MONEY & CAPITAL MARKETS (8526)

Unit-1 Introduction to Financial Assets and Markets

1.1 Financial Assets
1.2 Equity Market
1.3 Debt Market
1.4 Foreign Exchange Markets
1.5 Derivative markets
1.6 Issuers and investors Page | 1
1.7 Role of Financial intermediaries
1.8 Regulations of financial markets

1.1-Financial Assets:
Money at hand, or easily accessible, in the form of cash deposits, checks, loans, accounts
receivable, and marketable securities (bonds, notes, shares) and receivables.
An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and
the like are all examples of financial assets. Unlike land and property--which are tangible,
physical assets--financial assets do not necessarily have physical worth.
A financial asset is an intangible representation of the monetary value of a physical item. It
obtains its monetary value from a contractual agreement of what it represents. While a real asset,
such as land, has physical value, a financial asset is a document that has no fundamental value in
of itself until it is converted to cash. Common types of financial assets include certificates,
bonds, stocks, and bank deposits. While Real assets refer to things such as gold, silver, precious
metal or land. Financial assets, on the other hand, refer to money or shares of a stock or bond.
The items in the first category considered real assets are physical and identifiable. They
can be held in one's hand and have a concrete value and inherent worth.
According to the International Financial Reporting Standards (IFRS), a financial asset can be:

Cash or cash equivalent,

Equity instruments of another entity,
Contractual right to receive cash or another financial asset from another entity or to exchange
financial assets or financial liabilities with another entity under conditions that are potentially
favourable to the entity,
Contract that will or may be settled in the entity's own equity instruments and is either a non-
derivative for which the entity is or may be obliged to receive a variable number of the
entity's own equity instruments, or a derivative that will or may be settled other than by
exchange of a fixed amount of cash or another financial asset for a fixed number of the
entity's own equity instruments
Financial assets are classified into four broad categories which determine the way in which they
are measured and reported:

Financial assets "held for trading" i.e., which were acquired or incurred principally for the
purpose of selling, or are part of a portfolio with evidence of short-term profit-taking, or
are derivatives are measured at fair value through profit or loss.
Financial assets with fixed or with determinable payments and fixed maturity which the
company has to be willing and able to hold till maturity are classified as "held-to-maturity"
investments. Held-to-maturity investments are either measured at fair value through profit or
loss by designation, or determined to be financial
assets available for sale by designation.
Financial assets with fixed or determinable
payments which are not listed in an active market
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
 MONEY & CAPITAL MARKETS (8526)
are considered to be "loans and receivables". Loans and receivables are also either measured
at fair value through profit or loss by designation or determined to be financial assets
available for sale by designation.
All other financial assets are categorized as financial assets "available for sale" and are
measured at fair value through profit or loss by designation
Page | 2
1.2- Equity Market
The market in which shares are issued and traded, either through exchanges or over-the-counter
markets. Also known as the stock market, it is one of the most vital areas of a market
economy because it gives companies access to capital and investors a slice of ownership in a
company with the potential to realize gains based on its future performance.
Equity markets are the meeting point for buyers and sellers of stocks. The securities traded in the
equity market can be either public stocks, which are those listed on the stock exchange, or
privately traded stocks. Often, private stocks are traded through dealers, which is the definition
of an over-the-counter market.

1.3- Debt Market

The bond market (also debt market or credit market) is a financial market where participants can
issue new debt, known as the primary market, or buy and sell debt securities, known as
the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so
on. The environment in which the issuance and trading of debt securities occurs. The bond
market primarily includes government-issued securities and corporate debt securities, and
facilitates the transfer of capital from savers to the issuers or organizations requiring capital for
government projects, business expansions and ongoing operations.
Most trading in the bond market occurs over-the-counter, through organized electronic trading
networks, and is composed of the primary market (through which debt securities are issued and
sold by borrowers to lenders) and the secondary market (through which investors buy and sell
previously issued debt securities amongst themselves). Although the stock market often
commands more media attention, the bond market is actually many times bigger and is vital to
the ongoing operation of the public and private sector.

1.4- Foreign Exchange Markets

The exchange of one currency for another, or the conversion of one currency into another
currency. Foreign exchange also refers to the global market where currencies are traded virtually
around-the-clock. The term foreign exchange is usually abbreviated as "forex" and occasionally
as "FX."
The foreign exchange market (forex, FX, or currency market) is a global decentralized market
for the trading of currencies. This includes all aspects of buying, selling and exchanging
currencies at current or determined prices. In terms of volume of trading, it is by far the largest
market in the world.[1] The main participants in this market are the larger international
banks. centre around the world function as anchors of trading between a wide range of multiple
types of buyers and sellers around the clock, with the exception of weekends. The foreign
exchange market determines the relative values of different currencies.
As of April 2013, average daily turnover in global foreign exchange markets is estimated at
$3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April
2014. Some firms specializing on foreign exchange market had put the average daily turnover in
excess of US$4 trillion. The $3.98 trillion break-down is as follows:

M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
 MONEY & CAPITAL MARKETS (8526)
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion currency swaps
$207 billion in options and other products Page | 3

1.5- Derivative Markets

In Finance, a derivative is a contract that derives its value from the performance of an
underlying entity. This underlying entity can be an asset, index, or interest rate, and is often
called the "underlying".
The derivatives market is the financial market for derivatives, financial instruments like futures
contracts or options, which are derived from other forms of assets. The market can be divided
into two, that for exchange-traded derivatives and that for over-the-counter derivatives.
Derivatives either be traded over-the-counter (OTC) or on an exchange. OTC derivatives
constitute the greater proportion of derivatives in existence and are unregulated, whereas
derivatives traded on exchanges are standardized. OTC derivatives generally have
greater risk for the counterparty than do standardized derivatives.

