...FINANCIAL ENVIRONMENT Components of Financial Environment Financial environment consists of three main components * Financial Managers who determine how to invest a firm’s funds to capitalize on potential opportunities. They also determine how to obtain the funds needed to finance their respective firms’ investments. * Financial Markets that facilitate the flow of funds from the suppliers of funds to firms or governments who need funds. Financial institutions serve as intermediaries by channeling the savings of individuals to firms that need funds. * Investors commonly finance the investments made by firms by purchasing debt securities or equity securities issued by those firms. In this assignment, functioning of Financial Markets would be explained with details of Capital and Money Markets’ Instruments.. Financial Markets; Types and Functions A financial market is a place for buying and selling of financial securities such as stocks and bonds. The financial markets can be divided into different subtypes; * Capital Markets * Stock Markets, that deal in issuance and subsequent trading of shares or common stock. * Bond Markets, that deal in issuance and subsequent trading of bonds. * Commodity Markets, that facilitate the trading of commodities. * Money Markets, that provide short term debt financing and investment. * Derivatives Markets, that provide instruments for the management of financial risk. * Futures Markets...
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...Money Market Instruments The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities. There is no physical "money market." Instead it is an informal network of banks and traders linked by telephones, fax machines, and computers. Money markets exist both in the United States and abroad. The short-term debts and securities sold on the money markets—which are known as money market instruments—have maturities ranging from one day to one year and are extremely liquid. Treasury bills, federal agency notes, certificates of deposit (CDs), eurodollar deposits, commercial paper, bankers' acceptances, and repurchase agreements are examples of instruments. The suppliers of funds for money market instruments are institutions and individuals with a preference for the highest liquidity and the lowest risk. The money market is important for businesses because it allows companies with a temporary cash surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can sell securities or borrow funds on a short-term basis. In essence the market acts as a repository for short-term funds. Large corporations generally handle their own short-term financial transactions; they participate in the market through dealers. Small businesses, on the other hand, often choose to invest in money-market funds, which are professionally managed...
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...Purpose of Call Money Market Characteristics • Maturity: The maturity of the call money market instruments are varying between a day to a fortnight. As it consists with the day-to-day surplus funds, so its payable on demand at the option of either the lender or the borrower. • Liquidity Nature: All the instruments of this market are highly liquid and their liquidity being exceeded only by cash. • Yield: It includes the rate of interest paid on call loans and its also known as Call Rates. The call rate is highly variable from day to day and often from hour to hour. It may vary from centre to centre also. It is very sensitive to the changes in demand for and supply of call moneys. • Location of Transaction: The call money market is mainly located in big industrial and commercial centers. • Volume of Call Money to be Transacted: The volume of call loans depends on the extent of deposits accrual, the possibility of quick investment in and liquidation of other money market instruments, timing of advance tax payments and seasonal fluctuations in demand for credit etc. • Risk: This includes the flexibility of call money rate. As it is volatile in accordance with the difference in Trading Centers & Bank Rate so any removal of ceiling in these centers, the call money rate is supposed to be fluctuated widely. Beside these, the large amount of borrowings by banks an certain dates to meet CRR requirements, overextended credit...
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...Development of Non Bank Financial Institutions to Strengthen the Financial System of Bangladesh - MONZUR HOSSAIN∗ -MD. SHAHIDUZZAMAN∗ Abstract Non-bank financial institutions (NBFIs) represent one of the most important parts of a financial system. In Bangladesh, NBFIs are new in the financial system as compared to banking financial institutions (BFIs). Starting from the IPDC in 1981, a total of 25 NBFIs are now working in the country. As on June 30, 2001 the total amount of paid up capital and reserve of 24 NBFIs stood Tk.6901.8 million (BB, 2002). The NBFIs sector in Bangladesh consisting primarily of the development financial institutions, leasing enterprises, investment companies, merchant bankers etc. The financing modes of the NBFIs are long term in nature. Traditionally our banking financial institutions are involved in term lending activities, which are mostly unfamiliar products for them. Inefficiency of BFIs in long-term loan management has already leaded an enormous volume of outstanding loan in our country. At this backdrop, in order to ensure flow of term loans and to meet the credit gap, NBFIs have immense importance in the economy. In addition, non-bank financial sector is important to increase the mobilization of term savings and for the sake of providing support services to the capital market. The focus of this paper is to highlight the necessity and importance of NBFIs to strengthen the financial system for rapid economic development of the country. 1. Introduction...
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...was created by the Congress of the United States to provide the nation with a safer, more stable currency and economy. The Fed’s responsibilities have been further defined to include: * Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices. * Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers. * Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets. * Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems. (Board of Governors of the Federal Reserve System, 2013) The Fed uses several tools to accomplish these responsibilities including: * Open Market Operations – The purchase and sale of securities in the open market by a central bank – Used to adjust the supply of reserve balances so as to keep the federal funds rate--the interest rate at which depository institutions lend reserve balances to other depository institutions overnight--around the target established by the FOMC. * Discount Rate – The interest rate charged to commercial banks and other depository institutions on loans they receive from their...
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...Interactions between sovereign debt management and monetary policy under fiscal dominance and financial instability Hans J Blommestein and Philip Turner1 Abstract Serious fiscal vulnerabilities arising from many years of high government/GDP ratios have created new and complex interactions between public debt management and monetary policy. Although their formal mandates have not changed, recent balance sheet policies of many central banks have tended to blur the separation of their policies from fiscal policy. The mandates of debt management offices have usually had a microeconomic focus (viz, minimising longer-term borrowing costs, while limiting refunding risks). Such mandates have usually avoided any explicit macroeconomic policy dimension but some major policy overlaps are latent. What is needed is a policy framework for all official actions that affect the maturity structure of government debt in the hands of the public. This requires more analysis of the macroeconomics of government debt management. A full debate about the allocation of functional responsibilities would have to take account not only of the economics, but also of political and institutional constraints. There are operational advantages in having in place appropriate governance arrangements that serve to forestall short-sighted policies and hold specific institutions accountable for their mandates. Keywords: Monetary policy, central banks, policy design and consistency, policy coordination, debt management...
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...Commercial Paper Thomas K. Hahn C ommercial paper is a short-term unsecured promissory note issued by corporations and foreign governments. For many large, creditworthy issuers, commercial paper is a low-cost alternative to bank loans. Issuers are able to efficiently raise large amounts of funds quickly and without expensive Securities and Exchange Commission (SEC) registration by selling paper, either directly or through independent dealers, to a large and varied pool of institutional buyers. Investors in commercial paper earn competitive, market-determined yields in notes whose maturity and amounts can be tailored to their specific needs. Because of the advantages of commercial paper for both investors and issuers, commercial paper has become one of America’s most important debt markets. Commercial paper outstanding grew at an annual rate of 14 percent from 1970 to 1991. Figure 1 shows commercial paper outstanding, which totaled $528 billion at the end of 1991. This article describes some of the important features of the commercial paper market. The first section reviews the characteristics of commercial paper. The second section describes the major participants in the market, including the issuers, investors, and dealers. The third section discusses the risks faced by investors in the commercial paper market along with the mechanisms that are used to control these risks. The fourth section discusses some recent innovations, including asset-backed commercial...
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...MANAGEMENT MONEY MARKET AND MONEY MARKETS INSTRUMENTS ABROAD BY:- VISHESH KUMAR 10BSP1181 MONEY MARKET AND MONEY MARKETS INSTRUMENTS ABROAD The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities which are highly liquid and are relatively low-risk debt instruments. The maturities of money market instruments range from one day to one year and are often less than 90 days. It comprises of the call and notice money market, repo market and the market for debt instruments. There is no physical "money market." Instead it is an informal network of banks and traders linked by telephones, fax machines, and computers. Banks financial institutions, companies and government are the key participants in the money market. The size of the transactions in the money market typically is large ($100,000 or more). At the center of this web is the central bank whose policies have an important bearing on the interest rates in the money markets. The money market provides an equilibrium mechanism for levelling out the demand and supply of short term funds and serves as a focal point for the intervention by the central bank (RBI in India) for influencing the liquidity and interest rates in the financial systems.The money market is important for businesses because it allows companies with a temporary cash surplus to invest in short-term securities; conversely...
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...Understanding Financial Crises: Causes, Consequences, and Policy Responses Stijn Claessens, M. Ayhan Kose, Luc Laeven, and Fabián Valencia By now, the tectonic damage left by the global financial crisis of 2007-09 has been well documented. World per capita output, which typically expands by about 2.2 percent annually, contracted by 1.8 percent in 2009, the largest contraction the global economy experienced since World War II. During the crisis, markets around the world experienced colossal disruptions in asset and credit markets, massive erosions of wealth, and unprecedented numbers of bankruptcies. Five years after the crisis began, its lingering effects are still all too visible in advanced countries and emerging markets alike: the global recession left in its wake a worldwide increase of 30 million in the number of people unemployed. These are painful reminders of why there is a need to improve our understanding of financial crises. This book serves this purpose by bringing together a number of innovative studies on the causes and consequences of financial crises and policy responses to them. Although there is a rich literature on financial crises, there has been no publication since the recent financial crisis providing in one place a broad overview of this research and distilling its policy lessons. The book fills this critical gap. It covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to...
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...MONEY MARKET As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter, is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure. The money market developed because parties had surplus funds, while others needed cash. Today it comprises cash instruments as well. Functions of the money market * transfer of large sums of money * transfer from parties with surplus funds to parties with a deficit * allow governments to raise funds * help to implement monetary policy * determine short-term interest rates Money market organizations * Trading companies often purchase banker’s acceptance to be tendered for payment to overseas suppliers. * Retail and institutional money market funds * Banks * Central banks * Cash management programs * Merchant Banks Common money market instruments ...
