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Understanding Financial Systems: Functions, Organizations, and Market Dynamics

This comprehensive overview explores the essential functions of financial systems, including resource transfer, risk management, and payment settlement. It discusses various business organizations such as sole proprietorships, partnerships, and corporations, emphasizing governance structures and shareholder rights. The text distinguishes between primary and secondary markets, analyzes different types of investments, and examines major stock indexes. It also addresses market challenges through examples like the 1987 crash and corporate scandals. Gain insights into how financial systems operate and their impact on economies.

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Understanding Financial Systems: Functions, Organizations, and Market Dynamics

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  1. Financial Environment: FN6411 Summer 2004 Sris Chatterjee

  2. From WSJ, 30 April 2004

  3. Functions of Financial System • Transferring Resources across Time and Space • Managing Risk and Risk Sharing • Clearing and Settling Payments • Securitization • Information Processing • Financial Engineering and Innovations

  4. Forms of Business Organizations • Sole Proprietorship • Partnership • Corporations • Joint Venture

  5. Corporations • Identified as: Inc (in USA), PLC (in UK), SA (in France), SpA (in Italy), NV (in the Netherlands), AB (in Sweden), AG (in Germany) • Separation of Ownership and Management • Governance Structures and Challenges • Board of Directors: Duties and Obligations • Shareholder Rights

  6. Goals of the Firm • Growth in Sales, EPS, Market Share, etc. • Meeting Stakeholder Demands • Maximizing Profits • Maximizing Shareholder Wealth • Based on Corporate Law • Consistent with Market Discipline • Unifies Diverse Objectives

  7. Types of Markets • Primary Market vs. Secondary Market • Money Market vs. Capital Market • Auction Market vs. Dealer Market • Spot vs. Forward Market • Forwards and Futures • Options

  8. Types of Investment • Common Stock • ADRs • Preferred Stock • Fixed Income/Bonds • Federal, State and Munis • Corporate • Country • Mutual Funds • Open End • Closed End • Options and Futures

  9. Major Stock Indexes • USA DJI, SP500 • Japan Nikkei 225 • UK FT30, FT100 • Germany DAX • France CAC 40 • Global MSCI Equity

  10. Rates of Return • Single Period • Multi Period • Arithmetic • Geometric or Time Weighted Rate of Return • Money Weighted Rate of Return

  11. Stock Price Dynamics • Technical Analysis and Charting • Fundamental Analysis • Efficient Market Hypothesis • Random Walk Model

  12. Major Gate-Keepers • SEC • Justice Department and FTC • FASB • Rating Agencies • Delaware Courts • Exchanges

  13. The Dark Side of Markets • Crash of 1987 • S&L Crisis • Asian Crisis • LTCM • Dot-Com Bubble • Enron, Tyco, Global Crossing, Parmalat

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