1.6- Issuers and Investors

Issuers: A legal entity that develops registers and sells securities for the purpose of financing its
operations. Issuers may be domestic or foreign governments, corporations or investment trusts.
Issuers are legally responsible for the obligations of the issue and for reporting financial
conditions, material developments and any other operational activities as required by the
regulations of their jurisdictions. The most common types of securities issued are common
and preferred stocks, bonds, notes, debentures, bills and derivatives.
Investors: An investor is someone who provides (or invests) money or resources for an
enterprise, such as a corporation, with the expectation of financial or other gain.
We usually hear about an investor in a business context, but when someone invests things like
time or labor in a project or idea they, too, are investors of a sort. The "return on investment" in
these cases, however, is often a little less tangible than money. While 'Investing' The act of
committing money or capital to an endeavor (a business, project, real estate, etc.) with the
expectation of obtaining an additional income or profit. Investing also can include the amount of
time you put into the study of a prospective company, especially since time is money.

1.7- Role of Financial Intermediaries: A financial intermediary is a financial institution

such as bank, building society, insurance company, investment bank or pension fund. A financial
intermediary offers a service to help an individual/ firm to save or borrow money. A financial
intermediary (such as a bank) simultaneously interacts with savers (or lenders) and borrowers
and produces a set of services which facilitate the transformation of its liabilities (such as
deposits) into assets (such as loans). The function of facilitating liabilities (or assets) into assets
(or liabilities) is called intermediation. Through intermediation financial intermediaries allow
indirect lending (and borrowing) between savers and borrowers.
Direct lending between savers and borrowers is, like barter, inefficient. In order for financial
transactions to be completed there must be a double coincidence of wants. People with savings
will have a given amount of funds that they will want to lend for a particular time period. They
will need to find someone to lend to with matching circumstances, the same approximate amount
of funds and the same time period. Direct lending will necessitate a contract of some sort which
will have to be negotiated. Subsequent transactions involving repayments of interest and
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
 MONEY & CAPITAL MARKETS (8526)
principle will have to be accounted for. A further problem to be encountered by lenders is that
they will have limited ability to diversify and minimize their exposure to default risk. They could
try to do this by lending very small sums to many borrowers, but the transaction costs would be
prohibitively high. Financial intermediaries exist because they can simultaneously reduce
transaction costs and minimize risk..
The Functions of Intermediation: Financial intermediation can improve economic efficiency in at Page | 4
least five ways, by: 1) facilitating transactions; 2) facilitating portfolio creation; 3) easing
household liquidity constraints; 4) spreading risks over time; and 5) reducing the problem of
asymmetric information.
Brokerage: Brokerage is acting as an agent to bring buyers and sellers together in order to
complete financial transactions. Financial institutions such as stockbrokers specialize in
brokerage, while some financial institutions engage in brokerage in addition to intermediation.
Externalities: Spillover effects, negative or positive, generated by the actions of financial
institutions in particular, and the financial system in general, are called externalities. Negative
spillover effects are often used as a justification for government regulation of the financial
system.
Financial Institutions: Institutions which permit indirect lending (financial intermediaries)
include both deposit-takers and non-deposit-takers.
Types of Financial Institutions: At present, the Canadian financial system has three broad
categories of financial institutions: 1) deposit-taking institutions; 2) insurance companies and
pension funds; and 3) investment dealers and investment funds. In addition, there are
government financial institutions.
Deposit-Taking Institutions: Also called depository institutions, these institutions accept and
manage deposits and make loans. There are two types of deposit-taking institutions, chartered
banks and near banks. Chartered banks are relatively large and federally regulated, while near
banks are regulated by a combination of federal and provincial regulations. Near banks consist
of: 1) trust companies; 2) mortgage loan companies; and 3) credit unions
Insurance Companies and Pension Funds: Insurance companies provide their clients with
protection against a variety of risks, while pension funds manage pension funds or pension plans
such as registered retirement savings plans (RRSPs), registered pension plans (RPPs), and public
pension plans.
Investment Funds and Other Intermediaries: Investment funds, known as mutual funds, pool
funds for investment in a wide range of activities and instruments. Consumer and business
financial intermediaries (i.e., sales, finance, and consumer loan companies) and investment
dealers are also included in this category.
Government Financial Institutions: Deposit-taking government institutions such as Alberta
savings institutions and other agencies such as the Federal Business Development Bank and the
Canada Deposit Insurance Corporation (CDIC) are included in this category.
1.8- Regulations of Financial Markets:
Financial regulation is a form of regulation or supervision, which subjects financial
institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity
of the financial system. This may be handled by either a government or non-government

M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
 MONEY & CAPITAL MARKETS (8526)
organization. Financial regulation has also influenced the structure of banking sectors, by
decreasing borrowing costs and increasing the variety of financial products available.
The objectives of financial regulators are usually:

Market confidence to maintain confidence in the financial system

Financial stability contributing to the protection and enhancement of stability of the Page | 5
financial system
Consumer protection securing the appropriate degree of protection for consumers.
Reduction of financial crime reducing the extent to which it is possible for a regulated
business to be used for a purpose connected with financial crime.
Financial regulators ensure that listed companies and market participants comply with various
regulations under the trading acts. The trading acts demands that listed companies publish
regular financial reports, notifications or directors' dealings. Whereas market participants are
required to publish major shareholder notifications. The objective of monitoring compliance by
listed companies with their disclosure requirements is to ensure that investors have access to
essential and adequate information for making an informed assessment of listed companies and
their securities.

Market Capitaliza tion Number of shares Price per share

M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT