Module 1-Foundation (Financial Market)

Republic of the Philippines
Laguna State Polytechnic University

ISO 9001:2015 Certified
Province of Laguna
Level I Institutionally Accredited
LSPU Self-Paced Learning Module (SLM)
Course Financial Market (AE18)
Sem/AY First Semester/2022-2023
Module No. 1
Lesson Title Foundation (Financial Market)
Week
2-4
Duration
Date
Description
of the This lesson will discuss synopsis of the payment system, financial instruments and the role of
Lesson money in the economy
Learning Outcomes
Intended Students should be able to meet the following intended learning outcomes:
Learning -explain the role of money in a nation’s economy
Outcomes -explain how money evolved from the barter system to the present
-know the relationship between supply and demand for money
-explain the impact of money on the growth of the Economy
-explain the nature and determination of interest rate
-Distinguish between commodity and the fiat money
-explain the importance of check, bank client can use ATMs automated teller machine
-describe what financial instrument is
-explain what financial asset and financial liability is
Targets/ At the end of the lesson, students should be able to:
Objectives  Understand the role of money in the economy and its evolution
 Determine demand and supply of money
 Understand payment system and financial instruments
Student Learning Strategies

Online A. Online Discussion via Google Meet/Zoom
Activities You will be directed to attend in a __________class discussion on the nature and
(Synchrono types of educational technologies. To have access to the Online Discussion, refer
us/ to this link: ____________________.
Asynchron The online discussion will happen on Sept.______, and Jan.___, 2023, from
ous) ____________ AM./PM.
(For further instructions, refer to your Google Classroom and see the schedule of
activities for this module)
B. Learning Guide Questions:
1. What is the money and its role in the economy?
2. How does payment system occur in the community?
3. What is financial instrument?
LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

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Note: The insight that you will post on online discussion forum using Learning Management System (LMS)
will receive additional scores in class participation.
Lecture Guide
As introduction, what is Financial Market?
Financial markets refer broadly to any marketplace where the trading of securities
occurs, including the stock market, bond market, forex market, and derivatives market,
among others. Financial markets are vital to the smooth operation of capitalist economies.
Mar 3, 2020 www.investopedia.com › terms › financial-market
A financial market is a market where buyers and sellers trade commodities, financial
securities, foreign exchange, and other freely exchangeable items (fungible items) and
derivatives of value at low transaction costs and at prices that are determined by market
forces.
Offline
Activities
(e-
Learning/
Self-
Paced)
Basically, financial markets are all about bringing investors (lenders) and borrowers together.
https://www.google.com/search?q=financial+markets&oq=financial+ma&aqs=chrome.1.69i59j0j69i57j69i59j0j
69i60l3.5769j1j7&sourceid=chrome&ie=UTF-8
1. Role of Money - Moneyis any item or commodity that is generally accepted as a means
of payment for goods and services or for repayment of debt, and that serves as an asset to
its holder. Money is composed of bills and coins which have been printed or minted by the
National Government. Money includes also funds stores as electronic entries in one’s
checking and savings account.
Money is any object that is generally accepted as payment for goods and services and
repayment of debts in a given country or socio-economic context. The main functions
of money are distinguished as: a medium of exchange; a unit of account; a store of value;
and, occasionally, a standard of deferred
payment.https://www.google.com/search?q=money+definition&oq=money+definition&aqs=chrome
..69i57j0l7.45696j1j9&sourceid=chrome&ie=UTF-8
Since its invention, money is used to measure the value of any commodity (goods and
services) for easy exchange. It is said, money makes the world go round, which means the
motive to increase possession of more money occur. Money is the energy that allow all
business transactions and events be measured and translated into meaningful information.

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a. Characteristics and key function of money:
b.1 store of value - money acts as a means by which people can store their wealth
for future use.
b.2 item of worth - money has intrinsic value
b.3 means of exchange–accepted in exchange for goods or services.
b.4 Unit of account – issued by a recognized authority which trust is vested in thee.
b.5 standard of deferred payment – money can facilitate exchange at any point by
providing a medium of exchange
b. Evolution of Money:
1. When different commodities

were used as a medium of
exchange (Barter System).
2.Discovery of precious metal like

gold, copper and silver. Metals
were not used as coins but
Bullions.
3.Refers to notes issued by Central

Bank
4.Includes different instruments

issued by banks like cheques,
drafts.
5. Also known as e-money,

electronic cash, e-currency, digital
https://www.slideshare.net/BinthAlain/evolution-of-money-54011952
cash, digital currency

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c. Highlights in the History of Money in the Philippines – visit the link below to picture
out the history of Philippine money.
https://www.slideshare.net/drose11/evolution-of-philippine-money?next_slideshow=1
d. The Supply and Demand of money- Money facilitate the flow of resources in the
circular model of macroeconomy. Not enough money will slow down the economy, and too
much money can cause inflation because of higher price levels. Monitoring the supply and
demand for money is vital for the economy’s central bank policy, which aims to stabilize
price levels and to support economic growth. (Financial Market and Institutions 2020 edition by
Elenita B. Cabrera)
Money supply refers to the amount of money which is in circulation in an economy at
any given time. Money supply plays a crucial role in the determination of price level and
interest rate. Growth of money supply helps in acceleration of Economic development and
price stability. There must be a controlled expansion of money supply i.e. no inflation or
deflation in the economy. https://www.slideshare.net/dakshbapna/demand-and-supply-of-money
The BangkoSentral ng Pilipinas (BSP) is responsible for determining the supply of money. It
uses daily open market operations to influence the creation of money by banks and to
guide the availability of money in the economy. BSP also has impact on the creation of
money by banks through reserve requirements and the discount rate, the interest rate at
which banks can borrow from the BSP as a lender of last resort. Changes in the supply of
money will affect the interest rate and therefore the cost of borrowing money. This will
have an impact on consumption and investment levels in the economy.
Key measures for the Money Supply are:

 M1 – Includes money in circulation held by the nonbank public, demand deposits, other
checkable deposits, and travelers’ checks. Primarily refers to money used as a medium
of exchange.
 M2– In addition to M1, this measure includes money held in savings deposits, money
market deposit accounts, noninstitutional money market, mutual funds and other short-
term money market assets. M@ refers primarily to money used as a store value.
 M3-In addition to M2, this measure includes the financial institutions, refers primarily to
money used as a unit of account.
 L – In addition to M3, this measure includes liquid and near-liquid assets (e.g., short-
term Treasury notes, high-grade commercial paper and bank acceptance notes)
Demand of Money - money is demanded because money serves these purposes:

medium of exchange and store value. There are sources of demand for money, these
are as follows:
 Transaction demand – Money demanded for day-to-day payments through
balances held by households and firms (instead of stocks, bonds or other assets).
This demand varies with GSP, it does not depend on the rate of interest.
Gross Domestic Product, abbreviated as GDP, is the total value of goods and
services produced in a country. GDP in economics: GDP is measured over specific
time frames, such as a quarter or a year. GDP as an economic indicator is used
worldwide to show the economic health of a
country.https://www.google.com/search?q=gdp+meaning&oq=GDP&aqs=chrome.1.0l8.69
44j1j7&sourceid=chrome&ie=UTF-8

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 Precautionary demand – Money demanded as a result of unanticipated payments.
This kind of demand varies with GDP.
 Speculative demand – Money demanded because of expectations about interest

rates in the future. This means that people will decide to expand their money
balance and hold off on bond purchases if they expect interest rates to rise. This
kind of demand has a negative relationship with the interest rate.
(Financial Market and Institutions 2020 edition by Elenita B. Cabrera)
The Quantity Theory of money holds

that changes in the money supply MS
directly influences the economy’s price
level. This theory follows from the
equation of exchange.
Where M = quantity of money
V = velocity of money
P = price level
Y or T = real GDP
In monetary economics, the quantity

theory of money states that the general
price level of goods and services is
directly proportional to the amount of
money in circulation, or money supply.
e. Time Value of Money- Interest is defined as the cost of using money over time. Economists
prefer to say that interest represents the time value of money. Use the link below for the
discussion:
https://www.slideshare.net/priyasinha28/time-value-of-money-ppt-61447446
Present value:

