Chapter one (01) introduction _edited.ppt

So next time you want something done in a certain way, rather than telling people what to do, show them the behaviour you expect from them. This way, you will have more engaged, happier employees and clients.

6.Speaking of change, embrace it!

And one of my favourites — embrace change! Being a leader means knowing and accepting that nothing is forever. Even liking the idea: Change is a given in anything we do in life. In business, change brings with it opportunities and challenges more than it brings trouble.

So be flexible, be adaptable, enjoy change when it comes, and from time to time, search for it yourself — it will be worth it.

Misconceptions About Leadership

Like so many other things, leadership has its own myths and misconceptions.

I have found 3:

1.You can not be a leader if you aren’t in an authority position.

False! You can be a leader if you are a manager, but if you are a leader, you don’t have to be a manager as well. Setting positive examples, guiding the people around you, being their voice when the situation arises — that is the job of a true leader, no matter his daily job description.

2.You can not be a leader if you are an introvert.

False! Character traits are so different in people that we simply can not put a label on it and say that introverts aren’t good leaders. Sometimes, thinking more on the inside than on the outside proves even more beneficial than we think. Introverts aren’t masters of public speech, but that doesn’t mean they can not guide and inspire people toward great goals.

3.If everyone is a leader, who will follow?

False! The truth is, nobody leads in everything. The best leaders have their „specialties” and also, they step in and out of their role as leader gracefully.

The best estimates offered by research are that leadership is about one-third born and two-thirds made. How does this reflect into real life? Well, we can consider that leadership is a set of innate traits, completed by another set of qualities that are refined and perfected in time, with education, training, and experience.

I believe being a leader isn’t usually a job that you find, but rather one that finds you. Although it is not easy, it has a certain *je ne sais quoi* that draws one like a moth to a flame. As a leader, you need to make smart decisions about products and services, marketing, financing, and other operational issues, but you also have to maximize the full potential of your employees. There is a lot to do, but allow me to let you in on another little secret — leadership skills are great even for those who don’t want to lead. All the qualities I have depicted above will serve you well no matter your position at a job and in your personal life — you will be ready to step in, lead and make things smoother and better for many other people.

Once again remember “…be not afraid of greatness. Some are born great, some achieve greatness, and some have greatness thrust upon them”. Get your five buckets filled, and that wi

1. ©2009, The McGraw-Hill Companies, All Rights Reserved
Chapter One
Introduction

2. ©2009, The McGraw-Hill Companies, All Rights Reserved1-2McGraw-Hill/Irwin
Why study Financial Markets
and Institutions?
•Prudent investment and financing
requires a thorough understanding of
–the structure of domestic and international
markets
–the flow of funds through domestic and
international markets
–the strategies used to manage risks faced by
investors and savers

3. ©2009, The McGraw-Hill Companies, All Rights Reserved1-3McGraw-Hill/Irwin
Financial Markets
•Financial markets are structures
through which funds flow
•Financial markets can be distinguished
along two dimensions
–primary versus secondary markets
–money versus capital markets

4. ©2009, The McGraw-Hill Companies, All Rights Reserved1-4McGraw-Hill/Irwin
Primary versus Secondary Markets
•Primary markets
–markets in which users of funds (e.g., corporations
and governments) raise funds by issuing financial
instruments (e.g., stocks and bonds)
–Through financial institutions called investment
bank
–IPO: the first public issue of financial instruments
by a firm

5. ©2009, The McGraw-Hill Companies, All Rights Reserved1-5McGraw-Hill/Irwin
Primary versus Secondary Markets
•Secondary markets
–markets where financial instruments are traded
among investors (e.g., NYSE and Nasdaq)
–Provide the opportunity to trade securities at their
market values quickly with varying risk-return
characteristics
–Derivative security: a financial security whose
payoffs are linked to other, previously issued
securities

6. ©2009, The McGraw-Hill Companies, All Rights Reserved1-6McGraw-Hill/Irwin
Primary versus Secondary Markets
•Secondary markets
–Derivative security: A financial security whose
payoffs are linked to other, previously issued
securities

7. ©2009, The McGraw-Hill Companies, All Rights Reserved1-7McGraw-Hill/Irwin
Money versus Capital Markets
•Money markets
–markets that trade debt securities with
maturities of one year or less (e.g., CDs and
U.S. Treasury bills)
–Most U.S. money markets are over-the-counter
(OTC) markets.
–OTC: markets that don’t operate in a specific
fixed location

8. ©2009, The McGraw-Hill Companies, All Rights Reserved1-8McGraw-Hill/Irwin
Money versus Capital Markets
•Money markets instruments
–Issued by corporations & governments to
obtain short-term funds
–For example: T-bills, commercial paper,
negotiable certificates

