FINANCIAL MARKET AND CAPITAL

MARKET

EKONOMI PEMBANGUNAN
FAKULTAS EKONOMI DAN BISNIS
UNIVERSITAS UDAYANA
1. Financial Market Concept and Function
Financial markets perform the essential economic function of channeling funds from
households, firms, and governments that have saved surplus funds by spending less than
their income to those that have a shortage of funds because they wish to spend more than
their income. This function is shown schematically in Figure 2.1. Those who have saved
and are lending funds, the lender-savers, are at the left, and those who must borrow funds
to finance their spending, the borrower-spenders, are at the right. The principal lender-
savers are households, but business enterprises and the government (particularly state and
local government), as well as foreigners and their governments, sometimes also find
 themselves with excess funds and so lend them out. The most important borrower-spenders
are businesses and the government (particularly the federal government), but households
and foreigners also borrow to finance their purchases of cars, furniture, and houses. The
arrows show that funds flow from lender-savers to borrower-spenders via two routes.
In direct finance (the route at the bottom of Figure 2.1), borrowers borrow funds directly
from lenders in financial markets by selling them securities (also called financial
instruments), which are claims on the borrower’s future income or assets. Securities are
assets for the person who buys them, but they are liabilities (IOUs or debts) for the
individual or firm that sells (issues) them. For example, if General Motors needs to borrow
funds to pay for a new factory to man- ufacture electric cars, it might borrow the funds
from savers by selling them a bond, a debt security that promises to make payments
periodically for a specified period
of time, or a stock, a security that entitles the owner to a share of the company’s profits and
assets.

Financial
funds intermediaries funds

Borrower-spenders
Lender-savers Financial 1. Bussines firms
1. Households funds markets funds 2. Government
2. Bussines firms 3. Households
3. Government 4. foreigners
4. foreigners
Direct finance
2. Types of Financial Market
- The money market
- The Bond market
- The equity market
- The mortgage Market
- The derivatives market
- International Market
3. Function, participants, and instruments of Money Market
  Definition and participants
Money market in Indonesia is still relatively new when compared with rich countries.
However, in the development of the world today, the money market in Indonesia is also
growing although not as many as capital market. Participants in the money market are
banks or financial institutions that require short-term funds and usually the purchase of
money market securities is based on trust only, this is because money market securities
are usually unsecured. Therefore, the trust factor is dominant before the marketable
securities are bought by investors in addition to other factors.

 Function

Like the capital market, in the money market there are parties directly or indirectly
involved. Each party is mutually interested in each other and has their own goals as well.
Parties involved in money market are :
1. Parties in need of funds.
that it is either a bank or a non-bank company that happens to need immediate funds to be
met for a particular interest.
2. Parties who invest funds.
That is the party that provides funds or parties that sell funds both banks and non-bank
companies with the aim of investing in the money market.

For those who need the funds and seek these funds in the money market there are several
goals. This objective depends on the interests and needs of fundraisers. At least there are
four objectives in collect funds from the money market that is:
l. to meet the needs of short-term funds, such as paying off debts that will soon mature;
2. to meet the needs of liquidity, due to lack of cash money;
3. to meet working capital needs, ie paying costs, employee wages, salaries, purchases,
materials and other working capital needs;
4. is experiencing losing clearing, this is happening at the clearing institution and should
be immediately dibąyar.

While the purpose for those who intend to invest funds in the capital market are:
1. to earn income at a certain interest rate;
2. intends to assist those who are actually experiencing financial difficulties;
3. speculation, in the hope of gaining huge profits in a relatively short period of time and
under certain economic conditions.

 Instruments

The selection of funds by investors in the money market certainly with a variety of
considerations. Investors can choose one of the many marketable securities offered in
accordance with their respective goals. The market securities offered in the money
market we call the money market instruments. The types of money market instruments
offered include:
1. Interbank Call Money
2. Bank Indonesia Certificates (SBI)
3. Certificate of Deposit
4. Money Market Securities (SBPU)
5. Banker's Acceptance
6. Commercial Paper
7. Treasury Bills
8. Repurchase Agreement
9. Foreign Exchange Market

1. Interbank Call Money

is an interbank loan that occurs in the clearing process. in clearing transactions organized
by Bank Indonesia every working day and always there is a loser and there is a winner.
for banks that lose the clearing if not able to defeat his defeat will be exposed to sanctions
from the bank Indonesia. therefore, so that we are not exposed to sanctions due to lack of
liquidity, the bank can lend money from other banks that we know by the name of
interbank call money or call money

the definition of call money itself is a credit or loan that must be paid or paid immediately
if there is already a bill or call from the donor. the credit term is centered between one
and 7 days. the granting of call money can be in the form of one day call money which
must be paid in one day call money can also be in the form of two days call money where
the repayment period is two days.

there are several provisions that need to be considered in call money facilities such as :
a. call money facilities are provided at clearing institutions to banks that suffer losses on
clearing and lack of liquidity
b. the amount of call money loan should not exceed the clearing loss today
c. loan instruments can start promissory
d. maximum period of 7 days and if it can not be repaid on due date it will turn into a
regular loan

2. Bank Indonesia Certificates

Bank Indonesia certificate is a marketable securities published by the central bank or
bank Indonesia. SBI published is performed on a certain nominal basis and SBI issuance
is usually associated with government policy towards open market operation in the issue
of handling the money supply. SBI was first published in 1970 and traded only between
banks. This implementation did not last long because the government issued a policy to
allow commercial bank to issue certificates of deposit in 1971. SBI is being published
again with the release of banking deregulation policy 1 June 1983
3. Certificates of Deposit
with the government's policy of allowing banks to issue certificates of deposit since 1971,
so far the certificate of deposit is the main alternative for banks to meet their short-term
funding needs.
certificates of deposit published with a certain nominal term also varied in accordance
with the wishes of the bank. disbursement of certificate of deposit can be done after
maturity. but if investors need funds then it can also certificate of deposit is sold whether
to the institution or public party

the difference between the certificate of deposit and time deposit is in the case of identity
or this indicator, the certificate of deposit may be traded or transferred while the time
deposit is not then in the case of the nominal certificate of deposit already printed while
the time deposit has not the linen difference is in the case of interest withdrawal where
the certificate of deposit can be withdrawn at face while time deposits can only be
withdrawn any not before or due date.

