ERICCA P.

SALDITOS
III - BSA

FINANCIAL MARKETS

FINAL EXAMINATION

1. Why is there a need for an efficient financial system for a country to have a strong economy?

An efficient financial system of any nation relies upon the foundation office accessible in the nation.
Without key businesses like coal, force and oil, advancement of different enterprises will be hampered.
It is here that the monetary administrations assume a vital function by giving assets to the development
of framework enterprises. Private area will think that its hard to raise the gigantic capital required for
setting up framework enterprises. For quite a while, foundation enterprises were begun simply by the
public authority in India. However, presently, with the strategy of financial progression, more private
area ventures have approached to begin framework industry. The Development Banks and the
Merchant banks help in raising capital for these businesses.

An efficient financial system requires a fair development which implies development in all the areas all
the while. Essential area, optional area and tertiary area require satisfactory assets for their
development. The monetary framework in the nation will be equipped by the experts so that the
accessible assets will be conveyed to all the areas in such a way, that there will be a reasonable
development in businesses, farming and administration areas

2. Explain the basic flow of funds through the financial system.

First take the sections. The family unit area incorporates philanthropic associations inside it.
Nonfinancial organizations incorporate reserve funds and advance affiliations, shared investment funds
banks, insurance agencies, annuity reserves, common assets, and so on The leftover areas are obvious.
The last segment demonstrating saving and venture is a proportion of homegrown saving and
speculation of all areas short the remainder of the world.

Column 1 which identifies with net saving which is a wellspring of assets for family units (Rs 27 crores)
and non-monetary organization's (Rs 17 crores), and the short figure of Rs. 4 crores for the public
authority shows a shortfall in its spending plan.

Line 2 identifies with net venture which is a utilization of assets by families (Rs. 12 crores) and non-
monetary partnership's (Rs 28 crores). The last segment of the table shows that saving and venture are
equivalent to Rs 40 crores each. The figures of saving and venture should have been taken from the
public pay records of the economy.

Line 3 shows net monetary venture which is the abundance of saving over speculation or utilizations
over wellsprings of every area. For example, the family area makes positive net speculation of Rs 15
crores (27-12), while the non-monetary corporate area causes negative net venture of Rs 11 crores since
it makes-interest in overabundance of saving (17-28). The equivalent is the situation with the public
authority which is appeared as short Rs 4 crores. (It can likewise be shown up at by deducting the figure
of S of line 5 from the U figure of line 4 of every area).

Line 4 shows monetary utilizations (net) of assets. They dread to loaning. It approaches the amount of
the adjustment in every area's holding of monetary resources which incorporate interest stores,
government protections, corporate protections, home loans and net expansion in unfamiliar resources.

Subsequently the net monetary employments of the family area are Rs 25 crores which incorporate Rs 7
crores of interest stores in addition to Rs 4 crores of government protections in addition to Rs 14 crores
of corporate protections. Also for the excess areas.

Line 5 Financial sources (net) of assets shows the risk of every area. They allude to getting. For example,
the public authority area shows the obtaining of monetary resources of Rs 4 crores by offering
protections to the family area.

Two significant focuses should be noted: first, monetary utilizations (net) and monetary sources (net) of
the economy should approach. They are Rs 34 crores in our table. Second, changes in resources (uses)
and liabilities (wellsprings) of each sort of asset should add up to zero.

This is uncovered by the last segment of the table comparable to lines 6, 7, 8, 9 and 10. On account of
line 10 we have taken net expansion in unfamiliar resources for be zero for comfort. In the event that it
is a positive figure, the equilibrium will show surplus in the global current record of the public pay
accounts and a negative figure will show a shortage.

3. What are the key components of the financial system?

Financial Institutions

Financial establishments encourage smooth working of the monetary framework by making financial
specialists and borrowers meet. They prepare the reserve funds of speculators either straightforwardly
or by implication by means of monetary business sectors, by utilizing distinctive monetary instruments
just as in the process utilizing the administrations of various monetary administrations suppliers.

