Financial Markets and Institutions 2021-2022 |
Financial Markets and Institutions
Inhoud
1. Introduction ..................................................................................................................................... 4
2. Money and Money Creation ........................................................................................................... 5
2.1. Origin and Characteristics ....................................................................................................... 5
2.1.1. Definition ......................................................................................................................... 5
2.1.2. Function ........................................................................................................................... 6
2.1.3. Characteristics (important!) ............................................................................................ 6
2.1.4. Evolution.......................................................................................................................... 6
2.1.5. Development of banks .................................................................................................... 7
2.1.6. Forms ............................................................................................................................... 7
2.2. Supply of Money...................................................................................................................... 7
2.2.1. Definitions ....................................................................................................................... 7
2.2.2. Money supply .................................................................................................................. 8
3. Financial Institutions and Intermediaries ...................................................................................... 14
3.1. Financial Institutions ............................................................................................................. 14
3.1.1. Introduction ................................................................................................................... 14
3.1.2. ‘Credit Institutions’ ........................................................................................................ 14
3.1.3. Institutions supplying venture capital ........................................................................... 14
3.1.4. Investment companies .................................................................................................. 15
3.1.5. Institutional investors .................................................................................................... 16
3.1.6. Shadow banking ............................................................................................................ 18
3.2. Financial Intermediaries ........................................................................................................ 19
3.2.1. Definition ....................................................................................................................... 19
3.2.2. Existence: reasons ......................................................................................................... 20
3.2.3. Banks ............................................................................................................................. 25
4. Prudential Regulation .................................................................................................................... 32
4.1. Why regulation? .................................................................................................................... 32
4.2. Types of regulation ................................................................................................................ 35
4.2.1. Types of regulation: zoom on Basel III .......................................................................... 36
4.2.2. Types of regulation: zoom on Liquidity ......................................................................... 38
4.2.3. Types of regulation: other ............................................................................................. 38
4.2.4. Types of regulation: crisis management ....................................................................... 39
4.3. Organization in Europe/Belgium ........................................................................................... 40
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, Financial Markets and Institutions 2021-2022 |
5. Financial Instruments & Fixed Income Capital Markets ................................................................ 43
5.1. Introduction ........................................................................................................................... 43
5.2. Money Markets ..................................................................................................................... 44
5.2.1. Money markets: interbank market ............................................................................... 45
5.2.2. Money markets: short term government paper ........................................................... 46
5.2.3. Money markets: short term (non government & non bank) paper .............................. 46
5.2.4. Money markets: REPOs ................................................................................................. 47
5.3. Bond Markets ........................................................................................................................ 47
5.3.1. Terminology ................................................................................................................... 47
5.3.2. Relation between interest rate and credit quality & maturity...................................... 51
5.3.3. Price and creation of yield curve ................................................................................... 51
5.3.4. Discount factor .............................................................................................................. 52
5.3.5. Spot rates & bootstrapping ........................................................................................... 53
5.3.6. Forward rates ................................................................................................................ 54
6. Investing in Equities....................................................................................................................... 55
6.1. Introduction to Equity ........................................................................................................... 55
6.2. Equities .................................................................................................................................. 56
6.2.1. Characteristics ............................................................................................................... 56
6.2.2. Markets.......................................................................................................................... 57
6.2.3. Valuation ....................................................................................................................... 58
6.2.3.2. Price/Earnings............................................................................................................ 59
6.2.3.3. Dividend Yield ............................................................................................................ 60
6.2.3.4. Dividend yield/bond yield ......................................................................................... 60
6.2.3.5. Growth at reasonable price ....................................................................................... 61
6.2.3.6. Dividend Discount Model (DDM) .............................................................................. 62
6.2.3.7. Discounted Cashflow Model (DCF) ............................................................................ 64
6.2.4. Equity management process ......................................................................................... 66
6.2.5. Diversification ................................................................................................................ 71
7. Investing in Derivatives ................................................................................................................. 73
7.1. Futures (Forward) .................................................................................................................. 73
7.1.1. Characteristics ............................................................................................................... 73
7.1.2. Markets.......................................................................................................................... 73
7.1.3. Valuation ....................................................................................................................... 75
7.1.4. Strategies with Futures.................................................................................................. 77
7.2. Options .................................................................................................................................. 78
7.2.1. Definition ....................................................................................................................... 78
