ACCO 20083 

  FINANCIAL money: current money (cash), claims on

MARKETS Lecture 1 future money (credit), or claims on the
future income potential or value of real
assets (equity). These also include
What Is a Financial System?  derivative
instruments. Derivative instruments,
A financial system is a set of institutions, such as commodity futures or stock
such as banks, insurance companies, options, are financial instruments that
and stock exchanges, that permit the are dependent on an underlying real or
exchange of funds. Financial systems financial asset's performance. In
exist on firm, regional, and global levels. financial markets, these are all traded
Borrowers, lenders, and investors among borrowers, lenders, and
exchange current funds to finance investors according to the normal laws
projects, either for consumption or of supply and demand. 
productive investments, and to pursue a
return on their financial assets. The In a centrally planned financial system
financial system also includes sets of (e.g., a single firm or a command
rules and practices that borrowers and economy), the financing of consumption
lenders use to decide which projects get and investment plans is not decided
financed, who finances projects, and by counterparties in a transaction but
terms of financial deals.  directly by a manager or central planner.
Which projects receive funds, whose
KEY TAKEAWAYS  projects receive funds, and who funds
them is determined by the planner,
 A financial system is the set of whether that means a business
global, regional, or firm-specific manager or a party boss. 
institutions and practices used to
facilitate the exchange of funds.  Most financial systems contain elements
 Financial systems can be of both give-and-take markets and top-
organized using market principles, down central planning. For example, a
central planning, or a hybrid of both.  business firm is a centrally planned
 Institutions within a financial financial system with respect to its
system include everything from internal financial decisions; however, it
banks to stock exchanges and typically operates within a broader
government treasuries.  market interacting with external lenders
   and investors to carry out its long term
Understanding the Financial System  plans. At the same time, all modern
Like any other industry, the financial financial markets operate within some
system can be organized kind of government regulatory
using markets, central planning, or framework that sets limits on what types
some mix of both.  of transactions are allowed. Financial
systems are often strictly regulated
Financial markets involve borrowers, because they directly influence
lenders, and investors negotiating loans decisions over real assets, economic
and other transactions. In these performance, and consumer protection. 
markets, the economic good traded on
both sides is usually some form of

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https://ebrary.net/16/business_finance/si (e.g. treasury bills) or non-marketable
x_elements_the_financial_system  (e.g. retirement annuities). 
Cited July 25, 2020 
- Fourth: the creation of money (=
Six elements of the financial bank deposits) by banks when they
system  satisfy the demand for new bank credit.
This is a unique feature of banks.
The financial system is primarily Central banks have the tools to curb
concerned with borrowing (issuing of money growth. 
debt and share securities) and lending
and may be depicted simply as in Figure - Fifth: financial markets, i.e. the
1.  institutional arrangements and
conventions that exist for the issue and
Figure 1: financial system trading (dealing) of the financial
(simplified)  instruments. 

The financial system has six essential - Sixth: price discovery, i.e. the

elements:  establishment in the financial markets of
the price of money, i.e. the rates of
- First: the ultimate lenders (= surplus interest on debt (and deposit)
economic units) and borrowers (= instruments and the prices of share
deficit economic units), i.e. the non- instruments. 
financial economic units that undertake   
the lending and borrowing process. The Financial Market Components 
ultimate lenders lend to borrowers either
directly or indirectly via financial Multiple components make up the
intermediaries, by buying the securities financial system at different levels. The
they issue.  firm's financial system is the set of
implemented procedures that track the
- Second: the financial financial activities of the company.
intermediaries which intermediate the Within a firm, the financial system
lending and borrowing process. They encompasses all aspects of finances,
interpose themselves between the including accounting measures, revenue
lenders and borrowers, and earn a and expense schedules, wages,
margin for the benefits of intermediation and balance sheet verification. 
(including lower risk for the lender).
They buy the securities of the borrowers On a regional scale, the financial system
and issue their own to fund these (and is the system that enables lenders and
thereby become intermediaries).  borrowers to exchange funds. Regional
financial systems include banks and
- Third: financial instruments (or other institutions, such as securities
assets), which are created/issued by exchanges and financial
the ultimate borrowers and financial clearinghouses. 
intermediaries to satisfy the financial
requirements of the various participants. The global financial system is basically
These instruments may be marketable a broader regional system that

