Session 3 FM1 Preparatory class

Financial System: A systems view

Financial System: organizational view

Financial System: market view

Functions of Financial System

Functions of Financial System Payment system Pooling of funds Transfer of resources: temporal & Spatial Mechanism for managing uncertainty and controlling risks (especially using derivatives). Generates information Disseminates information removing informational asymmetry (Credit info. sharing) Agency problem Moral Hazard: get insured be negligent Adverse selection: insure only those at the highest risk Financial system promotes efficient distribution of funds through financial market by facilitating Price discovery (order, buy/bid quote, sell/ask quote, price discovery, bid-ask spread) Liquidity Reduction of cost of transaction

Financial System: product s view

Some of the bases of classifying financial products
Instrument Risk Return (including cash flow pattern) Maturity Cost of raising Tradability Terms and condition of fund providers Regulatory requirements, etc. Regulator Maturity/term Risk Return Ownership Secured/unsecured Raising Cost Nature..

Issuer Market

Equity Share Preference Shares Debentures Bonds Term Loan Long Short Other Hybrid instruments Rights Warrants Bonus shares