Financial Markets

A financial market is where monetary resources are made or moved. It tends to be extensively arranged
into currency markets and capital business sectors. Currency market handles transient monetary
resources (not exactly a year) while capital business sectors deal with those monetary resources that
have development time of over a year.

Financial Instruments

This is a significant part of monetary framework. The items which are exchanged a monetary market are
monetary resources, protections or other kind of monetary instruments. There is a wide scope of
protections in the business sectors since the requirements of financial specialists and credit searchers
are extraordinary. They show a case on the settlement of chief not far off or installment of a standard
sum by methods for interest or profit. Value shares, debentures, bonds, and so on are a few models.

Financial Services
Financial administrations comprise of administrations gave by Asset Management and Liability
Management Companies. They help to get the fundamental assets and furthermore ensure that they are
productively sent.

They help to decide the financing mix and expand their expert administrations upto the phase of
overhauling of moneylenders. They help with acquiring, selling and buying protections, loaning and
contributing, making and permitting installments and settlements and dealing with hazard introductions
in monetary business sectors. These reach from the renting organizations, shared asset houses, vendor
investors, portfolio chiefs, charge limiting and acknowledgment houses.

Money

Money is perceived to be whatever is acknowledged for installment of items and administrations or for
the reimbursement of obligation. It is a mode of trade and goes about as a store of significant worth.

4. What is a stock exchange? What is its main purpose?

A stock exchange is a significant factor in the capital market. It is a protected spot where exchanging is
done in an orderly manner. Here, the protections are purchased and sold according to very much
organized standards and guidelines. Protections referenced here incorporates debenture and offer gave
by a public organization that is effectively recorded at the stock trade, debenture and securities gave by
the public authority bodies, city and public bodies.

The purpose for stock exchange is the framework additionally gives programmed need to the purchaser
offering the greatest cost and to the merchant who offers shares at the least expense. The basic role of a
financial exchange is to control the trading of stocks, just as other monetary resources.

5. What does “listing of securities” mean?

We realize that the products wherein exchanges in a stock trade occur are Government Securities,
Corporate protections, stocks, securities, debentures and so forth In any case, the stock trade won't
permit all the protections to bargain inside it. Each stock trade keeps a rundown containing the names
of chosen organizations in whose protections the stock trade will bargain. This rundown is classified
"Official exchange list".

Recorded protections can be arranged into two sorts viz.,

Cleared Securities, and

Non-cleared-Securities.

The stock trade determines now and again, the protections admitted to dealings, which are
remembered for the cleared protections list. Any remaining protections not on the rundown of cleared
protections are considered to be non-cleared protections. It should likewise be noticed that forward
exchanges are conceivable just in the event of cleared protections. Henceforth, cleared protections are
known as protections on forward rundown and non-cleared protections as protections on money list.

6. Distinguish between primary market and secondary market.

The Primary market alludes to the market where new protections are given to acquire capital. Firms and
public or government foundations can raise assets from the essential market by making another issue of
stock (to get value financing) or securities (to acquire obligation financing).

At the point when a company is making another issue, it is called an Initial Public Offering (IPO), and the
cycle is alluded to as the 'guaranteeing' of the offer issue. In the essential market, the protections are
given by the organization that desires to acquire capital and is sold straightforwardly to the financial
specialist. In return for the assets that the investor contributes, a testament is given to speak to the
premium held in the organization.

The Secondary market alludes to the market where protections that have just been given are
exchanged. Instruments that are typically exchanged on the auxiliary market incorporate stocks,
securities, alternatives and fates. Certain home loan credits can likewise be offered to speculators on the
optional market. When a security has been bought unexpectedly by a financial specialist on the essential
market, a similar security can be offered to another speculator in the auxiliary market, which might be at
a sequential cost contingent upon the exhibition of the security during its time of exchanging. There are
numerous optional business sectors around the world, and celebrated not many incorporate the New
York Stock Exchange, The NASDAQ, the London Stock trade, the Tokyo stock trade and the Shanghai
Stock Exchange.

