1. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-1 FIN 444 Financial Institutions in Hong Kong Week 1 Introduction: Financial System and Financial Intermediation Mishkin (2006): Chapter 1 Why Study Financial Markets and Institutions?

2. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-2 Why Study Financial Markets? 1.Channels funds from savers to investors, thereby promoting economic efficiency. 2.Affects personal wealth and behavior of business firms.

3. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-3 Why Study Financial Markets? Well functioning financial markets, such as the bond market, stock market, and foreign exchange market, are key factors in producing high economic growth.

4. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-4 Bond Market and Interest Rates Complete list of interest rates http://www.federalreserve.gov/releases Figure 1.1 Interest Rates on Selected Bonds, 1950–2001

5. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-5 Why Study Financial Markets? The Stock Market The stock market is the market where stock, representing ownership in a company, are traded. Of all the active markets, it receives the most attention, probably because it is the place where people get rich (and poor) quickly.

6. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-6 Figure 1.2 Stock Prices as Measured by the Dow Jones Industrial Average, 1950–2005 Stock Market

7. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-7 Why Study Financial Markets? The Foreign Exchange Market The foreign exchange market is where international currencies trade and exchange rates are set. Although most people know little about this market, it has a daily volume around $1 trillion! View historical financial data and forecasts at http://www.forecasts.org/data/index.htm

8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-8 Foreign Exchange Market Figure 1.3 Exchange Rate of the U.S. Dollar for a Basket of Foreign Currencies, 1970–2004

9. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-9 Why Study Financial Institutions? We will also spend considerable time discussing financial institutions—the corporations, organizations, and networks that operate the so- called “marketplaces.” We will look at: 1.Central Banks and the Conduct of Monetary Policy – The role of the Fed and foreign counterparts 2.Structure of the Financial System – Helps get funds from savers to investors

10. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-10 Why Study Financial Institutions? 3.Banks and Other Financial Institutions – Includes the role of insurance companies, mutual funds, pension funds, etc. 4.Financial Innovation – Focusing on the improvements in technology and its impact on how financial products are delivered 5.Managing Risk in Financial Institutions – Focusing on risk management in the financial institution.