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Financial Markets Summary Notes
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8-page detailed summary of financial markets.
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The structure of financial markets and financial assetsFunctions of money
1) A medium of exchange
2) A standard of deferred payment
3) A store of wealth
4) A measure of value
Fiat money is a government-issued currency that is not backed by a physical commodity,
such as gold or silver, but rather by the government that issued it.
Liquidity: the measure of how easy an asset can be converted into cash without loss of value
- Cash = most liquid asset, alongside current account deposits that can be used to
purchase goods&services
Illiquid à Liquid
1) Real estate
2) Luxury
3) Commodities
4) Bonds
5) Stocks
6) Cash
The Money Supply
= the total volume of currency held by the public at a particular point in time
Several ways to define it:
- Narrow money (M0): stock of cash (notes and coins) plus liquid bank and building
society deposits à only the most liquid assets
- Broad money (M4): includes everything in narrow money plus other less liquid
financial assets, which although are stores of value, are not liquid enough, at least in
SR, to be used as a medium of exchange.
MV = PT
, The structure of financial markets and financial assets
Financial Markets:
1) The money markets: provide a means for lenders and borrowers to satisfy their short-
term financial needs
o Assets that are bought and sold on these markets have a short-term maturity
ranging from 1 day to 1 year and are normally easily converted into cash.
§ Maturity date: when debt will need to be repaid
o ‘money markets’ = umbrella term that covers several markets including
market for Treasury Bills and commercial bills
2) Capital markets: where firms raise medium/long term financing – usually for
investment in capital. Split into 2 markets:
a. Primary market: where a company would issue new shares/bonds
b. Secondary market: where shares&bonds can be traded on ‘second hand’ part
of the market; eg London / NY Stock Exchanges
3) Foreign exchange markets: (FOREX, FX or currency markets)
à Global decentralized markets for trading currencies. Split into 2:
a. The spot market: involves immediate transaction
b. The forwards market: involves exchange of currencies at some point in future.
Usually used by importers + exporters to protect themselves against some
form of currency fluctuation in future.
Hedging bets: bettor placing a bet on the opposite side of the outcome of their initial wager
on a specific event. Hedging bets is a risk-averse way of exposing yourself to the high
variance nature of sports betting and the different outcomes that can occur.
à using forwards fx market to hedge my bets?
These markets do not create any output but rather facilitate the workings of other firms who
need to use these financial services.
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