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encompasses all financial institutions,  Importance of Financial
borrowers, and lenders within the global Markets 
economy. In a global view, financial
systems include the International There are many things that financial
Monetary Fund, central banks, markets make possible, including the
government treasuries and monetary following: 
authorities, the World Bank, and major
private international banks.   Financial markets provide a place
   where participants like investors and
Functions of the Markets  debtors, regardless of their size, will
receive fair and proper treatment. 
The role of financial markets in the
 They provide individuals,
success and strength of an economy
companies, and government
cannot be underestimated. Here are
organizations with access to capital. 
four important functions of financial
 Financial markets help lower the
markets: 
unemployment rate because of the
many job opportunities it offers 
 1. Puts savings into more productive
  
use 
As mentioned in the example above, a What Are Financial Markets? 
savings account that has money in it
should not just let that money sit in the Financial markets refer broadly to any
vault. Thus, financial markets like banks marketplace where the trading of
open it up to individuals and companies securities occurs, including the stock
that need a home loan, student loan, or market, bond market, forex market, and
business loan.  derivatives market, among others.
Financial markets are vital to the smooth
 2. Determines the price of securities  operation of capitalist economies. 
Investors aim to make profits from their Understanding the Financial Markets.
securities. However, unlike goods and
services whose price is determined by Financial markets play a vital role in
the law of supply and demand, prices of facilitating the smooth operation
securities are determined by financial of capitalist economies by allocating
markets.  resources and creating liquidity for
businesses and entrepreneurs. The
 3. Makes financial assets liquid  markets make it easy for buyers and
Buyers and sellers can decide to trade sellers to trade their financial holdings.
their securities anytime. They can use Financial markets create securities
financial markets to sell their securities products that provide a return for those
or make investments as they desire.  who have excess funds
(Investors/lenders) and make these
 4. Lowers the cost of transactions  funds available to those who need
In financial markets, various types of additional money (borrowers).
information regarding securities can be   
acquired without the need to spend.  Financial Market refers to a
marketplace, where creation and
trading of financial assets, such as

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shares, debentures, bonds, derivatives,  It saves the time, money and
currencies, etc. take place. It plays a efforts of the parties, as they
crucial role in allocating limited don’t have to waste resources to
resources, in the country’s economy. find probable buyers or sellers of
It acts as an intermediary between securities. Further, it reduces
the savers and cost by providing valuable
investors by mobilising funds between information, regarding the
them.  securities traded in the financial
market. 
The financial market provides a platform
to the buyers and sellers, to meet, for  The financial market may or may
trading assets at a price determined by not have a physical location,
the demand and supply forces.  i.e. the exchange of asset
The financial market provides a platform between the parties can also take
to the buyers and sellers, to meet, for place over the internet or phone
trading assets at a price determined by also. 
the demand and supply forces.    
   Classification of Financial
https://businessjargons.com/financial- Market 
market.html 
  
By Nature of Claim 
  
Functions of Financial Market  Debt Market: The market where fixed
claims or debt instruments, such as
The functions of the financial market are debentures or bonds are bought and
explained with the help of points below:  sold between investors. 
 
 It facilitates mobilization of Equity Market: Equity market is a
savings and puts it to the most market wherein the investors deal in
productive uses.  equity instruments. It is the market
for residual claims. 
 It helps in determining the price
of the securities. The frequent A= E 
interaction between investors A = L+C 
helps in fixing the price of   
securities, on the basis of their By Maturity of Claim 
demand and supply in the
market.  Money Market: The market where
monetary assets such as commercial
 It provides liquidity to tradable paper, certificate of deposits,
assets, by facilitating the treasury bills, etc. which mature within
exchange, as the investors can a year, are traded is called money
readily sell their securities and market. It is the market for short-term
convert assets into cash.  funds.  

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No such market exist physically; the environment. It includes all the
transactions are performed over a virtual processes that help in the transfer of
network, i.e. fax, internet or phone.  already existing securities. 
  
Capital Market: The market
where medium and long-term financial It is divided into two types: 
assets are traded in the capital market.  
Primary Market: A financial market,
Capital Market, is used to mean the wherein the company  listed on an
market for long term investments, that exchange, for the first time, issues new
have explicit or implicit claims to capital. security or already listed
Long term investments refer to those company brings the fresh issue. 
investments whose lock-in period is Otherwise called as New Issues Market,
greater than one year.   it is the market for the trading of new
securities, for the first time.  
In the capital market, both equity and
debt instruments, such as equity shares, It embraces both initial public
preference shares, debentures, zero- offering (IPO) and further public offering.
coupon bonds, secured premium notes In the primary market,
and the like are bought and sold, as well the mobilisation of funds takes place
as it covers all forms of lending and through prospectus, right issue and
borrowing.  private placement of securities. 
  
Capital Market is composed of those Secondary Market: Alternately known
institutions and mechanisms with the as the Stock market, a secondary
help of which medium and long-term market is
funds are combined and made available an organised marketplace, wherein
to individuals, businesses and already issued securities are traded
government. Both private placement between investors, such as individuals,
sources and organized market like merchant bankers, stockbrokers and
securities exchange are included in it.  mutual funds. 

Capital market is a measure of inherent Secondary Market can be described as

strength of the economy. It is one of the
best sources of finance, for the
companies, and offers a spectrum of
investment avenues to the investors,
which in turn encourages capital
creation in the economy.  original issue in the primary market. It
Capital market improves the quality of
information available to the investor
regarding the investment. Add to that, it
plays a crucial role in encouraging the
adoption of rules of corporate
governance, which backs the trading
the market for old securities, in the
sense that securities which are
previously issued in the primary market
are traded here. The trading takes place
between investors, that follows the
covers both stock exchange and over-
the-counter market. 
Secondary market, colloquially known
as the stock market is the market which
provides a platform to the investors to
trade in initially issued securities. 

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 commodities takes place at a future
The stock market is just one type of specified date. 
financial market. Financial markets are   
made by buying and selling numerous By Organizational Structure 
types of financial instruments including
equities, bonds, currencies, and Exchange-Traded Market: A financial
derivatives. Financial markets rely market, which has
heavily on informational transparency to a centralised organisation with
ensure that the markets set prices that the standardised procedure. 
are efficient and appropriate. The
market prices of securities may not be Over-the-Counter Market: An OTC
indicative of their intrinsic value because is characterised by
of macroeconomic forces like taxes.  a decentralised organisation,
having customised procedures 
Functions of Capital Market   
Key Takeways 
 Mobilization of savings to finance
long term investments.   Financial markets refer broadly to
 Facilitates trading of securities.  any marketplace where the trading of
 Minimization of transaction and securities occurs. 
information cost.   There are many kinds of financial
 Encourage wide range of markets, including (but not limited to)
ownership of productive assets.  forex, money, stock, and bond
 Quick valuation of financial markets. 
instruments like shares and  Financial markets trade in all
debentures.  types of securities and are critical to
 Facilitates transaction settlement, the smooth operation of a capitalist
as per the definite time society. 
schedules. 
 Offering insurance against
market or price risk, through ACCO 20083   FINANCIAL
derivative trading.  MARKETS Lecture 2 Part 2
 Improvement in the effectiveness
of capital allocation, with the help Risk in the Financial Market Financial
of competitive price mechanism.  instruments…  
     
   Risk -- possible losses … danger….
By Timing of Delivery  Negative side…  
Cash Market: The market where the   
transaction between buyers and sellers RISKS IN THE FINANCIAL
are settled in real-time.  MARKETS 
2/10, N30    
   Market risk is the possibility of an
Futures Market: Futures market is one investor experiencing losses due to
where the delivery or settlement of factors that affect the overall
performance of the financial

