ECON 118 INTERNATIONAL FINANCE

FINANCIAL SYSTEM FUNCTIONS - Financial system functions serve

Financial System as an intermediary in allowing funds to be transferred from
savers to borrowers. It is financial system functions that
Financial System - is a set of markets and financial enable the surplus and deficit of funds to be allocated
institutions that enable funds to flow from lenders to efficiently in the economy.
borrowers.
OBJECTIVES OF FINANCIAL SYSTEM - The objectives of the
Financial Market - are markets where borrowers and lenders financial system are to lower transaction costs, reduce risk,
meet and exchange funds. and provide liquidity. These are the three main problems that
are faced by borrowers and lenders, which the financial system
Transaction Cost - is the cost that is associated with aims to regulate.
carrying out a financial transaction.
Transaction Cost - Transaction costs are expenses incurred
Financial Risk - is the future outcome associated with when buying or selling a good or service. It represents the
economic loss or benefit. labour required to bring a good or service to market, giving
rise to entire industries dedicated to facilitating exchanges.
Diversification - is an investment strategy that includes
investing in several assets with uncorrelated risks. Financial risk - The future outcome associated with economic
loss or benefit. Diversification is an investment strategy
Liquidity - Is the ability of an asset to be converted into that includes investing in several assets with uncorrelated
cash. risks.

Financial Institution - an organisation that acts as a middle Liquidity - The degree to which an asset or security can be
man between two parties and provide myriad of of financial quickly bought or sold in the market without affecting the
services asset's price. Or easily converted into cash.

Financial Instruments - Financial system functions serve as an
intermediary in allowing funds to be transferred from savers
to borrowers. It is financial system functions that enable the
surplus and deficit of funds to be allocated efficiently in
the economy.
Middle Man - The one who facilitates a financial transaction.
Financial Systems Components - The main financial system
components include financial institutions, financial services,
financial markets, and financial instruments. It would include
aspects such as finances, accounting, revenue, expenses,
wages, and more. From a regional standpoint, the financial
system, as mentioned above, facilitates the exchange of funds
between borrowers and lenders.
 • To know the causes of inflation and how it affects our daily
1. Financial Institution lives.
2. Financial Markets • To further know the advantages and disadvantages caused by
3. Financial Services inflation.
4. Financial Instruments • Examine different degrees and types of inflation.
• Explain how inflation is measured using Consumer Price Index
Importance of Financial System - Financial system importance (CPI).
comes from its role in stimulating higher savings and • Analyse the intricate relationship between money and
investment expenditure, leading to higher economic growth. inflation.
They serve as the foundation upon which economic transactions
may occur and upon which monetary policy can be based. Due to What is Money?
financial regulations, economic and financial institutions A medium of exchange that is centralised, generally accepted,
between parties involved in the financial system are safe and recognized, and facilitates transactions of goods and
secure. services.

