Chapter One

Introduction

Copyright © 2015 by McGraw-Hill Education. All rights reserved.

Why Study Financial Markets
and Institutions?

⚫ Markets and institutions are primary

channels to allocate capital in our society
⚫ Proper capital allocation leads to growth in:
⚫ Societal wealth

⚫ Income

⚫ Economic opportunity
Ti sao phi nghiên cu Th trng và nh ch Tài chính?
Th trng và th ch là nhng kênh chính phân b vn trong xã hi ca chúng
ta
Phân b vn hp lý dn n tng trng:
S giàu có v mt xã hi
Thu nhp

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Why Study Financial Markets
and Institutions?

⚫ In this text we will examine:

⚫ the structure of domestic and international
markets
⚫ the flow of funds through domestic and
international markets
⚫ an overview of the strategies used to manage
risks faced by investors and savers
Trong vn bn này, chúng ta s xem xét:
c cu th trng trong nc và th trng quc t
dòng tin thông qua th trng trong nc và quc t
tng quan v các chin lc c s dng qun lý ri ro mà các nhà u t và ngi tit kim phi i mt

1-3
Financial Markets

⚫ Financial markets are one type of

structure through which funds flow
⚫ Financial markets can be distinguished
along two dimensions:
⚫ primary versus secondary markets
⚫ money versus capital markets
Th trng tài chính
Th trng tài chính là mt loi cu trúc mà thông qua ó, dòng tin
Th trng tài chính có th c phân bit theo hai khía cnh:
th trng s cp so vi th trng th cp
tin so vi th trng vn

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Primary versus Secondary
Markets Th trng chính so vi th trng th cp
Th trng s cp
th trng trong ó ngi s dng qu (ví d: các tp oàn và chính ph) gây qu bng cách phát
hành các công c tài chính (ví d: c phiu và trái phiu)
Th trng th cp
th trng ni các công c tài chính hin ti c giao dch gia các nhà u t (ví d: sàn giao dch

⚫ Primary markets c giao dch: NYSE và không cn kê n: NASDAQ)

⚫ markets in which users of funds (e.g.,

corporations and governments) raise funds by
issuing financial instruments (e.g., stocks and
bonds)
⚫ Secondary markets
⚫ markets where existing financial instruments are
traded among investors (e.g., exchange traded:
NYSE and over-the-counter: NASDAQ)

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Primary versus Secondary
Markets

1-6
Primary versus Secondary
Markets

⚫ How were primary markets affected by

the financial crisis?
Các th trng s cp b nh hng nh th nào bi cuc khng hong tài chính?
Th trng th cp có tng thêm giá tr cho xã hi hay ch n gin là mt hình thc c bc c hp pháp hóa?
S tn ti ca th trng th cp nh hng n th trng s cp nh th nào?

⚫ Do secondary markets add value to

society or are they simply a legalized
form of gambling?
⚫ How does the existence of secondary markets
affect primary markets?

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Money versus Capital Markets
Th trng tin t
th trng giao dch chng khoán n có k hn t mt nm tr xung (ví d: CD và tín phiu Kho bc Hoa K)
ri ro mt vn ít hoc không có, nhng li nhun thp
Th trng vn
th trng mua bán các công c n (trái phiu) và vn c phn (c phiu) có k hn trên mt nm
⚫ Money markets ri ro mt vn áng k, nhng li nhun ha hn cao hn

⚫ markets that trade debt securities with maturities of one

year or less (e.g., CDs and U.S. Treasury bills)
⚫ little or no risk of capital loss, but low return
⚫ Capital markets
⚫ markets that trade debt (bonds) and equity (stock)
instruments with maturities of more than one year
⚫ substantial risk of capital loss, but higher promised return
Figure 1.3

1-8
Money Market Instruments
Outstanding, ($Bn) Các công c th trng tin t còn tn ng, (t ô la)

1-9
Capital Market Instruments
Outstanding, ($Bn)

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Foreign Exchange (FX) Markets

⚫ FX markets
⚫ trading one currency for another (e.g., dollar for yen)
⚫ Spot FX
⚫ the immediate exchange of currencies at current
exchange rates
⚫ Forward FX
⚫ the exchange of currencies in the future on a specific date
and at a pre-specified exchange rate
Th trng ngoi hi (FX)
Th trng ngoi hi
giao dch mt loi tin t này cho mt loi tin t khác (ví d: ô la cho yên)
FX giao ngay
trao i tin t ngay lp tc theo t giá hi oái hin hành
Chuyn tip FX
trao i tin t trong tng lai vào mt ngày c th và theo t giá hi oái c ch nh trc

1-11
Derivative Security Markets

⚫ Derivative security
⚫ a financial security whose payoff is linked to (i.e., “derived”
from) another security or commodity,
⚫ generally an agreement to exchange a standard quantity
of assets at a set price on a specific date in the future,
⚫ the main purpose of the derivatives markets is to transfer
risk between market participants.
Bo mt phái sinh
mt bo m tài chính có phn thng c liên kt vi (tc là “có ngun gc” t) mt chng khoán hoc hàng hóa
khác
Nói chung là mt tha thun trao i mt tài sn s lng tiêu chun vi mt mc giá c th vào mt ngày c th
trong tng lai
Mc ích chính ca th trng phái sinh là chuyn giao ri ro gia các bên tham gia th trng.

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Derivative Security Markets

⚫ Selected examples of derivative

securities
⚫ Exchange listed derivatives
⚫ Many options, futures contracts
⚫ Over the counter derivatives
⚫ Forward contracts
⚫ Forward rate agreements
⚫ Swaps
⚫ Securitized loans

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Financial Institutions (FIs)

⚫ Financial Institutions
⚫ institutions through which suppliers channel money to
users of funds
⚫ Financial Institutions are distinguished by:
⚫ whether they accept insured deposits
⚫ depository versus non-depository financial
institutions
⚫ whether they receive contractual payments from
customers

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Percentage Shares of Assets of Financial
Institutions in the United States, 1929–2013

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Non-Intermediated (Direct)
Flows of Funds

Flow of Funds in a World without FIs

Direct Financing
Financial Claims
(equity and debt
instruments)
Users of Funds Suppliers of
(corporations) Funds
Cash (households)

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Intermediated Flows of Funds

Flow of Funds in a World with FIs

Intermediated Financing
FIs
Users of Funds Suppliers of Funds
(brokers)

Cash FIs
Cash
(asset
transformers)
Financial Claims Financial Claims
(equity and debt securities) (deposits and insurance policies)

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Depository versus Non-Depository FIs

⚫ Depository institutions:
⚫ commercial banks, savings associations, savings banks,
credit unions
⚫ Non-depository institutions
⚫ Contractual:
⚫ insurance companies, pension funds,

⚫ Non-contractual:
⚫ securities firms and investment banks, mutual funds.

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FIs Benefit Suppliers of Funds

⚫ Reduce monitoring costs

⚫ Increase liquidity and lower price risk
⚫ Reduce transaction costs
⚫ Provide maturity intermediation
⚫ Provide denomination intermediation
FIs Li ích Nhà cung cp qu
Gim chi phí giám sát
Tng tính thanh khon và gim ri ro v giá
Gim chi phí giao dch
Cung cp trung gian áo hn
Cung cp trung gian mnh giá

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FIs Benefit the Overall Economy

⚫ Conduit through which Federal Reserve

conducts monetary policy
⚫ Provides efficient credit allocation
⚫ Provide for intergenerational wealth
transfers
⚫ Provide payment services
FIs mang li li ích cho nn kinh t tng th
Thông qua Cc D tr Liên bang thc hin chính sách tin t
Cung cp phân b tín dng hiu qu
Cung cp cho s chuyn giao tài sn gia các th h
Cung cp dch v thanh toán

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Risks Faced by Financial
Institutions Các ri ro mà các t chc tài chính phi i mt

⚫ Credit ⚫ Off-balance-sheet
⚫ Foreign exchange ⚫ Liquidity
⚫ Country or ⚫ Technology
sovereign ⚫ Operational
⚫ Interest rate ⚫ Insolvency
⚫ Market Ngoi bng
Tính thanh khon
Công ngh
Tín dng Hot ng
Ngoi hi Mt kh nng thanh toán
Quc gia hoc ch quyn
Lãi sut
Th trng

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Regulation of Financial
Institutions
⚫ FIs are heavily regulated to protect society at
large from market failures
⚫ Regulations impose a burden on FIs; before the
financial crisis, U.S. regulatory changes were
deregulatory in nature
⚫ Regulators attempt to maximize social welfare
while minimizing the burden imposed by
regulation

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Regulation of Financial
Institutions

⚫ Dodd-Frank Bill
1. Promote robust supervision of FIs
⚫ Financial Service Oversight Council to identify
and limit systemic risk,
⚫ Broader authority for Federal Reserve (Fed) to
oversee non-bank FIs,
⚫ Higher equity capital requirements,

⚫ Registration of hedge funds and private equity

funds.

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Regulation of Financial
Institutions

⚫ Dodd-Frank Bill
2. Comprehensive supervision of financial markets
⚫ New regulations for securitization and over
the counter derivatives
⚫ Additional oversight by Fed of payment
systems

3. Establishes a new Consumer Financial

Protection Agency

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Regulation of Financial
Institutions

⚫ Dodd-Frank Bill
4. New methods to resolve non-bank financial
crises
⚫ More oversight of Fed bailout decisions

5. Increase international capital standards and

increased oversight of international operations
of FIs.

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Globalization of Financial Markets
and Institutions
⚫ The pool of savings from foreign investors is
increasing and investors look to diversify globally now
more than ever before,
⚫ Information on foreign markets and investments is
becoming readily accessible and deregulation across
the globe is allowing even greater access to foreign
markets,
⚫ International mutual funds allow diversified foreign
investment with low transactions costs,
⚫ Global capital flows are larger than ever.

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Appendix: Government Rescue
Plan
Table 1-12 Federal Government Rescue Efforts through December 2009

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Appendix: Government Rescue
Plan
Table 1-12 Federal Government Rescue Efforts through December 2009

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Appendix: Government Rescue
Plan
Figure 1-11 Federal Funds Rate and Discount Window Rate—January
1971 through January 2010

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Appendix: Government Rescue
Plan
Table 1-13 Major Items in the $787 Billion Stimulus Program as
Passed by the U.S. Congress, February 13, 2009

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