ASSIGNMENT 1

ASSIGNMENT 1

ASSIGNMENT 1

Question A.

Capital can be transferred by three ways; direct transfer, investment banking house and financial intermediary. Direct transfer refers to selling of bonds and stocks from businesses (borrowers) to investors (savers) without the involvement of any institution. The borrower gets amount from the savers and sends them the securities in return. Another way is to involve intermediary whereby investment banks buy securities from the borrowers and sells them to the savers in return for dollars. Third way is through financial intermediary whereby savers invests funds and receive returns subsequently. Banks are best examples of financial intermediary; they borrow funds from the public (savers) and lend it to the borrowers.

Question B.

A market is a place where buying and selling takes place. There are different types of financial markets where selling and buying of assets takes place dealing with different customers, operating in different country and selling varieties of financial assets.

Financial market is essentially different from that of physical market since physical markets involve real and tangible assets such as machinery or assets that have physical presence. Financial markets on the contrary represent securities that represent claim with respect to assets.

Spot market is a market which involves buying and selling of financial assets at present time (t+2) while future markets involve buying today and selling later at a future date.

Money markets involve securities that have maturities less than one year, examples include London, Tokyo and New York money markets. Capital markets involve longer term securities including bonds and stocks.

Primary markets are markets where new securities are introduced in the market while secondary market is a place where trading of already existent securities takes place.

Private marker is a market where customized transactions takes place between the two primary parties while public markets involve standardized contracts. Public market transactions happen between organized exchanges.

Question C.

The main function of the financial markets is efficient transfer of funds from parties that have had a surplus of funds (savings) to the parties that suffer from a deficit in the funds. Financial markets are a virtual location or where different types of actors are exchanged for cash or equity futures. These are also the markets where transactions are conducted on financial assets and, increasingly, their derivatives. The capital market is actually the engine of the economy, since this is where the fuel, the money will be used to propel the machine forward, that is to say, generate wealth. Financial markets are of great importance in modern economies since it constitutes one of the main mechanisms through which it makes the allocation of resources to productive sectors, and on the other side plays an important role within the framework of development and implementation of economic policy.

Question D.

Financial derivatives are usually some of the most interesting financial products but usually not as well known as others. They are normally traded on stock markets and its price varies with that of an underlying asset value at which the derivative is ...