9. ©2009, The McGraw-Hill Companies, All Rights Reserved1-9McGraw-Hill/Irwin
Money versus Capital Markets
•Capital markets
–markets that trade debt (bonds) and equity
(stock) instruments with maturities of more
than one year
–With longer maturity, instruments experience
wider price fluctuations in the secondary
markets

10. ©2009, The McGraw-Hill Companies, All Rights Reserved1-10McGraw-Hill/Irwin
Money versus Capital Markets
•Capital markets instruments
–For example: corporate stocks, mortgages, and
bonds

11. ©2009, The McGraw-Hill Companies, All Rights Reserved1-11McGraw-Hill/Irwin
Money Market Instruments
Outstanding, ($Bn)
0
500
1000
1500
2000
2500
3000
1990q4 2000q4 2007q1
Fed funds and reposCommercial paper Negotiable CDs
U.S. Treasury billsBanker's accept.

12. ©2009, The McGraw-Hill Companies, All Rights Reserved1-12McGraw-Hill/Irwin
Capital Market Instruments
Outstanding, ($Bn)
0
5000
10000
15000
20000
25000
1990q4 2000q4 2007q1
Corporate stocks Mortgages Corporate bonds
U.S. gov't agencies Treasury securities State & local gov't bonds
Bank and consumer loans

13. ©2009, The McGraw-Hill Companies, All Rights Reserved1-13McGraw-Hill/Irwin
Foreign Exchange (FX) Markets
•FX markets
–trading one currency for another (e.g., dollar for yen)
–Financial managers have to understand how events and
movements in financial markets in other countries
affect the profitability and performance of a corporate
–Foreign currency exchange rates are flexible (demand
& supply )

14. ©2009, The McGraw-Hill Companies, All Rights Reserved1-14McGraw-Hill/Irwin
Foreign Exchange (FX) Markets
•Spot FX
–the immediate exchange of currencies at current
exchange rates
•Forward FX
–the exchange of currencies in the future on a specific
date and at a pre-specified exchange rate

15. ©2009, The McGraw-Hill Companies, All Rights Reserved1-15McGraw-Hill/Irwin
Derivative Security Markets
•Derivative security
–a financial security whose payoff is linked to
(i.e., “derived” from) another security or
commodity
–generally an agreement to exchange a standard
quantity of assets at a set price on a specific
date in the future

16. ©2009, The McGraw-Hill Companies, All Rights Reserved1-16McGraw-Hill/Irwin
Financial Market Regulation
•The Securities Act of 1933
–full and fair disclosure and securities
registration
•The Securities Exchange Act of 1934
–Securities and Exchange Commission (SEC) is
the main regulator of securities markets

17. ©2009, The McGraw-Hill Companies, All Rights Reserved1-17McGraw-Hill/Irwin
Financial Market Regulation
•Securities and Exchange Commission:
–Register the public securities
–Monitor trading
–Prevent the inside information
–Full and accurate information available
–Impose regulations to reduce excessive price
fluctuations

18. ©2009, The McGraw-Hill Companies, All Rights Reserved1-18McGraw-Hill/Irwin
Financial Institutions (FIs)
•Financial Institutions
–institutions through which suppliers channel
money to users of funds
•Financial Institutions are distinguished
by whether they accept deposits
–Depository versus non-depository financial
institutions

19. ©2009, The McGraw-Hill Companies, All Rights Reserved1-19McGraw-Hill/Irwin
Financial Institutions (FIs)
•Direct transfer
–A corporation sells its stock or debt directly to
investors without going through a financial
institution
•Indirect transfer
–A transfer of funds between suppliers and users
of funds through a financial intermediary

20. ©2009, The McGraw-Hill Companies, All Rights Reserved1-20McGraw-Hill/Irwin
Users of Funds
(corporations)
Suppliers of
Funds
(households)
Financial Claims
(equity and debt
instruments)
Cash
Flow of Funds in a World without FIsFlow of Funds in a World without FIs

21. ©2009, The McGraw-Hill Companies, All Rights Reserved1-21McGraw-Hill/Irwin
Users of Funds
FIs
(brokers)
FIs
(asset
transformers)
Suppliers of Funds
Financial Claims
(equity and debt securities)
Financial Claims
(deposits and insurance policies)
Cash
Cash
Flow of Funds in a World without FIsFlow of Funds in a World with FIs

22. ©2009, The McGraw-Hill Companies, All Rights Reserved1-22McGraw-Hill/Irwin
Depository versus Non-Depository FIs
•Depository institutions
–commercial banks, savings associations,
savings banks, credit unions
•Non-depository institutions
–insurance companies, securities firms and
investment banks, mutual funds, pension funds

