LO1 EXPLAIN WHY FINANCIAL SYSTEMS EXIST

False: Financial system includes financial markets

Main functions: - Channeling funds
- Providing payment mechanism
- Risk transfer
Dng s flows of funds through financial system trong sch gii thch
This question aims at functions of financial markets or system (debt or bond markets, interest
rates, stock market, foreign exchange market). According to the course book, financial systems
serve 4 functions including economic growth, personal wealth, the behavior of businesses and
consumers and the cyclical performance of the economy.
- Funding mobilization: Bond and stock markets help channeling funds from people
have an excess of available funds but do not have a productive use of them to those
who have a shortage.
- Investment: Financial market play an important part in arranging to invest funds.
Both firms and individuals by buying stock can raise funds to finance specific
companies activities.
- National growth: Financial market contribute to a nationals growth by shifting
money from industry to industry or firm to firm based on the supply and demand
for their products (foreign goods and domestic goods).
- Entrepreneurship growth: Financial markets allow entrepreneurs (and established
firms) to access the funds needed to invest in projects or companies based on the
price of a firms shares.

Source: https://www.boundless.com/economics/textbooks/boundless-economics-
textbook/introduction-to-macroeconomics-18/key-topics-in-macroeconomics-91/the-role-of-the-
financial-system-341-12438/

LO2: The structure of financial system.

Financial system includes financial intermediaries (institutions), financial
market, financial instruments.
c li cch phn loi financial intermediaries.
 FINANCIAL SYSTEM

FINANCIAL FINANCIAL
INSTITUTIONS MARKET

The financial system comprises many different types of private-sector financial institutions
which are heavily regulated by the government . L

FINANCIAL INSTITUTIONS

INVESTMENT
BANKS
BANKS CENTRAL INSURANCE MUTUAL FINANCE
BANKS COMPANIES FUNDS COMPANIES

The structure of the financial markets

FINANCIAL MARKETS

DEBT AND CAPITAL MONEY

EQUITY MARKETS MARKETS
MARKETS

PRIMARY SECONDARY
MARKETS MARKETS
 EXCHANGES OVER-THE-
COUNTER
MARKETS

REFERRENCES:
https://www.linkedin.com/pulse/understanding-nuances-financial-markets-layman-
approach-rohan-anand

LO3: Describe which financial intermediaries operate in financial systems:

- Financial intermediaries comprise Financial Institutions ( CentralBanks ) and Financial
intermediaries. (B)
- Financial intermediaries perform intermediation function: Accepting deposits and make
loans. They provide sources of funds. (B: ko hi functions, ko cn tr li)
They are chefly divided into 3 types:

Depository institutions ( Banks b) : Commercial Banks, Savings and loans

associations, mutual saving banks and credit unions.
Contractual savings intitutions: Life insurance companies, Fire and casualty insurance
companies, Pension funds, government retirement funds.
Investment intermediaries: Finance companies, Mutual funds, Money market mutual
funds.
They are strictly controlled by the government.
- Central Bank is responsible for the conduct of Moneytary policy which includes
managing the Money supply and control Interest rates.

Specific topics of Banking & Finance

Group 1: Topic 1 Overview of the Financial System
LO4: Explain which financial instruments are traded on financial markets

LO4: Explain which Financial instruments are traded on Financial market:

 1. Definition
- A financial instrument (a security) is a claim on the issuers future income or
assets (any financial claim or piece of property that is subject to ownership

- Financial instruments are assets that can be traded. Most types of financial
instruments provide an efficient flow and transfer of capital all throughout the
world's investors. These assets can be cash, a contractual right to deliver or receive
cash or another type of financial instrument, or evidence of one's ownership of an
entity.

2. Classification (5)
+ Shares/ Equity (= claims on companies)
+ Debts (= claims on ultimate borrowers)
+ Deposits (= claims on banks)
+ Participation interests (PIs) (= claim on investment vehicles)
+ Derivatives:
Honestly, derivative instruments dont represent lending and borrowing (2 key
factors to define financial instruments), but they are still considered as instruments
of finance.

3. Explain kinds of financial instruments

a. Share instruments
- There are 2 types of shares:
+ Ordinary (common/ stocks) shares:
+ Preference (preferred) shares

b. Debt instruments
- A debt instrument is a document that serves as a legally enforceable evidence of a
debt and the promise of its timely repayment (eg: Banker's acceptance, bills of
exchange, bonds, certificates of deposit, debentures, and promissory notes)
- The debt market is made up of:
+ The short-term debt market (STDM)
+ The long-term debt market (LTDM)
- The debt is loan from banks in various form:
+ Overdraft
+ Mortgage
+ Fixed term loans
+ Leasing contracts
+ Instalment credit contracts

c. Deposit instruments:
- The public (individuals, companies, organisations) and banks that hold properties
can deposit into central bank
- 2 types of deposit instruments are:
+ NCDs (negotiable certificates of deposit)
+ NNCDs (non-negotiable certificates of deposit)

d. Instruments of investment vehicles:

- An investment vehicle is a product used by investors with the intention of gaining
positive returns.
Investment vehicles can be:
+ low risk: certificates of deposit (CDs) or bonds, or
+ more risks: stocks, options and futures.
+ Other types of investment vehicles: art or coins; mutual funds; and exchange-
traded funds (ETFs).
- Some reminders of investment vehicles:
+ Constructual intermediaries: Insurers, Retirement funds
+ Collective investment schemes: Securites unit trusts (SUTs), Property unit trusts
(PUTs), Exchange traded funds (ETFs)
+ Alternative investments: Hedge funds (HFs), Private equity funds (PEFs)

e. Derivative instruments:
- Derivative instruments (or simply derivatives) are a category of financial
instruments that includes options, futures, forwards and swaps.
- The name of Derivatives arises from the fact that these instruments are derive
from debt and share instruments
- There are two groups of derivative contracts:
+ the privately traded over-the-counter (OTC) derivatives
+ exchange-traded derivatives (ETD)