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, Financial Markets and Institutions 2021-2022 |
7.2.2. Markets.......................................................................................................................... 79
7.2.3. Sell or buy: ..................................................................................................................... 79
7.2.4. Option pricing ................................................................................................................ 83
7.2.5. Option strategies ........................................................................................................... 86
8. Some other instruments................................................................................................................ 88
8.1. Hybrid products ..................................................................................................................... 88
8.2. Hedge funds........................................................................................................................... 88
9. Risk versus returns ........................................................................................................................ 89
9.1. Characteristics of a financial instrument: risk and return ..................................................... 89
9.2. Investor’s behaviour .............................................................................................................. 90
10. Investing Private Equity ............................................................................................................. 91
10.1. What is Private Equity? ..................................................................................................... 91
10.2. Private Equity: An attractive asset class ............................................................................ 92
10.3. Types of Private Equity Investments ................................................................................. 92
10.4. Private Equity Fund: A long-term illiquid investment ....................................................... 93
10.5. Fee structure Private Equity Investments ......................................................................... 94
10.6. Equivalence between IRR and Multiple of Cost for a given investment term .................. 94
10.7. Why are Private Equity returns market-beating? ............................................................. 94
11. Investing in practice .................................................................................................................. 95
11.1. Definitie van uw beleggersprofiel ..................................................................................... 95
11.2. Beheer van uw portefeuille ............................................................................................... 95
11.3. Beleggingsstrategie ........................................................................................................... 96
11.4. Selectie van de financiële instrumenten ........................................................................... 96
11.5. Selectie van fondsen in een open architectuur ................................................................. 96
11.6. Aandelenselectie – individuele lijnen ................................................................................ 97
11.7. Selectie van de obligaties – individuele lijnen ................................................................... 97
3
, Financial Markets and Institutions 2021-2022 |
Financial Markets and Institutions
1. Introduction
• 𝑌 = 𝐶 + 𝐼 + 𝐺 + (𝑋 – 𝑀)
o Y: GDP
o C: Consumption spending (on goods & services) by households
o I: Investments by business and households
o G: Government purchases of goods & services
o X – M: Export – Import = Net Export
• 𝑌 − 𝑇 = 𝐶 + 𝐼 + 𝐺 – 𝑇 + (𝑋 – 𝑀)
• 𝑌 − 𝑇 – 𝐶 = 𝐼 + (𝐺 – 𝑇) + (𝑋 – 𝑀)
• 𝑆 = 𝐼 + (𝐺 – 𝑇) + (𝑋 – 𝑀)
o 𝑌−𝑇−𝐶 = 𝑆
How to get the surplus (savings) to where it is needed (debt in all its forms + equity)?
→ This is determined endogenously: institutions change ‘automatically’
• Financial plumbing of the economy
Endogenous system:
• Time dependent
• Geography dependent (there is no unified system in the EU!)
2 countries: A & B
• Starting point: money in the hands of economic agents (consumers, corporations,
governments, institutional players).
• This money is used to transact (buying or selling). Therefore financial intermediaries
and/or auctions (exchanges/capital markets) are necessary just as payment systems.
• These payment systems (settlement mechanisms, like for instance Euroclear for
securities) are currently going through an important change because of financial and
technical innovations (Fin. Tech. evolutions).
4
Financial Markets and Institutions
Inhoud
1. Introduction ..................................................................................................................................... 4
2. Money and Money Creation ........................................................................................................... 5
2.1. Origin and Characteristics ....................................................................................................... 5
2.1.1. Definition ......................................................................................................................... 5
2.1.2. Function ........................................................................................................................... 6
2.1.3. Characteristics (important!) ............................................................................................ 6
2.1.4. Evolution.......................................................................................................................... 6
2.1.5. Development of banks .................................................................................................... 7
2.1.6. Forms ............................................................................................................................... 7
2.2. Supply of Money...................................................................................................................... 7
2.2.1. Definitions ....................................................................................................................... 7
2.2.2. Money supply .................................................................................................................. 8
3. Financial Institutions and Intermediaries ...................................................................................... 14
3.1. Financial Institutions ............................................................................................................. 14
3.1.1. Introduction ................................................................................................................... 14
3.1.2. ‘Credit Institutions’ ........................................................................................................ 14
3.1.3. Institutions supplying venture capital ........................................................................... 14
3.1.4. Investment companies .................................................................................................. 15
3.1.5. Institutional investors .................................................................................................... 16
3.1.6. Shadow banking ............................................................................................................ 18
3.2. Financial Intermediaries ........................................................................................................ 19
3.2.1. Definition ....................................................................................................................... 19
3.2.2. Existence: reasons ......................................................................................................... 20
3.2.3. Banks ............................................................................................................................. 25
4. Prudential Regulation .................................................................................................................... 32
4.1. Why regulation? .................................................................................................................... 32
4.2. Types of regulation ................................................................................................................ 35
4.2.1. Types of regulation: zoom on Basel III .......................................................................... 36
4.2.2. Types of regulation: zoom on Liquidity ......................................................................... 38
4.2.3. Types of regulation: other ............................................................................................. 38
4.2.4. Types of regulation: crisis management ....................................................................... 39
4.3. Organization in Europe/Belgium ........................................................................................... 40
1
, Financial Markets and Institutions 2021-2022 |
5. Financial Instruments & Fixed Income Capital Markets ................................................................ 43
