Professional Documents
Culture Documents
The roles of financial markets are the same role as any market, that is to transfer
funds from borrowers to lenders and to allocate funds between alternative uses.
Surplus funds
Deficit and surplus units- level of savings defined as Income Consumption =
the income must be greater then the consumption function. We arent worried
about the classification.
Definition: a surplus (deficit) unit saves more (less) than it invests. Investments
dont need to can be capital can be (a home, without borrowing not producing
cash but can have a opportunity cost)
Some terms
Investment refers to the acquisition of new physical assets. financial securities,
life style investment.
Saving means the change in a unit or sectors net worth. (Net worth = assetsliabilities)
Dissaving occurs when consumption exceeds income.
Implications
Surplus units- lend to other, increase their net assets, issue financial claims.
(equity doesnt have a set value, rights to the money, risk, no guarantees in
equity)
Deficit units- borrow from others, run down their net assets, take financial
obligations.
Intermediation
Also called indirect financing
Stands inbetween the borrowers and lenders. Involves the transfer of funds
between ultimate savers and ultimate borrowers via deposit-taking institutions.
Could be a shady person on the street or a bank. Lender of last resort borrowing
from the reserve bank. The bank takes the money because they know they can
lend for a higher amount.
Advantages of intermediation
Pooling of funds and lend out.
Multiplier effect
Aggregation
Economies of scale
Liquidity
Spreading risk- diversification.
Direct financing
Arbitragers: take offsetting positions in twin markets for profit without risk.
Stability of securities markets
Benefit of liquidy and confidence
Other qualities of securities market
Negotiability:
Low risk: