Chapter 3FinancialInstruments,FinancialMarketsand FinancialInstitutionsMcGraw-Hil/rwinCopyright 2006byTheMcGraw-Hill Companies,Inc.All rights reserved
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Financial Instruments, Financial Markets, and Financial Institutions
CONTENS083.1 Introduction:IndirectandDirectFinance3.2FinancialInstruments3.3FinancialMarkets3.4FinancialInstitutions3-2
3-2 CONTENS 3.1 Introduction: Indirect and Direct Finance 3.2 Financial Instruments 3.3 Financial Markets 3.4 Financial Institutions
3.1 Introduction: Indirect andODirectFinanceIndirect Finance An Institution stands between lender andborrower.DirectFinanceBorrowers and lenders deal directly with eachother.3-3
3-3 3.1 Introduction: Indirect and Direct Finance Indirect Finance • An Institution stands between lender and borrower. Direct Finance • Borrowers and lenders deal directly with each other
Financial and EconomicDevelopmentFigure3.1 FinancialandEconomicDevelopmentFinancial development is measured by the commonly used ratio of broadly definedmoneyto GDP.Economicdevelopment ismeasured byreal GDPper capita25000Correlation=0.6220000HongKong1500010000KoreaMalaysia5000'ChinaO050150100200250Financial Market Development3-4
3-4 Financial and Economic Development
CFinancial Instrumentsd1. DefinitionA financial instrument is the writtenlegal obligation of oneparty totransfer something of value-usually money-to another party atsome future date, under certainconditions,such as stocks,loansorinsurance。3-5
3-5 Financial Instruments • 1. Definition • A financial instrument is the written legal obligation of one party to transfer something of value – usually money – to another party at some future date, under certain conditions, such as stocks, loans, or insurance
3.2 Financial InstrumentsO2. Functions:Serve as a:Means of payment (Like Money)Store of Value (Like Money)allow for the trading of risk3-6
3-6 3.2 Financial Instruments 2. Functions: Serve as a: Means of payment (Like Money) Store of Value (Like Money) allow for the trading of risk
FinancialInstrumentsO3. CharacteristicsStandardizationCommunicate Information4.Classes of Financial InstrumentsPrimary-underlyingInstrumentsDerivative InstrumentsValue derived from the behavior of Underlying instruments3-7
3-7 Financial Instruments 3. Characteristics • Standardization • Communicate Information 4. Classes of Financial Instruments • Primary – underlying Instruments • Derivative Instruments • Value derived from the behavior of Underlying instruments
Financial Instrumentsa5.Value of Financial Instruments(1). Size the promised payment.(2). When the payment will be received.(3).The likelihood the payment will bemade (risk).(4).The conditions under which thepaymentwill be made3-8
3-8 Financial Instruments 5.Value of Financial Instruments (1). Size the promised payment. (2). When the payment will be received. (3). The likelihood the payment will be made (risk). (4). The conditions under which the payment will be made
Financial Instrumentsa6. Examples of Financial InstrumentsPrimarilyStoresofValueBankLoansBondsHomeMortgagesStocksAsset-backed securities3-9
3-9 Financial Instruments 6. Examples of Financial Instruments Primarily Stores of Value • Bank Loans • Bonds • Home Mortgages • Stocks • Asset-backed securities
Financial InstrumentsdExamples :Primarily to transfer riskInsuranceFutures ContractsOptions3-10
3-10 Financial Instruments Examples : Primarily to transfer risk • Insurance • Futures Contracts • Options