5.1. Introduction ........................................................................................................................... 43
5.2. Money Markets ..................................................................................................................... 44
5.2.1. Money markets: interbank market ............................................................................... 45
5.2.2. Money markets: short term government paper ........................................................... 46
5.2.3. Money markets: short term (non government & non bank) paper .............................. 46
5.2.4. Money markets: REPOs ................................................................................................. 47
5.3. Bond Markets ........................................................................................................................ 47
5.3.1. Terminology ................................................................................................................... 47
5.3.2. Relation between interest rate and credit quality & maturity...................................... 51
5.3.3. Price and creation of yield curve ................................................................................... 51
5.3.4. Discount factor .............................................................................................................. 52
5.3.5. Spot rates & bootstrapping ........................................................................................... 53
5.3.6. Forward rates ................................................................................................................ 54
6. Investing in Equities....................................................................................................................... 55
6.1. Introduction to Equity ........................................................................................................... 55
6.2. Equities .................................................................................................................................. 56
6.2.1. Characteristics ............................................................................................................... 56
6.2.2. Markets.......................................................................................................................... 57
6.2.3. Valuation ....................................................................................................................... 58
6.2.3.2. Price/Earnings............................................................................................................ 59
6.2.3.3. Dividend Yield ............................................................................................................ 60
6.2.3.4. Dividend yield/bond yield ......................................................................................... 60
6.2.3.5. Growth at reasonable price ....................................................................................... 61
6.2.3.6. Dividend Discount Model (DDM) .............................................................................. 62
6.2.3.7. Discounted Cashflow Model (DCF) ............................................................................ 64
6.2.4. Equity management process ......................................................................................... 66
6.2.5. Diversification ................................................................................................................ 71
7. Investing in Derivatives ................................................................................................................. 73
7.1. Futures (Forward) .................................................................................................................. 73
7.1.1. Characteristics ............................................................................................................... 73
7.1.2. Markets.......................................................................................................................... 73
7.1.3. Valuation ....................................................................................................................... 75
7.1.4. Strategies with Futures.................................................................................................. 77
7.2. Options .................................................................................................................................. 78
7.2.1. Definition ....................................................................................................................... 78
2
, Financial Markets and Institutions 2021-2022 |
7.2.2. Markets.......................................................................................................................... 79
7.2.3. Sell or buy: ..................................................................................................................... 79
7.2.4. Option pricing ................................................................................................................ 83
7.2.5. Option strategies ........................................................................................................... 86
8. Some other instruments................................................................................................................ 88
8.1. Hybrid products ..................................................................................................................... 88
8.2. Hedge funds........................................................................................................................... 88
9. Risk versus returns ........................................................................................................................ 89
9.1. Characteristics of a financial instrument: risk and return ..................................................... 89
9.2. Investor’s behaviour .............................................................................................................. 90
10. Investing Private Equity ............................................................................................................. 91
10.1. What is Private Equity? ..................................................................................................... 91
10.2. Private Equity: An attractive asset class ............................................................................ 92
10.3. Types of Private Equity Investments ................................................................................. 92
10.4. Private Equity Fund: A long-term illiquid investment ....................................................... 93
10.5. Fee structure Private Equity Investments ......................................................................... 94
10.6. Equivalence between IRR and Multiple of Cost for a given investment term .................. 94
10.7. Why are Private Equity returns market-beating? ............................................................. 94
11. Investing in practice .................................................................................................................. 95
11.1. Definitie van uw beleggersprofiel ..................................................................................... 95
11.2. Beheer van uw portefeuille ............................................................................................... 95
11.3. Beleggingsstrategie ........................................................................................................... 96
11.4. Selectie van de financiële instrumenten ........................................................................... 96
11.5. Selectie van fondsen in een open architectuur ................................................................. 96
11.6. Aandelenselectie – individuele lijnen ................................................................................ 97
11.7. Selectie van de obligaties – individuele lijnen ................................................................... 97
3
, Financial Markets and Institutions 2021-2022 |
Financial Markets and Institutions
1. Introduction
• 𝑌 = 𝐶 + 𝐼 + 𝐺 + (𝑋 – 𝑀)
o Y: GDP
o C: Consumption spending (on goods & services) by households
o I: Investments by business and households
o G: Government purchases of goods & services
o X – M: Export – Import = Net Export
• 𝑌 − 𝑇 = 𝐶 + 𝐼 + 𝐺 – 𝑇 + (𝑋 – 𝑀)
• 𝑌 − 𝑇 – 𝐶 = 𝐼 + (𝐺 – 𝑇) + (𝑋 – 𝑀)
• 𝑆 = 𝐼 + (𝐺 – 𝑇) + (𝑋 – 𝑀)
o 𝑌−𝑇−𝐶 = 𝑆
How to get the surplus (savings) to where it is needed (debt in all its forms + equity)?
→ This is determined endogenously: institutions change ‘automatically’
• Financial plumbing of the economy
Endogenous system:
• Time dependent
• Geography dependent (there is no unified system in the EU!)
2 countries: A & B
• Starting point: money in the hands of economic agents (consumers, corporations,
governments, institutional players).
• This money is used to transact (buying or selling). Therefore financial intermediaries
and/or auctions (exchanges/capital markets) are necessary just as payment systems.
• These payment systems (settlement mechanisms, like for instance Euroclear for
securities) are currently going through an important change because of financial and
technical innovations (Fin. Tech. evolutions).
4
