FM3 – Banking and Finance Market
SCHOOL OF BUSINESS, MANAGEMENT AND ACCOUNTANCY
CHAPTER 1
RATIONALE IN STUDYING FINANCIAL MARKETS AND
INSTITUTIONS
The Need to Study Financial Markets
In a market system, businesses of all types face risks, and businesses fail. Economist and
policy makers are particularly concerned about the risk and potential failure that financial
institutions (bank and non-bank) face because they play a vital role in the financial system.
Financial markets and institutions not only influence your everyday life but also involve huge
flows of funds – trillions of dollars – throughout the world economy which is turn affect
business profits, the production of goods and economy which is turn affect business profits,
the production of goods and services and the economic well-being of the countries around the
world.
The study of financial markets and institutions will reward you with an understanding of
many exciting such as how funds are transferred from people who have an excess of available
funds to people who have a shortage. Indeed, well-functioning financial markets are a key
factor in producing high economic growth and poorly performing financial markets are one
reason that many countries in the world remain desperately poor. Activities in financial
markets also have direct effects on personal wealth, the behavior of business and consumers
and the cyclical performance of the economy.
On the evening television news, you have just heard that the bind market has been booming.
In the business section of a local newspaper, you read that the Euro is slightly higher against
the yen. A European airline loses millions of dollars with derivatives. The Dow Jones
Industrial Average is off 18 points in active trading. Another local newspaper reported that
“with inflation slowing again in June 2019, the Bangko Sentral ng Pilipinas (BSP) Governor
has sounded off on potential rate cuts in the near term. There was even a hint that the
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overnight borrowing rate cut will likely come before the last installment of the latest reserve
by the BSP in early May 2019, will occur.
Does this mean that interest rates will fall so that it is easier for you to finance the purchase of
a new computer system for your small retail business? Will the economy improve in the
future so that it is a good time to build a new factory building or add to the one you are in?
Should you try to raise funds by issuing stocks or bonds or instead go to the bank for a loan?
If you import goods from abroad, should you be worried that they will become more
expensive?
All these events are examples of Financial Markets at work. That markets exercise enormous
influence over modern life comes is not news. But although people around the word speak
glibly of “Wall Street” the “stock market” and the “currency marks”. The meaning they
attach to these time-worn phrases are often unclear and out-of-date.
This book explain the purposes that different financial markets serve and clarifies the way
they work. It cannot tell you whether your investment portfolio is likely to rise or fall in
value. But it may help you understand how its value is determined and how the different
securities or financial instruments in it are created and traded.
This book provides answers to the businessmen’s questions by examining how financial
markets (such as those for stocks, bond and foreign currency exchange) and financial
institutions (such as banks, insurance companies, mutual funds and other institution) work.
The word “market” usually conjures up an image of the bustling, paper-strewn floor of the
New York Stock Exchange and of Philippines Stock Exchange and of traders motioning
frantically in the “futures” cubicles of Chicago. These images are out-of-date as almost all the
dealings are now handled computer to computer often with minimal human intervention.
Financial Markets have been around ever since mankind settled down to growing crops and
trading them with others. The independent decisions of all of those farmers constituted a
basic financial market, and that market fulfilled may be the same purposes as financial
markets do today.
GWENDOLYN B.
FM3 – Banking and Finance Market
SCHOOL OF BUSINESS, MANAGEMENT AND ACCOUNTANCY
Financial Markets are comprehensively discussed in Unit III.
THE NEED TO STUDY FINANCIAL INSTITUTIONS
Direct funds transfers are common among individuals and small businesses and in economies
where financial markets and institutions are less developed. But large businesses in
developed economies generally find it more efficient to enlist the services of a financial
institution when the time comes to raise capital.
Financial institutions are what make financial market work. Without them, financial markets
would not be able to move funds from people who save to people who have productive
investment opportunities. Thus, they also have important effects on the performance of the
economy as a whole.
Financial institutions are financial intermediaries that acquire funds by issuing liabilities and
in turn use those funds to acquire assets by purchasing securities or making loan.
They play on important role in the financial system because they reduce transaction costs,
allow sharing and solve problems created by adverse relation and moral hazard. As a result,
financial institutions allow small savers and borrowers to benefit from the existence of
financial markets thereby increasing the efficiency of the economy.
The field of financial markets and institutions is that they are among the largest employers in
the country and frequently pay very high salaries. Hence some of you have a very practical
reason for studying financial institutions: It may help you get a good job in the financial
sector. Even if your interest lie elsewhere, you should still care about how financial
institutions are run because there will be many times in your life, as an individual, an
employee, or the owner of a business, when you will interact with these institutions. Knowing
how financial institutions are managed may help you get a better deal when you need to
borrow from them or if you decide to supply them with funds.
APPROACH STUDYING FINANCIAL MARKETS AND INSTITUTIONS
The framework underlying all discussions in this text has three levels, namely:
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a) Underlying
Students learn to understand economic analysis, that is, students develop the economic
intuition they need to organize concepts and facts
b) Evaluating
Students learn to evaluate current development and the financial news. Students learn to use
financial data and economic analysis to think critically about how they interpret current
events.
c) Predicting
Students learn to use economic analysis to predict likely changes in the economy and the
financial system.
This book stresses a unifying, analytic framework to study financial markets and institutions.
This framework uses a few basic concepts to keep organize your thinking about the
determination of asset prices, the structure of financial markets, bank management and the
role of monetary policy in the economy. The basic concepts are equilibrium, basic supply and
demand analysis to explain behavior in the financial markets, the search for profits, and an
approach to financial structure based on transaction costs and asymmetric information.
The framework also provides the tools needed to understand trends in the financial market
place and in variables such as interest rates and exchange rates. This text also emphasizes the
interaction of theoretical analysis and empirical data in order to expose the reader to real-life
events and data.
And to function better in the real world outside the classroom, it is recommended that one
must get into the lifelong habit of regularly following the financial news that appears in
leading financial publications or read the financial/ business section of the newspapers.
GWENDOLYN B.
FM3 – Banking and Finance Market
SCHOOL OF BUSINESS, MANAGEMENT AND ACCOUNTANCY

Lastly, the World Wide Web has become an extremely valuable and convenient resource for
financial research. These sites contain additional information and are updated frequently.
Visit these sites to further explore topics that one finds of particular interest.

ACTIVITY 1:
1. Why is there a need to understand how necessary monetary policy is conducted by central
banks worldwide?

2. What crucial role do banks and other financial institutions play?

3. Give three important reasons why is there a need to study Financial Market.

4. What is the most significant role that financial markets play?

5. Explain briefly the three levels of the framework that underlie the study of financial
markets and institutions.

ALDERSGATE COLLEGE S.Y.: 2021-2022 GWENDOLYN B.

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