Superior University Lahore

FINANCIAL MARKETS

Why Markets matters

Functions of Markets Cross-Border Measure International Breakdown Reasons for Increase in the use of Financial markets The type of Investors Characteristics of Financial Markets The Forces of Change

Foreign Exchange Markets

Currency Markets Players of Currency Markets Trading Locations Settlement of Deals Managing Interest Rates Types of Interest Rates

Money Markets
Functions of Markets Products in Money Markets Mechanism if Trading in Money Markets Benchmark Rates in Money Markets

Bond Markets
Importance of Bond Markets Purposes of Issuing Bonds Types of Issuer of Bonds Types of Bonds Benchmark Rates in Bond Issuance Mechanism of Trading and Settlement Properties of Bonds

Bond Market Continue

Types of Rates to be considered in bond Pricing Yield Curve and YTM Concept Enhancing the Security of Bonds Bonds in International Markets

Securitization
Purpose of Securitization Types of Securitization Process of Securitization Market Development International Developments in Securitization Securitization in Pakistan Pricing and Risk Management in Securitization.

International Fixed Income Market

History of Eurobond Markets Rise in the Fixed Income markets International Bond Market Instrument International Swap markets Trading of Fixed Income Securities

Equity Markets
Origin of Equities Raising Equities Types of Equities Issuance of Equities Primary and Secondary Issuance Bench mark rates of equities Equities analysis tools Types of Markets

Commodities and Futures markets

Concepts of Risk in markets Purpose of Commodities and Futures Markets Participants of Commodities and Futures markets Instruments of Commodities and Future Markets Types of Contracts available in such markets Terms of Contracts

Cont..
Individual and Exchange based Future Contracts Mechanism of Trading Trading Strategies

Option and Derivative markets

Purpose of Option and Derivative markets Function of markets Types of Options Styles of Options Motivation for Options market Mechanism of Trading Options Factors of Trading options Components of options Risks in Markets Scope of Options and Derivative

Recommended Books
Foundations of Financial Markets and Institutions 3RD Edition Frank j.

Modigliani, Fran J. Jones, Michael G. Ferri Financial Markets Money and Risk 4th Edition D. Johannes Juttner & Kim M. Hawtrey Management of Banking & Financial Services Justin Paul and Padmalatha Suresh Indian Financial System 2nd Edition H R Machiraju The Money Market 3rd Edition by Dr. Stigum Exchange Rates and International Finance 4th Edition Laurence Copeland Money Banking & Economic Activity Gaile E. Makinen Modern Investment Theory 5th Edition Robert A. Haugen Global Capital Markets 2nd Edition P R Joshi International Money & Finance 7th Edition Michael Melvin Security Analysis and Portfolio Management 6th Edition Donald E. Fischer, Ronald J. Jordan Public Finance 4th Edition Harvey S. Rosen Money and Capital Markets 4th Edition Peter S. Rose Bank Financial Management Indian Institute of Banking & Finance The Truth about the Global Financial Crisis Dr. Omar Masood Islamic Economics Prof. Abdul Hameed Darr, Prof. Muhammad Azmat, Prof Mian Muhammad Akram

Fabozzi, France

Introduction of Financial Markets

Financial Assets are assets which contain a coinciding

financial liability on the other part of it as . These are also termed as financial instruments and securities.

The Entity that agrees to make future payments is

called the issuer of financial asset and the owner of the financial asset is called an Investor. Examples include the loans granted by the financial institutions and Bonds/Certificates Issued by Financial Institutions.

Financial Assets
There are certain types of instruments that fall under both categories. The examples are Preferred Stocks/Shares which carry fixed amount payments. Another example is Convertible Bonds which carry the holder the right to covert debt into equity under certain circumstances. Debt and preferred stock that pay fixed dollar amounts are also called fixed-income instruments.

Financial Assets
Financial Assets Basically are of two types: Debt Instruments: In this case the holder has a fixed amount claim on the assets of the issuer. Equity Instruments: In this case the holder has varying or residual amount claim on the assets of the issuer.

Notional Classification of Financial Markets

On the Basis of Nature of Claims:

Debt Markets: Deal with Securities with ownership rights Equity Markets: Deal with Securities with ownership rights

On the Basis of Maturity of Claims Money Markets: Market for short term securities Capital Markets: Market for long term securities

Notional Classification of Financial Markets

On the Basis of Seasoning of Claims Primary Markets: These deal with newly issued securities Secondary Markets: These deal with previously issued securities On the Basis of Immediate or Future Delivery Cash or Spot Markets: Where assets are traded for immediate delivery Derivative Markets: These provide the right to buy securities at some future date.

Characteristics of Financial Markets

Liquidity: It is the ease with which the trading can be

conducted. Transparency: It is the availability of prompt and complete information about the trade and prices. Reliability: The assurance that the trade is completed with agreed terms. Legal Procedures: The rules about the settlement of disputes. Suitable Investor Protection Regulations: Low Transaction Costs.

Notional Classification of Financial Markets

On the Basis of Organizational Structure Auction Market: A market where trade is conducted by seeking bids from the buyers and sellers. Over-the-counter Markets: It is an unregulated market whereby geographically traders interact via some communication Channels. Intermediated Markets: Where an Intermediary agent facilitates the interaction of buyers and sellers.

Functions of Financial Markets

Price Setting: It matches demand of an asset with its

supply for price discovery process.

Asset Valuations: After an asset has been purchased the

market price help in determining the asset values at any future time.

Arbitrage: This occurs in countries with poor market

structures where the markets are not integrated and the investors try to benefit from different prices in different markets.

Functions of Financial Markets

Raising Capital: By Issuing Shares Bonds etc., the

companies can meet additional capital requirements for expansion. Commercial Transactions: Financial Markets provide liquidity to its customers to meet sometimes the working capital requirements. Investing: The Markets provide and opportunity to the investors to earn return on funds that might not be possible otherwise.

Risk Management : Futures Options and Derivative

Contracts also Provide Risk Management Mechanism to the investors apart from investments.

Cross Border Measures

Due to Globalization of Financial Markets the entities around the world can now raise funds from anywhere around the world. The following are the factors that has lead to this globalization:

Deregulation and liberalization of markets. Technological advances for reaching the world markets. Increased institutionalization of financial markets

Cross Border Measures

Globalization leads to the following additional types of Financial Markets:
Internal Markets, this has further two types:

Domestic Markets: Where only the local residents issue and deal in securities. Foreign Markets: Where the securities of the issuers not domiciled in the country are traded.

Cross Border Measures

External/Offshore or Euromarkets: These allow two distinguishing features to the issuers of securities:

Securities are issued in more than One Countries at the same time. They are issued outside the jurisdiction of any single country.

International Break Down

The sourcing of Raising funds internationally has

changed. More Corporations are raising funds through equities as compared with debts before.

Reasons for Increase in the use of Financial Markets

Inflation: Financial Markets provide a opportunity to

the investors to protect the reduction in the values of their assets. Because the returns in the market often adjusts to the inflation rates through pricing mechanism.
Stock and Bond Market Performance: markets

provide pricing, risk management etc., mechanisms due to which the use of markets has increased.

Types of Investors
Driving Force behind financial markets is the desire

to earn a return on investors. The return has two components:

Yield Capital Gains

The investors are of the following types:

Individuals Investors Institutional Investors

Types of Investors
Institutional Investors are of the following types:

Mutual Funds Hedge Funds Insurance Companies Pension Funds Financial Institutions

The Forces of Change

The following factors are driving the mechanisms of

change in the financial markets:

Technology Deregulation Liberalization Consolidation Globalization