7. Describe what money market is

Money market essentially alludes to a segment of the monetary market where monetary instruments
with high liquidity and transient developments are exchanged. Currency market has become a part of
the monetary market for purchasing and selling of protections of transient developments, of one year or
less, for example, depository bills and business papers.

Over-the-counter exchanging is done in the currency market and it is a discount cycle. It is utilized by the
members as a method of acquiring and loaning for the present moment.

Money market comprises of debatable instruments, for example, depository charges, business papers.
furthermore, declarations of store. It is utilized by numerous members, including organizations, to raise
assets by selling business papers on the lookout. Currency market is viewed as a protected spot to
contribute because of the high liquidity of protections.

It has certain dangers which speculators should know about, one of them being default on protections,
for example, business papers. Currency market comprises of different monetary establishments and
vendors, who try to obtain or credit protections. It is the best source to put resources into fluid
resources.

The currency market is an unregulated and casual market and not organized like the capital business
sectors, where things are coordinated in a conventional way. Currency market gives lesser re-visitation
of speculators who put resources into it however gives an assortment of items.

Pulling out cash from the currency market is simpler. Currency markets are not the same as capital
business sectors as they are for a more limited timeframe while capital business sectors are utilized for
longer time-frames.
In the interim, a home loan moneylender can make security against an aftermath hazard by entering a
concurrence with an office or private channel for operational, as opposed to required, conveyance of
the home loan. In such an arrangement, the home loan originator adequately purchases an alternative,
which gives the bank the right, yet not the commitment, to convey the home loan.

Against that, the private course charges an expense for permitting discretionary conveyance.

8. Explain how money market works

With regards to bringing in revenue on your cash, investment account aren't the lone game around.
Currency market accounts are one of the most mainstream investment funds choices, and on the off
chance that you're curious about their highlights, it's presumably an ideal opportunity to find out
additional. So how does a currency market account work? Here's an introduction on this adaptable
investment account.

A money market account works like other ledgers.

Money market accounts work a lot of equivalent to other bank store accounts, similar to investment
funds or financial records. The thought is pretty clear: you put cash in the record and the bank pays
revenue on your equilibrium intermittently as indicated by the provisions of the record.

Opening a money market account is basic, as well. Much of the time, you simply give your own data, put
aside an underlying installment, and the record is prepared to utilize. A few banks have least store sums
or least equilibrium prerequisites, yet those differ by bank.

9. Enumerate and describe the features of money market instruments

There are a few distinct assortments of money market instruments, given by the two organizations and
governments. This is definitely not a thorough rundown, however a portion of the more normal kinds of
money market instruments include:

- Transient CDs
- Financiers acknowledgments
- Depository bills
- Business paper
- Civil notes
- Government reserves
- Repurchase arrangements (repos)
- Qualities

Money market instruments share a couple of things for all intents and purpose. First of all, we previously
referenced that they have short developments, characterized as one year or less. Thus, a six-month CD
would qualify as a money market instrument, however a two-year CD would not. Money market
instruments' developments can last from one day to one year, with a quarter of a year or less being the
most widely recognized.
Also, money market instruments for the most part have the accompanying two qualities:

Liquidity - Money market instruments are fluid ventures, which implies that they can promptly be
purchased and sold at stable costs. There are dynamic optional business sectors for most currency
market instruments, so they can be handily sold before development.

Security - Because of their liquidity and the idea of the banks, currency market instruments are more
secure than numerous different sorts. For instance, Treasury bills are supported by the credit of the U.S.
government. Currency market store accounts are governmentally protected for up to $250,000.
Nonetheless, notice that generally safe and danger free are two distinct things. A few kinds of currency
market instruments do have some danger. Business paper, for example, is just as protected as the
organization that gave it.