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markets in which he or she is Financial risk is a type of danger that
involved. ...  can result in the loss of capital to
   interested parties. 
Corporations also face the possibility of   
default on debt they undertake but may Financial Risks for Governments 
also experience failure in an undertaking
the causes a financial burden on the Financial risk also refers to the
business.  possibility of a government losing
   control of its monetary policy and being
Individuals face financial risk when they unable or unwilling to control inflation
make decisions that may jeopardize and defaulting on its bonds or other
their income or ability to pay a debt they debt issues. 
have assumed. 
   For governments, this can mean they
Financial markets face financial risk due are unable to control monetary policy
to various macroeconomic forces,   and default on bonds or other debt
·        changes to the market interest issues 
rate, and     
·        the possibility of default by sectors Financial risk is the possibility of losing
or large corporations – listed money on an investment or business
companies.  venture.  
     
     
Sources of market risk include Some more common and
recessions, political turmoil, changes in distinct financial risks include 
interest rates, natural disasters and ·        credit risk,  
terrorist attacks.  ·        liquidity risk, and  
   ·        operational risk. 
Four primary sources of risk affect the   
overall market:     
1.     interest rate risk,   Financial risks are everywhere and
2.     equity price risk,   come in many sizes, affecting
3.     foreign exchange risk, and   everyone.  
4.     commodity risk You should be aware of all financial
   risks. Knowing the dangers and how to
TYPES OF RISKS  protect yourself will not eliminate the
risk, but it can mitigate their harm. 
There are different types of risks that a   
firm might face and needs to overcome. Understanding Financial Risks for
Widely, risks can be classified Businesses is a must…  
into three types:  
1.     Business Risk,    It is expensive to build a business
2.     Non-Business Risk, and  from the ground up.  
3.     Financial Risk.   At some point in any company's
   life the business may need to
seek outside capital to grow. This

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 need for funding creates a marketplace. During this time,
financial risk to both the business businesses closed, investors lost
and to any investors or fortunes, and governments were forced
stakeholders invested in the to rethink their monetary policy.  
company. 
However, many other events also
THUS, HAVING THE FOLLOWING  impact the market. 
     
1.       Credit risk—also known as default Volatility brings uncertainty about the
risk—is the danger associated with fair value of market assets. Seen as a
borrowing money. OR LENDING statistical measure, volatility reflects the
MONEY  confidence of the stakeholders that
market returns match the actual
Should the borrower become unable to valuation of individual assets and the
repay the loan, they will default. marketplace as a whole. Measured
Investors affected by credit risk suffer as implied volatility (IV) and represented
from decreased income or from loan by a percentage, this statistical value
repayments, as well as lost principal and indicates the bullish or bearish—market
interest.   on the rise versus the market in decline
—view of investments. Volatility or
Creditors may also experience a rise in equity risk can cause abrupt price
costs for collection of the debt.    swings in shares of stock.  
 
When only one or a handful of Default and changes in the market
companies are struggling it is known as interest rate can also pose a financial
a specific risk.   This danger, related to a risk. Defaults happen mainly in the debt
company or small group of companies, or bond market as companies or other
includes issues related to capital issuers fail to pay their debt obligations,
structure, financial transactions, and harming investors. Changes in the
exposure to default. The term , specific market interest rate can push individual
risk, is typically used to reflect an securities into being unprofitable for
investor's uncertainty of collecting investors, forcing them into lower-paying
returns and the accompanying potential debt securities or facing negative
for monetary loss.  returns. 
  
EXAMPLE OF FINANCIAL Asset-backed risk is the chance that
RISKS  asset-backed securities—pools of
various types of loans—may become
Financial Risks for the Market  volatile if the underlying securities also
Several types of financial risk are tied to change in value. Sub-categories of
financial markets.  asset-backed risk involve the borrower
  paying off a debt early, thus ending the
During the 2007 to 2008 global financial income stream from repayments and
crisis, when a critical sector of the significant changes in interest rates. 
market struggles it can impact the   
monetary wellbeing of the entire Financial Risks for Individuals 