23. ©2009, The McGraw-Hill Companies, All Rights Reserved1-23McGraw-Hill/Irwin
FIs Benefit Suppliers of Funds
•Reduce monitoring costs
–Superior skills and training
–Alleviates the “free-rider” problem
–Delegated monitor: an economic agent
appointed to act on behalf of smaller investors
in collecting information and/or investing fund
on their behalf

24. ©2009, The McGraw-Hill Companies, All Rights Reserved1-24McGraw-Hill/Irwin
FIs Benefit Suppliers of Funds
•Increase liquidity and lower price risk
–Asset transformers: financial claims issued by
an FI that are more attractive to investors than
are the claims directly issued by corporations
–FI purchase the financial claims issued by
users of funds and finance these purchases by
selling financial claims to investors
–FI claims have liquidity attributes

25. ©2009, The McGraw-Hill Companies, All Rights Reserved1-25McGraw-Hill/Irwin
FIs Benefit Suppliers of Funds
•Increase liquidity and lower price risk
–Diversify: the ability of an economic agent to
reduce risk by holding a number of securities in
a portfolio
–Diversification allows an FI to predict more
accurately expected return and risk on its
investment portfolio > credibly promises to the
suppliers to provide highly liquid claims with
little price risk

26. ©2009, The McGraw-Hill Companies, All Rights Reserved1-26McGraw-Hill/Irwin
FIs Benefit Suppliers of Funds
•Reduce transaction costs
–Economies of scale: cost of reduction in
trading and other transaction services results
from increased efficiency when FI perform
these services
–Etrade and private placement

27. ©2009, The McGraw-Hill Companies, All Rights Reserved1-27McGraw-Hill/Irwin
FIs Benefit Suppliers of Funds
•Provide maturity intermediation
–Ability to bear the risk of mismatching the
maturity of their assets and liabilities than can
small savers
•Provide denomination intermediation
–By pooling the funds of many small savers

28. ©2009, The McGraw-Hill Companies, All Rights Reserved1-28McGraw-Hill/Irwin
FIs Benefit the Overall Economy
•Provides efficient credit allocation
–The major source of financing for particular
sector
•Provide for intergenerational wealth
transfers
–Important to country social well-being

29. ©2009, The McGraw-Hill Companies, All Rights Reserved1-29McGraw-Hill/Irwin
•Credit Risk
–Risk that promised cash flows from loans and
securities held by FIs may not be paid in full
•Foreign exchange risk
–Risk that exchange rate changes can affect the
value of an FI’s assets and liabilities located
abroad
Risks Faced by Financial Institutions

30. ©2009, The McGraw-Hill Companies, All Rights Reserved1-30McGraw-Hill/Irwin
•Country or sovereign risk
–Repayments from foreign borrowers may be
interrupted because of interference from
foreign governments
•Market risk
–Incurred in trading assets and liabilities due to
changes in interest rates, exchange rates, and
other assets price
Risks Faced by Financial Institutions

31. ©2009, The McGraw-Hill Companies, All Rights Reserved1-31McGraw-Hill/Irwin
•Liquidity risk
–Requiring an FI to liquidate assets in a very short period
of time and at low price
•Technology risk
–Technological investment do not produce anticipated
cost saving
•Insolvency risk
–May not have capital to offset a sudden decline in the
value of its assets
Risks Faced by Financial Institutions

32. ©2009, The McGraw-Hill Companies, All Rights Reserved1-32McGraw-Hill/Irwin
Risks Faced by Financial Institutions
•Credit (default)
•Foreign exchange
•Country or
sovereign
•Interest rate
•Market
•Off-balance-sheet
•Liquidity
•Technology
•Operational
•Insolvency

33. ©2009, The McGraw-Hill Companies, All Rights Reserved1-33McGraw-Hill/Irwin
Regulation of Financial Institutions
•FIs are heavily regulated to protect society at
large from market failures
•Regulations impose a burden on FIs and recent
U.S. regulatory changes have been
deregulatory in nature
•Regulators attempt to maximize social welfare
while minimizing the burden imposed by
regulation

34. ©2009, The McGraw-Hill Companies, All Rights Reserved1-34McGraw-Hill/Irwin
Globalization of Financial Markets and
Institutions
•The pool of savings from foreign investors is
increasing and investors look to diversify globally
now more than ever before
•Information on foreign markets and investments is
becoming readily accessible and deregulation across
the globe is allowing even greater access
•International mutual funds allow diversified foreign
investment with low transactions costs