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f. Interest Rates- An interest rate is the amount of interest due per period, as a proportion of
the amount lent, deposited or borrowed. The total interest on an amount lent or borrowed
depends on the principal sum, the interest rate, the compounding frequency, and the
length of time over which it is lent, deposited or borrowed. Wikipedia
Interest rates link the future to the present. It allows individuals to evaluate the present value (the
value today) of future income and costs. In essence, it is the market price of earlier availability.
(additional topics for discussion)
a. How interest rates are determined
b. Determining the Interest rates
c. Money market equilibrium
d. The nominal or money rate versus the real rate of interest
e. Interest rates and risk
f. The impact of changing interest rates – when interest rates raised; when interest raised are
lowered
Engaging Activities (1): with the enumerated additional topic related to interest rates (a to f) provide at
least four to five sentences each to explain. Need to pass this on the Sept 7, 2022.
2. Overview of the Payment System–A payment system is any system used to settle financial
transactions through the transfer of monetary value. This includes the institutions, instruments,
people, rules, procedures, standards, and technologies that make its exchange
possible. A payment system is a mechanism composed of rules, institutions, people, markets
and organizations that make exchanges of payments possible. It facilitates the transfer of
money from a payor to a payee in order to effect a payment transaction. BSP
Commodity money involves the use of an actual good in place of money (gold coin,
tobacco). Fiat money has no other value than as a medium for exchange; value comes from
government (paper money).
The value of fiat money is based largely on public faith in the issuer. Commodity money's value,
on the other hand, is based on the material it was manufactured with, such as gold or
silver. Fiat money, therefore, does not have intrinsic value, while commodity money often
does.
Commodity money is money whose value comes from a commodity of which it is made.
Commodity money consists of objects having value or use in themselves (intrinsic value) as well
as their value in buying goods.[1] This is in contrast to representative money, which has little or
no intrinsic value but represents something of value, and fiat money, which has value only
because it has been established as money by government regulation. Examples of commodities
that have been used as media of exchange include gold, silver, copper, salt, peppercorns, tea,
decorated belts, shells, alcohol, cigarettes, silk, candy, nails, cocoa beans, cowries and barley.
https://en.wikipedia.org/wiki/Commodity_money.
Importance of checks - Use of checks in payment or settlement of a specific

transaction is a convenient way. A major innovation in the payment system. Checks are
promises to pay on demand money deposited with a bank or other financial institutions.
Settling transactions with checks require more steps than settling transactions with
currency. There are information costs in using checks – the time and effort required by the
seller to verify whether the issuer has sufficient amount of money the checking account.
BSP supervises the payment system and had come up with desirable outcomes for a
payment system: Security; Efficiency; Speed; Smooth international transaction and
Effective collaboration among participants in the system. Among other payment system
that are currently in use of technologies are 1) Debit cards 2) Credit Cards 3) Proximity
mobile payments 4) Automated Clearing House (ACH) 5) Automated Teller Machine.
(Financial Market and Institutions 2020 edition by Elenita B. Cabrera)

