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Financial Markets, Institutions & Derivative Instruments

Financial Markets, Institutions & Derivative Instruments. ECO 473 – Money & Banking – Dr. D. Foster. Economic Functions of Financial Markets. Match savers and investors Savers want to  wealth Investors want to create wealth Spread/share risk . Successful strategy - diversification

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Financial Markets, Institutions & Derivative Instruments

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  1. Financial Markets, Institutions & Derivative Instruments ECO 473 – Money & Banking – Dr. D. Foster

  2. Economic Functions of Financial Markets • Match saversand investors • Savers want to  wealth • Investors want to create wealth • Spread/share risk. • Successful strategy - diversification • Savers seek out mutual funds • Savers seek out financial intermediaries • Investors seek OPM

  3. Financial Markets - Why & Who • banks • credit unions • S&Ls • thrifts • savings banks • Why - Intermediation • Who . . . • pension funds • Insurance companies • mutual funds • mortgage brokers • investment bankers • finance companies

  4. Financial Markets - New & Used • New - Primary Markets • stocks (IPO), bonds, mortgages, other. • Used - Secondary Markets • exchange of ownership. • Where: NYSE,NASDAQ,OTC . . .

  5. Financial Markets - Short & Long • Short - Money Markets • A financial instrument that matures w/in one year. • Used to facilitate liquidity demands. • Need funds soon. • Have excess cash. • Fed’l funds • Repurchase agreements • Bankers’ acceptances • Euro$ funds • 3 mo. & 6 mo. T-Bills • Commercial paper • Bank CDs

  6. Money Market Instruments Outstanding, 2000-2012

  7. Financial Markets - Short & Long • Long - Capital Markets • Maturities of more than one year. • Used for capital purchases (investment). • Less liquid & more risk than MM. • Corporate stock • Corporate bonds • U.S. Treasury bonds • Other U.S. & Munis • Mortgages • Comm./Con. loans

  8. Capital Market Instruments Outstanding, 2012

  9. Sell diversification to individual savers. Government regulations limit risks. 8,000 mutual funds in the United States. Financial Institutions Mutual Funds Hedge Funds • Raise money from wealthy people/institutions • Largely unregulated • Use leverage which magnifies gains/losses. • Trade in derivative instruments.

  10. A brokerbuys and sells securities for others May be “full service” or “discount.” Adealerbuys and sells for itself, making a market in these securities. Brokers and Dealers Investment Banks • Underwrites and advises companies on mergers and acquisitions. • Investment banks buy and sell securities and derivatives.

  11. The End of Investment Banks? • 1930s regulations • 2008 - collapse of the MBS market. • Bear Stearns - couldn’t roll over debt. • Lehman Brothers - $639 bill. in assets. • Merrill Lynch - sold to BoA • Goldman Sachs & Morgan Stanley- converted to commercial banks.

  12. Case Study – 2004 Google IPO • Google structured IPO as a “Dutch” auction. • Google saved on investment bank services. • Presumption is Google will earn more $$. • Had touted a price of $135 earlier. • Ended up with a price of $85. • Earned $1.67 billion on sale. • Conclusion: Investment underwriters are not biased!

  13. Case Study – 2004 Google IPO After After After After 8/2012 trading IPO, IPO, IPO, IPO, At peak, traded at At peak, traded at At peak, traded at At peak, traded at at about $542 traded traded traded traded almost $715 almost $715 almost $715 almost $715 at $106 at $106 at $106 at $106 $1234 – 9/23/2019

  14. Financial Markets, Institutions & Derivative Instruments ECO 473 – Money & Banking – Dr. D. Foster

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