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Alcera, Vincent Luigil C.
 ·        investment portfolio… invest in
Individuals can face financial risk when different companies in different
they make poor decisions. This hazard industries 
can have wide-ranging causes from   
taking an unnecessary day off of work to Currency risk  -  Investors
investing in highly speculative holding foreign currencies are exposed
investments. Every undertaking has to currency risk because different
exposure to pure risk—dangers that factors,  
cannot be controlled, but some are done ·        such as interest rate changes and 
without fully realizing the ·         monetary policy changes, can
consequences.  alter the calculated worth or the value of
   their money. 
2.       Liquidity risk comes in two  Meanwhile, changes in prices because
scenarios or flavors for investors to of market differences, 
fear.   ·        political changes,  
1.     The first involves securities and ·        natural calamities, 
assets that cannot be purchased or ·         diplomatic changes,  
sold quickly enough to cut losses in a ·        or economic conflicts may cause
volatile market. This is known as market volatile foreign investment conditions
liquidity risk this is a situation where that may expose businesses and
there are few buyers but many sellers.   individuals to foreign investment risk. 
  
2.     The second risk is funding or cash Things to understand on the good and
flow liquidity risk. Funding liquidity risk is bad of Financial Risk 
the possibility that a corporation will not
have the capital to pay its debt, forcing it Ø Financial risk, in itself, is not
to default, and harming stakeholders.  inherently good or bad but only exists to
   different degrees. 
3.      operational risk  --Businesses can Ø "Risk" by its very nature has a
experience operational risk when they negative connotation, and financial risk
have poor management or flawed is no exception. A risk can spread from
financial reasoning. Based on internal one business to affect an entire sector,
factors, this is the risk of failing to market, or even the world.  
succeed in its undertakings.  Ø Risk can stem from uncontrollable
   outside sources or forces, and it is often
   difficult to overcome. 
Speculative Risk -  is one where a profit Ø Understanding the possibility of
or gain has an uncertain chance of financial risk can lead to better, more
success. Perhaps the investor did not informed business or investment
conduct proper research before decisions. Assessing the degree of
investing,  reached too far for gains, financial risk associated with a security
or  invested too large of a portion of their or asset helps determine or set that
net worth into a single investment         investment's value.  
DO NOT PUT ALL YOUR EGGS IN Ø Risk is the flip side of the
ONE BASKET …  reward. RISK RETURN TRADEOFF 

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Ø No progress or growth can occur, be assume the theory to be true, we can
it in a business or a portfolio, without use it to make practical predictions
assuming some risk.   about the future of bond yields for our
Ø Financial risk usually cannot be own investing.Dec 20, 2015 
controlled, exposure (IMPACT) to it can   
be limited or managed.  Pure expectation Theory is a theory
                                                   that asserts that forward
Further discussions on some economic rates exclusively represent the expected
theories  future rates. In other words, the
   entire term structure reflects
Liquidity Preference Theory is a the market's expectations of
model that suggests that an investor future short-term rates.  
should demand a higher interest rate or   
premium on securities with long-term   
maturities that carry greater risk What Is Market Segmentation
because, all other factors being equal, Theory? 
investors prefer cash or other
highly liquid holdings  Market segmentation theory is a theory
   that long and short-term interest rates
Liquidity Preference Hypothesis. are not related to each other. It also
A theory stating that, all other things states that the prevailing interest rates
being equal, investors prefer liquid for short, intermediate, and long-term
investments to illiquid ones....  bonds should be viewed separately like
   items in different markets for debt
Expectations theory attempts to securities. 
predict what short-term interest rates will
be in the future based on current long-  Market segmentation theory
term interest rates. The theory suggests states that long- and short-term
that an investor earns the same interest interest rates are not related to each
by investing in two consecutive one-year other because they have different
bond investments versus investing in investors. 
one two-year bond today. Nov 13, 2020   Related to the market
   segmentation theory is the preferred
Expectations theory attempts to explain habitat theory, which states that
the term structure of interest rates. ... investors prefer to remain in their
Expectations theories are predicated own bond maturity range due to
upon the idea that investors guaranteed yields. Any shift to a
believe forward rates, as reflected (and different maturity range is perceived
some would say predicted) by future as risky. 
contracts are indicative of future short-   
term interest rates. Aug 5, 2020  Market segmentation theory further
   asserts that the buyers and sellers who
Unbiased Expectations Theory states make up the market for short-term
that current long-term interest rates securities have different characteristics
contain an implicit prediction of future and motivations than buyers and sellers
short-term interest rates. ... If we of intermediate and long-term maturity

