Attend and participate at least 80% of tutorials;

Attempt mid-session exam in week 7

Obtain at least 50% in final exam; and

if not, will result in Technical Fail.

E.g. overall mark 52/100 but only achieve 47% in
final exam.

Gain an overall mark of at least 50%.

Role of financial manager

Forms of business organisation
Managing the financial function
Goal of the company
Agency conflicts
Business ethics

Week 2
Overview of financial Markets, Institutions and Money
Textbook reading 3
Kidwell et al. Chapter 1

The financial system consists of financial

markets, institutions and money.
The roles of the financial system are:

To
To
To
To
To

The financial system allows the flow of funds

from surplus spending units (SSUs) to deficit
spending units (DSUs).

facilitate the flow of funds

provide the mechanism to settle transactions
generate and disseminate information
provide the means to transfer and manage risk
provide ways of dealing with incentive problems
Figure1.2Flowoffunds

YouTube: How does the financial system work?

5

Economic units can be classified as:

Households
Businesses
Governments

A surplus unit is a unit whose income

exceeds planned expenditure.
A deficit unit is a unit whose expenditure
exceeds its receipts.
The flow of funds from SSUs (mainly
households) to DSUs (mainly business
firms and governments) is a fundamental
function of the financial system.

SSUs lend money to DSUs and accept a

financial claim in return.
In direct financing, this exchange takes place
directly without an intermediary.
The limitations of direct financing create a
role for financial intermediaries to intervene
between DSU and SSU.

Direct financing requires DSUs to find SSUs

that want direct claims and the
denominations involved are usually very
large.
These problems are resolved through the
involvement of a financial intermediary.
Financial intermediaries purchase direct
claims from DSUs, transform them into
______________________and sell them to
______________.

When intermediaries transform direct claims into

indirect ones, they perform five services:
Denomination ___________________
Currency ___________________
Maturity ___________________
Credit risk ____________________________
Liquidity

10

Australian financial intermediaries include:

Banks, building societies and credit unions

Foreign bank representatives
General and life insurers
Friendly societies
Money market corporations, finance companies
and securitisers
Licensed trustees
Superannuation entities.

11

Commercial banks are the largest and most

diversified intermediaries.
Australian-owned commercial banks hold
more than $2 trillion in financial assets
(end 2012).
These assets consist of loans to
consumers, businesses and governments.
Commercial banks liabilities consist of
deposit accounts and other sources of
funds.
Commercial banks might also be engaged
in other activities such as underwriting.
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NBFCs provide many of the same services

and products that commercial banks provide.
NBFCs may be classified into four groups:

Building Societies
Credit Unions
Money-market Corporations
Finance Companies

Several groups of other financial institutions

operate in the financial system.
These include:

Life insurance companies

General insurance companies
Superannuation funds
Managed Funds
Securitisers

13

In addition to domestic institutions, there are

a number of important international
organisations.
These include:

The
The
The
The

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Bank of International Settlements

World Bank
International Monetary Fund
Asian Development Bank

15

Primary markets are where financial claims

are initially sold by DSUs.
This might take place through an initial
public offering of shares to the public.
Secondary markets are where previously
issued financial claims are exchanged among
investors.
YouTube: IPO
16

Once issued, the exchange of claims can take

place on an organised exchange.
In Australia, an example is the Australian
Securities Exchange (ASX).
Financial claims can also be exchanged
over-the-counter. (OTC)
OTC markets have no central location.

Other types of financial markets include:

The futures market

The options market
Foreign exchange markets
International markets

For example: the eurocurrency markets and

eurobond markets where domestic or overseas
firms can borrow or lend Australian dollars
deposited in overseas banks.

17

We usually sort financial markets into either

money or capital markets.
Money markets are where a certain type of
financial claim are traded.
Specifically, a wholesale ______________ term
to maturity (less than 12 months) claim is
classified as a money market transaction.

18

19

Banks and businesses adjust their liquidity

positions by borrowing and lending for a
short time on the money market.
The RBA also conducts monetary policy on
the money markets.
The money market consists of a collection
of markets each trading a different
financial instrument.
All of instruments have characteristics very
similar to money: high liquidity and low
default risk.
20

The instruments traded on the money

market include:

Treasury notes
Commercial paper
Commercial bills
Negotiable certificates of deposit
Secured and unsecured notes

Capital markets: where ____________ term

(greater than 12 months) securities are
traded.
On capital markets, capital goods are
financed with stock or longer-term debt
instruments.
Capital market instruments are less
marketable, have varying default levels and
have maturities ranging from five to thirty
years.

21

The instruments traded on the capital market

include:

Shares
Corporate bonds
Government bonds
Mortgages

23

22

Financial institutions are exposed to a variety of

risks.
These include:
Credit risk
Interest rate risk
Liquidity risk
Foreign exchange risk
Political risk
Reputational risk
Environmental risk
24

The risks faced by financial institutions is

managed by:
___________________________of loans and investments
Careful _____________ analysis of borrowers
Careful monitoring of borrowers over time
The undertaking of appropriate hedging
strategies on the financial markets.

25

Wollongong Campus
Date: Thursday 27 August (week 5)
Time: 12:30-2:00pm
Venue: To be advised

27

You should now be able to:

Explain the role of the financial system and why

it is important.
Explain the function of direct and indirect
financial markets.
Describe the different types of financial
intermediaries.
Describe the various types of financial markets.
Explain the economic function of money and
capital markets.
Identify the risks that financial institutions face
and describe how these risks are managed.
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