure of financial markets overall