4. Marketable securities of money market

is a securities introduced by the Indonesian bank in 1985 as one of the tools to conduct
open market operations in order to participate in stabilizing the value of rupiah banks or
financial institutions that want to obtain short-term funds can menervitkan this sbpu then
traded with the bank Indonesia or other parties

5. banker’s acceptance
is a bank notes stamped with the word accepted and can be traded in the money market as
one source of short-term funds. the drawdown period ranges from 30 days to 180 days.
banker's acceptance occurs in foreign trade (import export) the occurrence of banker's
acceptance in which the process of buying and selling transactions of goods between
countries.

6. commercial paper
is a valuable paper that can be traded on the money market for a period not exceeding one
year. which is included in the type of commercial paper is a promo issued by a financial
institution company including a bank

the issuance of promissory notes to this type of commercial paper is not accompanied by
certain guarantees such as other types of money market securities that the commercial
paper is issued to meet the short-term capital requirements of the company to which the
issuer promises to pay a certain amount of money at maturity

the advantages over commercial paper lie rather than the guarantee that the issuer does
not provide certain guarantees then the interest rate is relatively low when compared with
other types of credit other thing is its issuance is relatively easy with a period that is not
too short while its weakness is due to the absence of guarantee certain then to sell it
 relatively more difficult if the publisher of his bonafidity is considered less
7. treasury bills
is a capital market instrument issued by the central bank with a maximum period of one
year issuance of treasury bills by the central bank is usually on the show with a certain
nominal also

the benefits of treasury bills for purchasers of the factors of trust will be paid back as they
are issued by government banks in addition to these types of securities are easy to trade.
treasuru bills published abroad sedankan in indonesia can be likened to the indonesian
bank certificate issued by bank indonesia

8 repuchace agreement
is a form of securities that can also be traded with a written agreement that the seller will
buy back the securities letter repurchase securities are with the agreement that is the price
and the date of falling temponua
this repuchase agreement transaction is traded on a discounted trading instrument which
may be in the form of sbi sbpu deposit certificate as well as treasury bills
4. Foreign Exchange Market definition, participants and background
the foreign exchange market is a market where foreign exchange transactions are
conducted both between countries and within a country. transactions may be performed by
an agency or company or individually with various purposes. in every time doing foreign
exchange transaction then used the exchange rate. this exchange rate may change according
to time and time conditions caused by various factors such as economic and political
factors.
in the international foreign exchange market trading only currency that is classified as
"convertible currencies" are often traded, while those not included in the class are rarely
traded. which belong to a strong currency class of covertible currencies among others are :
US Dollar : American dollar
FRF : France
JPN : Japan Yenn
SFR : France Switzerland
AUD : Australian Dollar
CAD : Canadian Dollar
DM :Germany Deutch Mark
SGD : Singapore Dollar
HKD : Hongkong Dolar
GBP :England poundsterling, etc

in addition to inter-country foreign exchange transactions can also be conducted between

banks with their customers such as foreign banknotes, travelers checks, foreign exchange
deposits, foreign transfers or other foreign currency activities. in this transaction the bank
uses the selling rate and buying rate where the use of the exchange rate can be done as
follows
 - the selling rate at the time the bank sells and the customer buys
- buying rate at the time the bank buys and the customer sells
the determination of the exchange rate can be done by direct rate and indirect rate. direct
rate means the determination that puts the domestic currency in front of the asinh currency.
while the indirect rate calculation is the opposite of placing the foreign currency in front of
the domestic currency.

5. Forms and Purpose of Foreign Exchange Market Transactions

there are several goals in making transactions of foreign exchange, whether done
by companies / entities and individuals, namely
1. for payment transactions
2. maintaining purchasing power
3. remittance abroad
4. make a profit
5. hedging
6. convenience of shopping
There are three kinds of transaction that can be done:
1. Spot Transactions
in the spot transaction usually the delivery of foreign currency is determined 2 working
days later. For example a foreign currency sale and purchase contract closed on the
10th day of delivery, but if the 12th day of the week or holiday of the country of origin,
the delivery can be done on the next day (eligible date) this kind of situation is called
value date. There are 3 ways to submit in the spot transactions which is:
- Value today
- Value tomorrow
- Value spot
2. Forward Transactions
forward transactions are often called futures transactions, because they have a certain
time period. the rate is set at the time the contract is made, but the payment may be in
the future over time. due to being paid by the time period, then the rate used in forward
transactions is higher when compared with spot transactions. Such transactions are
"premium" and if the opposite is called a "discount" forward transactions are often
made for hedging against exchange rate fluctuations
3. Swap Transactions
a swap transaction is a combination of buyers and sellers for two currencies in cash
followed by selling and repurchasing the same currency in cash and credits
simultaneously with different time limits. swap transactions are often called exchange
transactions using a currency for a certain period of time and barter transactions the
amount of purchase of a currency is always the same as the sale. therefore, in a swap
transaction will not change the position of exchange of profits. the purpose of this
transaction is to preserve the possibility of losses caused by changes in exchange rates.