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Engaging Activities (2):1. Describe the process of E-Money, Bitcoin and Blockchain
2. Give insight about Cashless Society
3. Financial Instruments – A financial instrument is any contract that gives rise to a financial
asset of one entity and a financial liability or equity instrument of another entity. Financial
instruments include primary instruments and derivative financial instruments. Financial asset
includes cash, equity instrument, receivables.
a. Financial Assets that are considered financial instruments.
1) Cash on Hand and in Banks: Petty Cash Fund, Demand, savings and time deposits;
Undeposited checks; Foreign currencies; Money orders; Bank drafts
2) Accounts, notes and loans receivable and investment in bonds and other debt
instrument issued by other entities
3) Interest in shares or other equity instruments issued by other entities: Stock
Certificates; Publicly listed securities
4) Derivative Financial Assets: Future Contracts; Forward; Call options; Foreign Currency
Futures; Interest Rate Swaps
b. Financial Liabilities – a.) A contractual obligation; b) A contract that will or may be settled
in the entity’s own equity instruments. Examples:
1) Accounts and notes payable, loans from other entities and bonds and other debt
Instruments issued by the entity.
2) Derivative financial liabilities
3) Obligations to deliver own shares worth a fixed amount of cash.
4) Some derivative on own equity instruments.
c. Equity Instruments – is any contract that evidence a residual interest in the assets of an entity
after deducting all of its liabilities. Examples are:
1) Ordinary Share
2) Preference Share
3) Warrants or written call option
d. Derivative Financial Instruments – that “derive” their value on contractually required cash
flows from other security or index. Examples are:
1) Future Contract 3) Call Option 5) Interest Rate Swaps
2) Forward Contracts 4) Foreign Currency Futures

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Engaging Activities (3): 1. Answer the review Questions on page 57 & 58. Copy shall be
provided through google classroom

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Learning Resources
Cabrera, Ma. E. B. and Cabrera, G. A., (2020) Financial Markets and Institutions, 2020 edition, GIC
Enterprises,2017 C. M. Recto Avenue, Manila Philippines
https:// www.investopedia.com › terms › financial-market

https://www.google.com/search?q=financial+markets&oq=financial+ma&aqs=chrome.1.69i59j0j69i
57j69i59j0j69i60l3.5769j1j7&sourceid=chrome&ie=UTF-8
https://www.google.com/search?q=money+definition&oq=money+definition&aqs=chrome..69i57j0
l7.45696j1j9&sourceid=chrome&ie=UTF-8
https://www.slideshare.net/BinthAlain/evolution-of-money-5401195
https://www.slideshare.net/drose11/evolution-of-philippine-money?next_slideshow=1
https://www.slideshare.net/dakshbapna/demand-and-supply-of-money
.https://www.google.com/search?q=gdp+meaning&oq=GDP&aqs=chrome.1.0l8.6944j1j7&sourceid
=chrome&ie=UTF-8
https://www.slideshare.net/priyasinha28/time-value-of-money-ppt-61447446
https://en.wikipedia.org/wiki/Commodity_money.
https://www.google.com/search?sxsrf=ALeKk021hVBs6zcb0rWjMr7VFHzddSHxIg:1598166416818&
source=univ&tbm=isch&q=pictures+of+financial+instruments+example&sa=X&ved=2ahUKEwjz1MP
s4bDrAhUSGqYKHYFKDB4QsAR6BAgKEAE&biw=1920&bih=969#imgrc=Aq90mY
Intellectual Property
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states, “The fair use of a copyrighted work for criticism, comment, news reporting, teaching
including
multiple copies for classroom use, scholarship, research, and similar purposes is not an
infringement of copyright”.
The unauthorized reproduction, use, and dissemination of this module, without joint consent
of the authors and LSPU, is strictly prohibited and shall be prosecuted to the full extent of the
law, including appropriate administrative sanctions, civil, and criminal.

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Module 1-Foundation (Financial Market)

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Laguna State Polytechnic University

Student Learning Strategies

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

1. When different commodities

2.Discovery of precious metal like

3.Refers to notes issued by Central

4.Includes different instruments

5. Also known as e-money,

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

Key measures for the Money Supply are:

Demand of Money - money is demanded because money serves these purposes:

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

 Speculative demand – Money demanded because of expectations about interest

The Quantity Theory of money holds

In monetary economics, the quantity

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

Importance of checks - Use of checks in payment or settlement of a specific

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

https:// www.investopedia.com › terms › financial-market

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

LSPU SELF-PACED LEARNING MODULE: FINANCIAL MARKET

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