Rationale in studying financial markets and institutions

The need to study financial markets

1. Business of all types face risk

2. Economist and policy makers are particularly CONCERNED about the risk and potential failure
that FINANCIAL INSTITUTIONS face because the PLAY A VITAL ROLE IN THE FINANCIAL SYSTEM
3. Financial markets and institutions not only influence your everyday life but also involve HUGE
FLOWS OF FUNDS – Trillions of dollars – throughout the world economy which in turn AFFECT
BUSINESS PROFITS, and also the production and services and the economic well-being of the
countries around the world

THE STUDY OF FINANCIAL MARKETS

1. By studying financial markets and institutions, you can obtain knowledge such as how does a
funds transferred from people who have an excess amount of their funds to people who have
less funds.
2. When it comes in high economic growth, well-functioning financial markets are one of the
reasons why a country is prosperous, and that’s why also poor financial markets are one of the
reasons why a country is poor.
3. News! EURO IS SLIGHLT HIGHER THAN YEN
4. INFLATION SLOWING DOWN
5. Studying FINANCIAL MARKETS can help you grow your portfolio , but it doesn’t tell you whether
your investment portfolio will fail or not. But it helps you understand how the values are
determined and how different securities or financial instruments in it are CREATED AND TRADED

THE STUDY OF FINANCIAL INSTITUTIONS

1. Large business utilizes financial institutions to fund their growing business especially for a
developed economy.
2. Financial markets move because of financial institutions. The objective of financial markets is to
move fund from people who wants to save their money to people who have so many productive
investment opportunities, and this could not be possible without the guidance of FINANCIAL
INSITUTIONS
3. One good reason why to study financial institutions because when it comes to HIGH PAYING
SALARY JOB, financial institution is one of those. They are also one of the largest employers in a
country.
It is also better to study financial institutions because even though you’re not Financially
proficient, you won’t know when you will face in your life one of the financial institutions.

Being knowledgeable about financial institutions may help when the time comes you decided to
borrow money from them, striking a good deal to supply your funding.
APPROACH IN STUDYING FINANCIAL INSTITUTIONS

A. Understanding
- Students will be able to understand economic analysis that could help them grow their
economic intuition that they could use to organize concepts and fact
B. Evaluating
- Students learn to evaluate CURRENT DEVELOPMENTS AND FINANCIAL USE
- Could learn to use financial data and economic analysis to think critically on how would they
interpret current event
C. Predicting
- Use economic analysis to predict likely changes in the economy and financial system

QUESTIONS

1. Why is there a need to understand how monetary policy is conducted by central banks
worldwide?

Understanding how monetary policy is conducted by central banks worldwide is crucial for several
reasons:

Economic Stability: Central banks play a key role in maintaining economic stability by managing the
money supply, interest rates, and inflation. Monetary policy decisions impact various aspects of the
economy, including employment levels, economic growth, and price stability.

Investment and Financial Markets: Monetary policy influences interest rates, which in turn affect
borrowing costs, investment decisions, and asset prices in financial markets. Understanding central bank
actions helps investors anticipate changes in market conditions and adjust their investment strategies
accordingly.

Business Operations: Monetary policy directly affects the cost of borrowing for businesses. Changes in
interest rates impact firms' decisions regarding investment, expansion, and hiring. Understanding
monetary policy helps businesses make informed decisions about capital expenditures and financing
options.

2. What crucial role do banks and other financial institutions play?

Banks and other financial institutions play several crucial roles in the economy:
Intermediation: Financial institutions act as intermediaries between savers and borrowers. They gather
funds from savers (deposits, investments, etc.) and provide loans and other forms of credit to borrowers
(individuals, businesses, governments) who need capital for various purposes such as investment,
consumption, or financing operations.

Risk Management: Financial institutions help individuals and businesses manage risks by providing
various financial products and services such as insurance, hedging instruments, and diversification
strategies. They spread risks across a large pool of customers, thereby reducing the impact of individual
losses.

Capital Allocation: Banks and financial institutions allocate capital efficiently by directing funds to
productive investments and projects. Through lending and investment activities, they facilitate the flow
of funds from savers to investors, supporting economic growth and development

3. Give three important reasons why there is a need to study financial markets

Studying financial markets is essential for several reasons:

Understanding Economic Dynamics: Financial markets are a reflection of broader economic conditions
and dynamics. By studying financial markets, individuals can gain insights into economic trends, business
cycles, and factors influencing economic growth, inflation, and employment. This understanding is
crucial for making informed decisions about investments, business operations, and policy actions.

Investment Decision Making: Financial markets provide a platform for buying and selling various
financial assets, including stocks, bonds, commodities, currencies, and derivatives. Studying financial
markets helps investors analyze asset prices, assess risks and returns, and make informed investment
decisions. Whether individuals are investing for retirement, managing a portfolio, or making strategic
business investments, knowledge of financial markets is indispensable for achieving investment
objectives and managing risks effectively.

Risk Management and Financial Stability: Financial markets are inherently characterized by volatility
and uncertainty. Studying financial markets enables individuals, businesses, and policymakers to
understand and manage risks associated with fluctuations in asset prices, interest rates, exchange rates,
and other market variables. Moreover, insights gained from studying financial markets contribute to the
development of policies and regulations aimed at enhancing financial stability, reducing systemic risks,
and safeguarding the integrity of the financial system.
CHAPTER 2

MONEY

- Is any item or commodity that is generally accepted as a means of payment or exchange

for goods and services
- Or for repayment of debt

CURRENCY

- Printed or minted by the NATIONAL GOVERNMENT

INTRINSIC VALUE of money

- Coins weight in gold or silver

FIDUCIARY BASIS

- Relying on the public’s confidence int the established forms of monetary exchange

MONEY IS:

- Oil

WHO CONTROL’S A COUNTRY’S ECONOMY?

