What role does a financial system play in an economy? What is the structure of a financial system?
Plus notes on Allen & Gale "Comparing Financial Systems" chpts 1, 2 3
| Banking |
Semester 1 (2021)
Quick personal notes before exam (followed by start of summary)
- VARiance(?: us epast info and project the future. with data set that has
past/historical values
- 2 approaches
- historical approach: look at which was the largest drop/negative movement, and
add the sum of the 10% worst
- statistical approach: understand the mean of my movements/data set. the mean
represents that if i project sth into future, ill have 50% chances of a higher
number or 50% of a lower number. i want to understand how far from the mean
have the n been in the historical period. standard deviation means how far. i
asses what is the value of 1 sd, 2 sd, etc. once a have mean and sd, i can
measure/quantify how stressed needs to be the movement of this variables to be
within the mean. 1 sd is 34%
- 4ex: mean is 10, sd is 3
- 95% sure my sd will be btw 7 and 13.
- 100% that it will be bt 0 and 100
- more precision=less confidence
- what is variance? VAR assesment:
- How to manage a poertfolio? It mind mahs no meaning what im reowortnb
- duration of portfolio (core to calculate change in net worth, take all durations to
present value), variance, changes in net board
● what type of risk we asses
how to asses manage them
concept of duration and value risk (find value of bond, duration and compare to actual
price 4ex)
mistakes: know what i rate to use in CF!!!!!!!, usar potencia en el denominador del i rate,
and in BS i want to assess the i rates (im comparing the duration on both sides of the
BS)
, | Chp 2: Intro to FS |
What role does a financial system play in an economy? What
is the structure of a financial system?
● Functions of Financial System:
1. Channeling funds from households/ Credit function: provide mechanisms so
funds can be transferred from units in surplus (lenders/savers) to units with a
shortage of funds (borrowers/spenders)
2. Portfolio Composition Adjustment: enable wealth holders to adjust the
composition of their portfolios
3. Monetary Function: provide payment mechanisms
4. Risk Transferring: provide mechanisms for risk transfer
1. Lender-savers do not frequently have profitable investment opportunities, while
borrower-spenders have investment opportunities but lack funds. It fuels the
economy to work. It connects lenders & suppliers by
a. Direct finance / financial markets: financial markets. Borrowers borrow
funds directly from lenders in financial markets by selling them securities
(also called fi nancial instruments) which are claims on the issuers future
income or assets. Securities are assets for the person who buys them, but
liabilities (IOUs or debts) for the individual or firm that sells (issues) them.
The channeling gives funds to people who have profitable investment
opportunities, they produce an efficient allocation of capital
b. Indirect finance: financial intermediaries.
,2. Portfolio: Borrower-spenders may want to invest their current income or to
adjust the composition of their wealth/portfolio to allocate that money with a risk.
3. Monetary function: The introduction of money into the economy avoids the
double coincidence of wants, allows them to overcome the main problem of
barter (trueque). Financial intermediaries help the financial system to work well.
Monetary policy: the government through the Central Bank trying to adjust the
level of money in the financial system.
4. Risk mechanisms: More efficient allocation of risk results through financial
systems. 4EX insurance contracts. The firm or household will pay a fee
(insurance premium) for this transfer. The insurance company, by providing a
large number of insurance contracts, is better able to manage the risk than an
individual firm or household as they can obtain benefits of pooling and
diversification. Thus a more efficient allocation of risk results. Results can be
hard to manage. Is this easy to do? One might say the contratu
5.
, ● Structure of FS: markets, securities & Intermediaries:
● Financial markets: markets in which funds are moved from people who have
an excess of available funds to people who have investment opportunities (and
lack of funds). Therefore, they contribute to increase the production and the
efficiency in the overall economy. Financial markets (such as bond and stock
markets) are markets in which securities are traded.
● Securities (aka financial instruments): Financial claims on the issuer’s future
income or assets. They represent financial liabilities for the borrower in return for
money, and financial assets for the buyer (lender or investor in the financial
claim). Governments and corporations raise funds to finance their activities by
issuing debt instruments (bonds) and equity instruments (shares, aka stocks).
We have 2 types of securities:
1) Marketable securities (easily bought or sold):
a. Investment or debts,
b. Stocks, bonds, mutual funds and certificate securities.
2 types of marketable securities:
- Equity securities: provide partial ownership in an investment
- Debt securities: represent and obligation for repayment
2) Non marketable securities (difficult to buy or sell, they are usually non
transferable and they do not trade in traditional markets):
a. Investment or debts
b. Governments bonds or private company shares
→ Securities are not secured with collateral (assets that a borrower offers to a
lender to secure loan) securirites and loans and bnaking! secutrities and loans
and bankin securities and loan snd bankinn
➔ Bonds securities that promise to make periodic payments of a sum of
money for a specified period of time.
➔ Stocks securities that represent a share of ownership in the firm.
The maturity of a debt instrument is the number of years until that instrument’s
expiration date. They are short-term (less than a year), intermediate-term (1-5
years) and long-term.
● Financial intermediaries / institutions: Economic agents who specialise in the
activities of buying and selling financial contracts (loans and deposits) and
securities (bonds and stocks). Financial securities are easily marketable, while
financial contracts cannot be easily sold (marketed).
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