To summarize it, money market instruments are viewed as a protected spot to put cash due to their high
liquidity, short developments, and security comparative with different sorts of speculations.

10. Describe capital market trading

Capital market may exchange other monetary protections including bonds; subordinate agreements, for
example, choices, different advances, and other obligation instruments, and item prospects. Other
monetary instruments might be sold in capital business sectors and these items are getting progressively
refined. Some capital business sectors are accessible to the public straightforwardly while others are
shut to everybody aside from enormous institutional financial specialists. Private exchange, generally
between enormous foundations with high-volume exchanges, happens through made sure about PC
networks at high speeds. These business sectors all exchange monetary protections, so they are largely
capital business sectors. The financial exchange is an exceptionally critical bit of the all out volume of
capital market exchanges.

Capital market are made out of essential and auxiliary business sectors. Most of current essential and
auxiliary business sectors are PC based electronic stages. Essential business sectors are available to
explicit financial specialists who purchase protections straightforwardly from the responsible
organization. These protections are viewed as essential contributions or beginning public contributions
(IPOs). At the point when an organization opens up to the world, it offers its stocks and securities to
enormous scope and institutional financial specialists, for example, multifaceted investments and
common assets.

11. What is meant by translation exposure in terms of foreign exchange risk?

Translation exposure is most evident in multinational organizations since a portion of their operations
and assets will be based in a foreign currency. It can also affect companies that produce goods or
services that are sold in foreign markets even if they have no other business dealings within that
country.

In order to properly report the organization's financial situation, the assets and liabilities for the whole
company need to be adjusted into the home currency. Since an exchange rate can vary dramatically in a
short period of time, this unknown, or risk, creates translation exposure. This risk is present whether the
change in the exchange rate results in an increase or decrease of an asset's value.

12. Explain how exports and imports tend to influence the value of a currency

When a country is importing goods, this represents an outflow of funds from that country. Local
companies are the importers and they make payments to overseas entities, or the exporters. A high
level of imports indicates robust domestic demand and a growing economy. If these imports are mainly
productive assets, such as machinery and equipment, this is even more favorable for a country since
productive assets will improve the economy's productivity over the long run.

A healthy economy is one where both exports and imports are experiencing growth. This typically
indicates economic strength and a sustainable trade surplus or deficit. If exports are growing, but
imports have declined significantly, it may indicate that foreign economies are in better shape than the
domestic economy. Conversely, if exports fall sharply but imports surge, this may indicate that the
domestic economy is faring better than overseas markets.

For example, the U.S. trade deficit tends to worsen when the economy is growing strongly. This is the
level at which U.S. imports exceed U.S. exports. However, the U.S.’s chronic trade deficit has not
impeded it from continuing to have one of the most productive economies in the world.

However, in general, a rising level of imports and a growing trade deficit can have a negative effect on
one key economic variable, which is a country's exchange rate, the level at which their domestic
currency is valued versus foreign currencies.

13. Describe what derivative financial instruments are

A derivative is a financial contract that derives its value from an underlying asset. The buyer agrees to
purchase the asset on a specific date at a specific price.

Derivatives are often used for commodities, such as oil, gasoline, or gold.1 Another asset class is
currencies, often the U.S. dollar. There are derivatives based on stocks or bonds. Still others use interest
rates, such as the yield on the 10-year Treasury note.

The contract's seller doesn't have to own the underlying asset. He can fulfill the contract by giving the
buyer enough money to buy the asset at the prevailing price. He can also give the buyer another
derivative contract that offsets the value of the first. This makes derivatives much easier to trade than
the asset itself.

Derivatives Trading

In 2017, 25 billion derivative contracts were traded.2 Trading activity in interest rate futures and options
increased in North America and Europe thanks to higher interest rates. Trading in Asia declined due to a
decrease in commodity futures in China. These contracts were worth around $532 trillion.3

Most of the world's 500 largest companies use derivatives to lower risk.4 For example, a futures
contract promises the delivery of raw materials at an agreed-upon price. This way the company is
protected if prices rise. Companies also write contracts to protect themselves from changes in exchange
rates and interest rates.