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Alcera, Vincent Luigil C.
securities. The theory is partially based payments. An IRS allows companies
on the investment habits of different and/or banks to hedge their exposure to
types of institutional investors, such as interest rate changes. 
banks and insurance companies. Banks
generally favor short-term securities, Currency swaps 
while insurance companies generally A currency swap is a contract where two
favor long-term securities.  parties trade principal and interest in
   one currency for the same in another
 Preferred habitat theory says currency. A currency swap is usually
that investors prefer certain maturity executed by a bank or financial
lengths over others when it comes to institution to hedge exposure to
the term structure of bonds. ... exchange rates. Unlike an IRS, a
Meanwhile, market segmentation currency swap involves the exchange of
theory suggests that investors only principal. 
care about yield, willing to buy bonds
of any maturity.  Commodity swaps 
A commodity swap is a derivative
What is a swap rate?  contract where two parties agree to
exchange cash flows based on the price
A forex swap rate, also known as a of an underlying commodity, such as oil.
rollover rate or a swap, is a fee that is The agreement involves a fixed-leg
paid or charged to an open trade at the component and a variable-leg
end of each trading session. It’s the component, allowing traders to fix the
interest fee, which is charged or earned, price of an agreed quantity of the
for keeping positions open overnight. A commodity, at a future date. 
swap rate allows positions to be
extended into the next interbank session Credit default swaps 
without closing or settling.  Also known as a CDS, a credit default
swap is similar to an insurance policy. It
Swap rates can be calculated using the is a contract that allows traders to swap
following formula: Rollover rate = (Base or offset their credit risk with another
currency interest rate – Quote currency trader or investor. For example, a trader
interest rate) / (365 x may decide to invest in company bonds,
Exchange Rate).Sep 19, 2019  in exchange for a fixed rate of interest,
known as a bond dividend. To protect
Types of swaps  their investment against company
There are several types of swaps in default, the trader may engage in a
financial trading.  CDF, usually issued by a bank or an
insurance provider. The CFD seller then
Interest rate swaps  charges the trader a fee in exchange for
An interest rate swap (IRS) is a taking on the risk. 
derivative contract where two parties
exchange interest payments on Zero coupon swaps 
underlying debt. The most common type In financial trading, a zero-coupon swap
of IRS involves the exchange of fixed- is a linear interest rate derivative (IRD).
rate payments for variable-rate It’s an exchange of cash flows where

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Alcera, Vincent Luigil C.
the variable-leg interest payments are rate uses a benchmark to U.S. Treasury
made periodically, whereas the fixed-leg Bonds. 
component is made as a lump sum at A forward rate is the settlement price of
maturity.  a transaction that will not take place until
a predetermined date; it is forward-
Total return swaps  looking. In bond markets, the forward
Also known as a TRS, a total return rate refers to the effective yield on a
swap is a contract between two parties bond, commonly U.S. Treasury bills,
where one party makes payments and is calculated based on the
based on a set rate, being fixed or relationship between interest rates and
variable. Whereas the second party maturities. Aug 10, 2020 
makes repayments based on the return   
of an underlying asset.  Forward Rate vs. Spot Rate: An
Overview 
Libor swap rate 
LIBOR is an acronym for London Inter- The precise meanings of the terms
Bank Offered Rate, which is the "forward rate" and "spot rate" are
benchmark for variable short-term somewhat different in different markets.
interest rates used by high-credit banks. But what they have in common is that
The rate is set daily and has seven they refer, for example, to
different maturity dates, including one the current price or bond yield—the spot
day, one week. 1, 2, 3, 6 and 12 rate—versus the price or yield for the
months.  same product or instrument at some
   point in the future—the forward rate. 
  
