Lecture Notes
Financial Markets and Institutions Lecture Notes
Lecture 1 - The Financial System
• Evolution of the Financial System
- Simplest form of economy - barter economy (swapping goods for other
goods)
• Wants do not always coincide (and therefore you cannot swap) -
double coincidence of wants is rare
• There is need for a ‘common medium of exchange’ - which has value
- stones, precious metals (gold etc.), paper money, digital money
• The Role of the Financial System
- The collection of markets and intermediaries for financial claims, individuals
and institutions who issue, buy and trade the financial claims. And regulators
who monitor the system
• Two main roles :
- An intermediary between deficit and surplus agents (channels funds to
agents with highest productivity and low costs)
- A payment mechanism
- Cheques, online payments, debit / credit card
- Overseas payments (with security), LC (Letter of Credit)
• Participants of the Financial System
- Primary lenders and ultimate borrowers
- Individuals and organisations that need financial services
- Financial Institutions
- Regulators
1
, Lecture Notes
• Global financial centres
- Factors for judging the quality of a financial centre
• People
• Business Environment
• Infrastructure
• General Competitiveness
- E.g. London, New York, HK, Singapore
2
, Lecture Notes
Lecture 2 - Financial Claims
What is a Financial Claim?
A claim to the ownership of a series of future cash inflows
• Also called a financial assets, security or instrument
• Opposite of a financial liability (obligation to pay a series of future cash flows)
Who hold financial claims? Who has the financial liabilities?
• Bank loans - banks hold the claims
• Government bonds (guilts) - bond holders hold financial claims, government hold
financial liabilities
• Company stocks and shares - financial claim owned by the share holder, has the
right to dividends (future cash inflow)
• Innovative financial products (mortgage backed securities etc.)
Total financial assets = total financial liabilities (in a closed economy)
UK is a net investor and open economy (UK companies and households invest a lot in
overseas assets and companies)
Characteristics of Financial Claims
• Risk and expected return
• Real value certainty
• Liquidity
• Term to maturity
• Currency denomination
3
Financial Markets and Institutions Lecture Notes
Lecture 1 - The Financial System
• Evolution of the Financial System
- Simplest form of economy - barter economy (swapping goods for other
goods)
• Wants do not always coincide (and therefore you cannot swap) -
double coincidence of wants is rare
• There is need for a ‘common medium of exchange’ - which has value
- stones, precious metals (gold etc.), paper money, digital money
• The Role of the Financial System
- The collection of markets and intermediaries for financial claims, individuals
and institutions who issue, buy and trade the financial claims. And regulators
who monitor the system
• Two main roles :
- An intermediary between deficit and surplus agents (channels funds to
agents with highest productivity and low costs)
- A payment mechanism
- Cheques, online payments, debit / credit card
- Overseas payments (with security), LC (Letter of Credit)
• Participants of the Financial System
- Primary lenders and ultimate borrowers
- Individuals and organisations that need financial services
- Financial Institutions
- Regulators
1
, Lecture Notes
• Global financial centres
- Factors for judging the quality of a financial centre
• People
• Business Environment
• Infrastructure
• General Competitiveness
- E.g. London, New York, HK, Singapore
2
, Lecture Notes
Lecture 2 - Financial Claims
What is a Financial Claim?
A claim to the ownership of a series of future cash inflows
• Also called a financial assets, security or instrument
• Opposite of a financial liability (obligation to pay a series of future cash flows)
Who hold financial claims? Who has the financial liabilities?
• Bank loans - banks hold the claims
• Government bonds (guilts) - bond holders hold financial claims, government hold
financial liabilities
• Company stocks and shares - financial claim owned by the share holder, has the
right to dividends (future cash inflow)
• Innovative financial products (mortgage backed securities etc.)
Total financial assets = total financial liabilities (in a closed economy)
UK is a net investor and open economy (UK companies and households invest a lot in
overseas assets and companies)
Characteristics of Financial Claims
• Risk and expected return
• Real value certainty
• Liquidity
• Term to maturity
• Currency denomination
3