Derivatives make future cash flows more predictable. They allow companies to forecast their earnings
more accurately. That predictability boosts stock prices. Businesses then need less cash on hand to
cover emergencies. They can reinvest more into their business.

Most derivatives trading is done by hedge funds and other investors to gain more leverage.5 Derivatives
only require a small down payment, called “paying on margin.” Many derivatives contracts are offset, or
liquidated, by another derivative before coming to term. These traders don't worry about having enough
money to pay off the derivative if the market goes against them. If they win, they cash in.

14. Distinguish between conventional mortgage loan and insured mortgage loans

A conventional loan has no government insurance and so typically has a higher interest rate but offers
more flexibility in terms, such as length of the loan and interest options. A conventional loan usually
requires higher down payments, often up to 20 percent of the loan. Conventional loans are processed
more quickly because they require less paperwork and do not need approval of government agencies.

Government-secured loans are backed by a federal agency, most often the Federal Housing
Administration or Veterans Administration, and have specific eligibility requirements. These loans are
insured to protect the lender in case of default and so generally have lower interest rates and much
lower down payment requirements because the lender is protected by the government insurance. They
are fixed-rate loans, with the same interest rate for the term of the loan.

15. What is meant by “securitization of mortgages”?

The process of mortgage securitization involves combining individual mortgages of similar characteristics
in a pool and selling debt securities that draw interest on principal payments from the pool of
mortgages. Securitization turns illiquid assets of individual mortgage loans into marketable securities
that can be bought. sold and traded on the secondary markets.

The securitization process allows mortgage originators to sell mortgage loans from their books and use
the money to make more loans. If a mortgage originator gives a home owner a $300,000 mortgage at 6
percent. If the loan company retains the mortgage, it will earn an origination fee of 1 percent or more
and the 6 percent until the loan is paid off. If the loan company sells the loan to a mortgage pool, it can
again lend out the $300,000 and collect more fees. Mortgage securitization allows lenders to continue to
recycle loan money to home owners without retaining the loan assets on their books.

16. Explain the value of cross-border financing

Cross-border financing—also known as import and export financing—refers to any financing

arrangement that occurs outside a country's borders. Cross-border financing helps businesses
participate in international trade by providing a source of funding that enables them to compete globally
and conduct business beyond their domestic borders.

Cross-border financing sometimes requires the lender or provider to act as an agent between the
business, their suppliers, and the end-customers. Cross-border financing comes in many forms and
includes cross-border.

17. What is a financial intermediary?

A financial intermediary is an entity that acts as the middleman between two parties in a financial
transaction, such as a commercial bank, investment bank, mutual fund, or pension fund. Financial
intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and
economies of scale involved in banking and asset management. Although in certain areas, such as
investing, advances in technology threaten to eliminate the financial intermediary, disintermediation is
much less of a threat in other areas of finance, including banking and insurance.

18. Distinguish between defined contribution plan and defined benefit plan

Defined-Benefit Plan

Defined-benefit plans provide eligible employees guaranteed income for life when they retire.
Employers guarantee a specific retirement benefit amount for each participant that is based on factors
such as the employee’s salary and years of service.

Employees have little control over the funds until they are received in retirement. The company takes
responsibility for the investment and for its distribution to the retired employee. That means the
employer bears the risk that the returns on the investment will not cover the defined-benefit amount
due to a retired employee.

Because of this risk, defined-benefit plans require complex actuarial projections and insurance for
guarantees, making the costs of administration very high. As a result, defined-benefit plans in the
private sector are rare and have been largely replaced by defined-contribution plans over the last few
decades. The shift to defined-contribution plans has placed the burden of saving and investing for
retirement on employees.