What is the value of a swap?  In commodities futures markets, a spot
rate is the price for a commodity being
At the initiation or start date of a swap, traded immediately, or "on the spot". A
the value is zero to both parties forward rate is the settlement price of a
involved. The value of the swap then transaction that will not take place until a
changes over time as the value of the predetermined date; it is forward-
underlying asset or interest rate looking. 
changes. Because one leg of the swap
is fixed and the other leg is variable, any In bond markets, the forward rate refers
positive change for one party will result to the effective yield on a bond,
in an adverse change to the other party.  commonly U.S. Treasury bills, and is
calculated based on the relationship
At the initiation date, the two parties between interest rates and maturities. 
involved in a swap will agree to
exchange cash flows to the same value.  In commodities markets, the spot
Therefore, fixed value = variable value. rate is the price for a product that will
The party making payments on a be traded immediately, or "on the
variable rate will typically use the spot." 
benchmark rate set by LIBOR while the  A forward rate is a contracted
party making payments based on a fixed price for a transaction that will be

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Alcera, Vincent Luigil C.
 completed at an agreed upon date in of the household whether they hold or
the future.  use it for investment. Liquidity premium
 In bond markets, forward rate increases as the maturity lengthens 
refers to the future yield based on   
interest rates and maturities.  The risk-free rate should be the rate that
assumes zero default in the market
The Spot and Forward Rates in where this is more or less equivalent to
Commodities Markets  the rates offered by the sovereign. 

A spot rate, or spot price, represents a In finance, interest can be determined

contracted price for the purchase or sale by the function of the risk and the
of a commodity, security, or currency for compensation of the investor on the
immediate delivery and payment on difference between the risk-free rate and
the spot date, which is normally one or the market fluctuations 
two business days after the trade date.   
The spot rate is the current price quoted Market Segmentation Theory assumes
for immediate settlement of the that the driver of the interest rates are
contract.  the savings and investment flows. 

For example, if during the month of
August a wholesale company wants
immediate delivery of orange juice, it will
pay the spot price to the seller and have
orange juice delivered within two days.  the business to be capable of meeting
On the other hand, if the company
needs orange juice to be available in
late December, but believes the
commodity will be more expensive
during the winter period due to lower
supply, it wouldn't want to make a spot
purchase since the risk of spoilage is
high. A forward contract would a better
fit for the investment. Unlike a spot
transaction, a forward contract, involves
an agreement of terms on the current
date with the delivery and payment at a
specified future date.  time
  
  
 In summary 
Liquidity preference theory -This
economic theory accordingly drives the
interest rate assumes that the interest
rates are dependent on the preference
Default risk arise on the inability to make
payment consistently 
Liquidity Risk is identified by ensuring
all its currently maturing obligation. 
Legal risk is dependent on the
covenants set and agreed in between
the lenders and the borrowers. 
Market risk is the impact of the market
drivers to the ability of the borrowers to
settle the obligation. 
When the agreement is a spot rate the
applicable interest rate is based on the
prevailing market rate at. the particular
 
·         
Forward rates are normally contracted
rates that fixed the rates and allow a
party to assume such risk on the
difference between the contracted rate
and the spot rate. 
·         

作成した/終わった: 01-06-2021
Alcera, Vincent Luigil C.
Swap rate is another contract rate
where a fixed rate exchange for a
certain market rate at a certain maturity. 

In order to mitigate the risk, most

businesses hedge forward rates or enter
into a swap rate agreement. It is
important for the borrowers and lenders
to know what the spot rate in the
prevailing market is and employ certain
expectations in the future. 
  
Expectation theory This economic
theory accordingly affects the term
structure of interest rate. Interest rates
are driven by the expectation of the
lender or borrowers in the risks of the
market in the future. 
·         
Market segmentation theory This
economic theory accordingly affects the
terms structure of interest rate. This
theory assumes that the driver of the
interest rates are the savings and
investment flows. 
·         
Pure Expectation theory This theory is
based on the current data and statistical
analysis to project the behavior of the
market in the future 
·         
Biased expectation theory - This theory
includes that there are other factors that
affect the term structure of the loans as
well as the interest to be perceived
moving forward. The forward rates will
be affected or will be adjusted if the
liquidity of the borrower will be weaker
or stronger in the future 

作成した/終わった: 01-06-2021
Alcera, Vincent Luigil C.