1. Financial Markets and Institutions – BA 441
Monday and Wednesday -- Bexell 320
10:00 to 11:50 p.m.

2. Chapter 1 – Introduction
Definition of Markets
Where an economic transaction takes place
Example: Car Purchase
Example: Swap (Bond swap from fixed to floating rate)
Types of Markets
Product
Factor
Labor
Capital (Financial Markets)
Course Focus -- Financial Markets

3. Chapter 1 – Introduction
Assets – something that has value to the owner
Types
Real (tangible – physical attributes)
Financial (intangible – claim to future cash)
Financial Asset Players
Issuer
Investor
Value of Assets
Price – arm’s length transaction between buyer and seller
Present value of future cash flow (financial asset)

4. Chapter 1 – Introduction
Financial Markets and Risk
Expected Cash Flow
The future cash flow is not always guaranteed
Risk is the uncertainty about the future cash flow
Risk -- Types
Purchasing Power Risk – Inflation
Credit Risk – Probability of Default
Foreign Exchange Risk – Currency Changes

5. Chapter 1 – Introduction
Role of Financial Assets
Transfer funds from those with “excess” (investors) to those with “needs” or “opportunities” (issuers or borrowers)
Issuers use funds to invest in tangible assets
This is the end of the transfer process
Potential for many intermediate steps before funds are used to purchase tangible assets
Transfer risk
Some players (agents) can handle more risk and the “risk-averse” players can transfer some risk to the “risk-takers” – example insurance

6. Chapter 1 – Introduction
Financial Markets
Where Financial Assets are Bought and Sold
Some are physical some are not
Function of Financial Markets
Price Discovery (set returns)
Liquidity
Reduction of search and information costs
Types or Classifications (See Table 1-1, page 6)
Money and Capital (time horizon)
Primary and Secondary
Cash or Derivative

7. Chapter 1 – Introduction
Classification of Global Markets
Internal markets
Domestic or national market – issuer is “citizen” of the country
Foreign market – issuer is “citizen” of a foreign country
Rules for issue are controlled by country where financial assets are sold
Foreign market names
Yankee (U.S.A.)
Samurai (Japan)
Bulldog (England)
Rembrandt (Netherlands)
Matador (Spain)
External Markets
Issued outside the jurisdiction of a single country simultaneously in multiple countries
Offshore or Euromarket

8. Chapter 1 – Introduction
Derivative Markets
Financial Assets that derive their value based on some specific underlying asset (real or financial)
Forward Contracts
Futures Contracts
Traded on organized financial market
Options Contracts
Calls – right but not the obligation to buy
Puts – right but not the obligation to sell