Defined-Contribution Plan

Defined-contribution plans are funded primarily by the employee. But many employers make matching
contributions to a certain amount.

The most common type of defined-contribution plan is a 401(k). Participants can elect to defer a portion
of their gross salary via a pre-tax payroll deduction to the plan, and the company may match the
contribution if it chooses, up to a limit it sets.

As the employer has no obligation toward the account’s performance after the funds are deposited,
these plans require little work, are low risk to the employer, and cost less to administer. The employee is
responsible for making the contributions and choosing investments offered by the plan. Contributions
are typically invested in select mutual funds, which contain a basket of stocks or securities, and money
market funds, but the investment menu can also include annuities and individual stocks.

19. Explain your understanding of the nature of commercial banks

A commercial bank is a financial institution that grants loans, accepts deposits, and offers basic financial
products such as savings accounts and certificates of deposit to individuals and businesses. It makes
money primarily by providing different types of loans to customers and charging interest.

The bank’s funds come from money deposited by the bank customers in saving accounts, checking
accounts, money market accounts, and certificates of deposit (CDs). The depositors earn interest on
their deposits with the bank. However, the interest paid to depositors is less than the interest rate
charged to borrowers. Some of the loans offered by a commercial bank include motor vehicle loans,
mortgages, business loans, and personal loans.

20. Give and explain the major forces that led to the growth of the Philippine Banking System

In 2017, the Philippines was among the top three growth performers in the region. Only Vietnam and
China did better. The Philippine economy grew from 6.9 percent year-on-year in 2016 to 6.7 percent
year-on-year in 2017. Growth was anchored in strong exports, while investment growth significantly
slowed and consumption growth moderated. The Philippines’ annual exports rose sharply in 2017 and
became the main engine of economic growth, while imports continued to grow by double-digits.
Investment growth slowed in 2017, following two consecutive years of rapid expansion, and climbing
inflation slowed real wage growth and contributed to a moderation in private consumption growth.

Sustained economic growth is likely to continue to contribute to poverty reduction. Under the
assumption that the responsiveness of the poverty rate to economic growth follows historical trends,
the poverty rate, based on the lower middle-income poverty line of US$3.20/day, is projected to decline
from 27.0 percent in 2015 to 22.9 percent and 21.7 percent in 2018 and 2019, respectively, as economic
growth remains robust. These projections would imply a continuing trend of one million Filipinos being
lifted out of poverty each year. Factors that have been driving poverty reduction in the Philippines
include the movement of employment out of agriculture, a sustained inflow of remittances, and the
government’s conditional cash-transfer program.

PROSPECTS AND RISKS

The country’s medium-term growth outlook remains positive. The Philippine economy is projected to
continue on its expansionary path and grow at an annual rate of 6.7 percent in both 2018 and 2019. In
2020, growth is expected to level at 6.6 percent. The economy is currently growing at its potential,
making productive investment in physical and human capital essential so that the economy can continue
to grow along its current growth trajectory. Investment growth hinges on the government’s ability to
effectively and timely implement its ambitious public investment program. Moreover, the government
needs to clarify the role of the private sector in its investment program
Domestic risks are becoming more prominent. Inflationary pressure is expected to intensify in 2018 due
to both domestic and external factors. The Philippine economy is also at risk of overheating. The
implementation of the public infrastructure program is vital to the country’s growth outlook, as private
investment is expected to weaken. Prudent fiscal management and the implementation of the
government’s tax reform agenda could help secure the country’s fiscal sustainability.

External risks remain present, especially a faster-than-expected policy normalization in advanced

economies that could trigger financial volatility and increase capital outflows from the Philippines.
Renewed protectionist sentiments in several advanced economies will also elevate policy uncertainty,
which may disrupt trade and investments.

Higher real wages are essential to achieve shared prosperity and inclusive growth. In recent years, the
Philippine economy has made great strides in delivering inclusive growth, evidenced by the declining
poverty rates and a falling Gini coefficient.