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...Running head: THE FEDERAL RESERVE AND THE FINANCIAL CRISIS The Federal Reserve and the Financial Crisis Laura Brotherton Strayer University Principles of Economics ECO 100 Professor Isley March 13, 2013 The Federal Reserve and the Financial Crisis Government-sponsored enterprises (GSEs) are financial services corporations established by Congress with the hope of enhancing the flow of credit to certain targeted sectors of the economy making them more efficient and transparent. They also intend to reduce the risk to investors and other suppliers of capital. GSE’s make homeownership more available by injecting liquidity into the mortgage market. The GSE purchases mortgages from banks which provide cash for those banks to make additional guaranteed loans to borrowers. Securitization is a financial practice of pooling various types of contractual debt such as mortgages, auto loans or credit card debt obligations and selling this debt as bonds, pass-through securities, or collateralized mortgage obligation (CMOs) to various investors. Principal and interest on the debt, underlying the security, is paid back to the various investors regularly. The complexity inherent in securitization can limit investors' ability to monitor risk, and that competitive securitization markets may be particularly prone to sharp declines in underwriting standards. Bad mortgage products and practices are a trigger. Moreover, low interest loans allow more and more people...
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...Kale(1985) & Black(1986) |If traders trade on “noise” signals, unrelated to fundamental data, then share price can deviate from intrinsic value. | | |Shleifer (2000) |Two major foundation of behavioral finance: | | |Limited arbitrage | | |Investor sentiment | |Shleifer (2000) |Investor sentiment is mainly driven by two phenomena: | | |The tendency of people to view events as representative of some specific | | |class and ignore the laws of probability in the process | | |And conservatism. | |Lee, Shleifer & Thaler (1991) |CEFD suggest that as the discount increase, retail investor sentiment | | |decrease. | |Barber, Odean and Zhu(2006)...
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...FINC/070 CO PY IBS Center for Management Research Commercial Paper Market in India D O N O T This case was written by Nitya Nand Tripathi, IBS Center for Management Research and D.S. Chary, IBS, Hyderabad. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. 2011, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: info@icmrindia.org www.icmrindia.org FINC/070 Commercial Paper Market in India “Volumes of commercial papers will increase because it will be cheaper for companies to raise money through this route rather than loans from banks.”1 - Paritosh Kashyap, www.livemint.com, in March 2010 CO PY “Close to $210 billion have flown into the Indian debt market this calendar year alone. Investment by local banks in commercial paper has surged from Rs 25.188 billion in March 2010 to Rs 37.863 billion in August. Is the moribund Indian debt market finally showing signs of life 18 years after it was opened up to global money?… The current sets of circumstances have been favorable for the Indian bond market.”3 - Abheek Barua, The Economic Times4, November 2010 “CP issuances are going to rise...
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...governments. D. some combination of government transfer and barter. Short selling is: A. the sale of a financial product at a discount to its current market value. B. the sale of a financial product in small quantities. C. the sale of a financial product that the seller does not own. D. the sale of a financial product where the seller agrees to buy it back at a predetermined price. The term ‘medium of exchange' for money refers to its use as: A. coinage. B. currency. C. something that is widely accepted as payment for goods and services. D. any standard of value that prices can be expressed in. The role of money as a store of value refers to: A. the value of money falling only when the money supply falls. B. the value of money falling only when the money supply increases. C. the fact that money allows worth to be stored readily. D. the fact that money never loses its value compared with other assets. Money increases economic growth by assisting transfers from: A. consumers to investors. B. savers to borrowers. C. businesses to consumers. D. borrowers to investors. Financial markets have developed to facilitate the exchange of money between savers and borrowers. Which of the following is NOT a function of money? A. A store of value B. A medium of exchange for settling economic transactions C. A claim to future cash flows D. Short-term protection against inflation Buyers of financial claims lend their excess funds because they: A. expect to borrow extra funds in the future. B. want...
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...2013/2014 Prof Dr. K. Kuperan Viswanathan SHORT PAPER #1 INTERDEPENDENCE OF WORLD FINANCIAL MARKETS AND FOREIGN EXCHANGE FLUCTUATIONS Submitted by: ZAHARIN BIN ALI MATRIC No. 95906 June 14, 2014 Short Paper #1 Page |2 1. INTRODUCTION With the increase in advancements in transportation and communications made possible by technology, the world has seen exponential growths in economic ties among all nations. In the last few decades, globalization has resulted in a rapid surge in the interchanging of goods and services reaching across further and faster beyond national borders, whilst increasing the interconnectedness of different markets and cultures. These economic ties come in the forms of international trade, foreign direct investment and monetary integration, made possible with the complementary increase in the interdependence of international financial markets. With further liberalization and deregulation, financial market interdependence grew in momentum alongside the worldwide capital mobilization. This growing interconnectedness of all the world financial markets and the degree of their interdependence have themselves created a subject of substantial interest among economists. The recent global financial crisis has only elevated this interest further, as the impact of U.S. subprime crises on the world economies have provided evidence of global financial markets interdependence. Many international stock markets, for example, experienced their worst abrupt...
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