Money, Foreign Exchange, Finance

 

Task 1

 

Name: María Guadalupe Medina Jasso

 

What is Finance?

 Finance is monetary resources comprising debt and ownership funds of the state, company or person

 

What is Financial System?

The financial system deals with the financial transactions and the exchange of money between savers, investors, lenders and borrowers

The financial system provides financial services for various stakeholders operating in the financial system like depositors, lenders, borrowers, government and others, the financials system tries to integrate these stakeholders for the transaction purpose and also to exchange the money between them, to maximize their return or to fulfill the requirements in terms of the financial requirements

 

What are the functions of a financial system?

·         It provides payment system for the exchange of goods and services in the economy.

·         It provides the mechanism to pull the founds in terms of households savings for corporate investments.

·         It provides the financial capital for long-term capital formation for the government and business organizations.

·         It facilitates the investors and other market participants to liquidate their investments alternatives like stocks and bonds, etc.

·         It provides the avenues for managing the risk faced by the market participants.

·         It takes care of both short-theme and long-term need of the market participants

·         It supplies the required financial capital to government for public expenditure on the social welfare activity, infrastructure development, etc.

·         It provides the price information which helps to coordinate the decentralized decision making process in the various sectors.

·         In helps in reduction of the asymmetric information and moral hazard problems which in turn facilities in reducing the transaction costs.

·         It creates different investment opportunities for the investors to maximize their return.

·         It helps in efficient allocation of financial resources.

·         It plays a significant role for economic growth as it helps to create the demand and supply of the funds through which the interest rates are determined in various markets. Changes in interest rated affect the money supply, inflation rate also the possibility of the foreign investments.

How are the main types of financial institutions categorized? Describe each one.

·         Regulatory - It is a state or nationally chartered bank, savings and loan association or savings bank, credit union, trust company, or other state or federally chartered lending institution or a regulated affiliate or regulated subsidiary of any of these entities.

·         Intermediaries - It is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers).

·         Non intermediaries - These include insurance firms, venture capitalists, currency exchanges, some microloan organizations, and pawn shops. These non-intermediaries financial institutions provide services that are not necessarily suited to banks, serve as competition to banks, and specialize in sectors or groups.

·         Others

 

Which are the main classes of financial instruments issued in a financial system? Describe them in detail.

 Cash Instruments: The values of cash instruments are directly influenced and determined by the markets. These can be securities that are easily transferable. 

Derivative Instruments : The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates, or indices.

 

What are the distinctions between various types of financial markets according to their function? Explain them.

 Money and capital markets

· Is based on the differences in the period of maturity of financial assets issued in these markets

·   While the money markets deal in the short-term claims, the capital markets does so in the long-term claims.

Primary and secondary markets

·   Primary markets deal in the new financial claims or new securities

·   Secondary markets deal in securities already issued or existing or outstanding

 

What does the “flow of funds” refer to? Explain in detail.

Flow of funds (FOF) are financial accounts that are used to track the net inflows and outflows of money to and from various sectors of a national economy