- Nation’s government and;

- Central bank
IN THE PHILIPPINES:
Bangko sentral ng pilipinas

CHARACTERISTIC AND KEY FUNCTION OF A MONEY

Money is NOT money UNLESS it has all of the following defining characteristics: (DUMPDUL)

- Durable
- Uniform
- Must have value
- Portable
- Divisible
- Usable
- Limited supply

Store of value

- Money acts as a means by which people can store their wealth for future use

Item of worth

- Most money originally has an intrinsic value, such as that of the precious metal that was
used to make the coin

Means of exchange

- Must be possible to exchange money freely and widely for goods, and its value should be
stable as possible

Unit of account

- Money can be used to record wealth possessed, traded or spent personally and nationally

Standard of deferred payment

- Money is also useful because of its ability to serve as a standard of deferred payment

Money can facilitate exchange at a _______ by providing a medium of exchange and unit of account.
THE EVOLUTION OF MONEY

Barter (10,000-3,000 bce)

- The direct exchange of goods

- Formed the basis of trade for thousands of years
- A cow for a wheat

Advantages and disadvantages of BARTER

Advantages

- Trading relationship – strong link between partners

- Physical goods are exchanged – doesn’t rely on trust that money will retain its value

Disadvantages

- Market needed – Both parties must want what the other offers
- Hard to establish a set value on items – High value today, less value tomorrow
- Goods may not be easily divisible – living animal cannot be divided
- Large-scale transactions can be difficult

ADAM SMITH

- The author of “The wealth nation”

- Identified barter as a precursor to money

(Continuation of the evolution of money)

Evidence of trade records (7000bce)

- Pictures of items were used to record trade exchanges

Coinage (600-1100BCE)

- Defined weights of precious metals used by some merchants

Bank notes (1100-2000)

- States began to use bank notes, issuing paper IOUs that were traded as currency

DIGITAL MONEY (2000 Onward)

- Money can now exist virtually on computers

ARTIFACTS OF MONEY

Barter (INULET!)(5000 BCE)

- Early trade involved directly exchanged items

Sumerian cuneiform tablets (4,000BCE)

- Scribes recorded transactions on clay tablets

Cowrie Shells (1,000BCE)

- Used as currency across India and the South Pacific

- Appeared in MANY COLORS AND SIZES

Lydian Gold coins (600BCE)

- A mixture of gold and silver was formed into disks, or coins

Athenian Drachma (600BCE)

- Used silver from LAURION to mint

- Greek world

Han Dynasty (200BCE)

- Often made bronze or copper

- Early Chinese coins

Roman Coin (27BCE)

- Bearing the HEAD OF THE EMPEROR

- Circulate throughout the roman empire

Byzantine coin (700BCE)

- Early byzantine coins were PURE GOLD

- Later ones contain metals such as copper

Anglo-Saxon coin (900BCE)

- This 10th century penny has an inscription stating that OFFA (Korean hehe) is king of mercia

Arabic dirham

- Many silver coins from the Islamic empire were carried to Scandinavia by Vikings
THE ECONOMICS OF MONEY

Potosi inflation (1540-1640)

- Spanish discovered silver in potosi, Bolivia

- Caused a century of inflation

The great Debasement (1542-1551)

- England’s Henry VIII debased the silver penny

Early-joint stock companies (1553)

- Merchant in England become to form companies

Bank of England (1694)

- Bank of England was created as a body that could raise funds at a low interest rate and
manage national debt

The royal Mint (1696)

- Isaac Newton became WARDEN

US dollar (1775)

- Continental congress authorized the issue of united states dollars

Gold standard (from 1884)

- British pound was tied to a defined equivalent amount of gold

Credit cards (1970s)

- Creation of credit card enabled consumers to access short term credit to make smaller
purchases

Digital money

- Easy transfer of funds and convenience of electronic payment

Euro

- Twelve EU countries joined together

BITCOIN

- A form of electronic money that exist solely as encrypted data.

HIGHLIGHTS IN THE HISTORY OF MONEY IN THE PHILIPPINES

Pre-spanish Regime

- Philippine was already trading with neighboring countries such as china, java and Macau
- Gold, gold dust, silver wires

Spanish regime

- Spanish introduced coins when they colonize philippines in 1521

- Silver coin minted in Mexico

American regime

- When Spanish ceded the Philippines in 1898 to america, America introduces the country’s
first local currency, the Philippine Peso.

Japanese regime

- Japanese war notes

Post-war period

- All Japanese currencies are illegal

THE SUPPLY AND DEMAND FOR MONEY

The money supplies

- Precision definition is complex

The key measures for the money supply are:

M1

- Narrowest measure of money supply

- Currency circulation held by the non-bank
- Money used as medium of exchange

M2

- Money held in saving deposit money

- Money used as a store of VALUE

M3

- Includes financial institutions

- Money used as unit of account
L

- This measure includes liquid and near-liquid assets

BANGKO SENTRAL NG PILIPINAS

- Responsible for determining the supply money

THE DEMAND FOR MONEY

Transaction demand

- Money demanded for day-to-day payments

- This kind of demand varies with GDP

Precautionary demand

- Money demanded as a result of unanticipated payment

- Varies with GDP

Speculation demand

- Because of expectations about interest rates in the future

RATE OF INTEREST

- Price paid in money market for the use of money