Money and Inflation History of Money

MONEY - Medium of exchange.
DECOMPOSE - To break up into constituent parts. TRANSACTION -
An instance of buying or selling something. INTRINSIC VALUE –
Something that is made of gold and silver. LEGAL TENDER –
Recognized by law as a medium of exchange.
DEFERRED – Delayed or until a stated time.
VALUE – Worth of money.
INEVITABLY – Impossible to avoid.
DISTORT- When prices and production are higher or lower than
levels that would usually exist in a comparative market.
Objectives
• To be able to know the history, characteristics, types, and
functions of money.
• To be able to know the difference between commodity money
and fiat money.
Barter System - Is an old method of exchange. This system has
been used for centuries and long before money was invented.
People exchanged services and goods for other services and
goods in return.
Commodity Money - This is when money takes into a form of
commodity that has intrinsic value.
Fiat Money - Currency established as money, often by
government regulation, that does not have intrinsic value.
Characteristics of Money
1. Durability - Item retains the same shape, form, and
substance over an extended period of time. It does not easily
decompose, degrade, or otherwise change form.
2. Divisibility - Means money can be divided into small
increments that can be used in exchange for goods of varying
values.
3. Transportability - Means that money can be easily moved
from one location to another when such movement is needed to
complete exchanges.
4. Non Counterfeit Ability - Means that money cannot be easily
duplicated. A given item cannot function as a medium of
exchange if everyone is able to "print up," or "make up" a
batch of money any time that they want.
5. Limited supply - Means that restriction on the amount of
money in circulation. Each country's Government has the
responsibility to control/maintain an adequate money supply.
6. Acceptability - Acceptability means that everyone must be
able to use the money for transactions. Money is universally
accepted anywhere in the world as a universal means for
transaction.
Types of Money
1. Commodity Money - Commodity money is a good whose value
serves as the value of money. Commodity money has been
replaced with fiat money.
2. Fiat Money - Money that a government has declared to be a
legal tender. Its value relies on trust in the government and
its ability to maintain stability.
3. Bank Money - Bank money consists of the book credit that
banks extend to their depositors. Transactions made using
checks drawn on deposits held at banks involve the use of bank
money.
Functions of Money
As a Unit of Value - measures the value of various goods and
services which are produced in an economy.
Medium of Exchange - money facilitates transaction of goods
and services.
Standard of Deferred Payment - goods can be acquired now and
paid for at a later date.
Store of Value - money has the ability to keep wealth in a
form so that it can be readily available to spend in the
future.
The Demand and Supply of Money
Demand of Money - is the desired holding of financial assets
in the form of money: that is, cash or bank deposits rather
than investments.
Supply for Money - is the total amount of money—cash, coins,
and balances in bank accounts —in circulation.
Inflation
What is Inflation?
is a rise in prices, which can be translated as the decline of
purchasing power over time. The rate at which purchasing power
drops can be reflected in the average price increase of a
basket of selected goods and services over some time.
Causes of Inflation
1. DEMAND PULL INFLATION - When demand for goods increases and
exceeds production capacity.

2. COST-PUSH INFLATION - When prices increase due to increases Degree of Inflation

in production cost.
Deflation - refers to a decrease in the average price level of
3. INFLATION EXPECTATIONS - Inflation expectations are simply goods and services over time.
the rate at which people consumers, businesses, investors Low inflation - inflation rates of between 0.5% are considered
expect prices to rise in the future. They matter because "low and stable".
actual inflation depends, in part, on what we expect it to be. High inflation - inflation rates greater than 5% are
considered high firms and households will rush to spend their
Effects of Inflation- In an inflationary environment, unevenly money now for fear of higher prices in future.
rising prices inevitably reduce the purchasing power of some
consumers, and this erosion of real income is the single Types of Inflation
biggest cost of inflation. Inflation can also distort
purchasing power over time for recipients and payers of fixed Creeping Inflation - (1-3%) mild inflation, which makes the
interest rates. consumer expect that prices will keep going up.
Walking Inflation - (3-10%) people start to buy more than they
Advantages of Inflation - Affordability is a top priority for need to avoid tomorrow's much higher prices.
most consumers. So, it’s not surprising that many see Running Inflation - (10-20%) money loses value so fast that
inflation as a negative. But in reality, inflation can have businesses and employers income cannot keep up.
numerous positive effects. - Keeps Deflation Under Control Hyperinflation - (>50%) is very rare.
- Encourages Spending And Investing
- Lowers Debt Service Costs Measuring Inflation
- Reduces Unemployment
CPI (CONSUMER PRICE INDEX) - measures changes in the prices
Disadvantages of Inflation for a market basket of goods/services.
For all the positives associated with inflation, there are CPI= value of current market basket/value of market basket in
downsides to consider as well. base year x 100
- Disproportionately Impacts Low-Income Households
- Raises Cost Of Living
- Causes Higher Interest Rates Relationship of Money and Inflation
- Introduces Risk Of Hyperinflation
- Hurts The Growth Of Stocks And Bonds
• The connection between money and inflation lies in the basic
economic principle of supply and demand
• Conversely, a decrease in the money supply or a decrease in
the velocity of money can contribute to deflation.
• Therefore, the relationship between money and inflation is
dynamic, with the key factor being the balance between the
supply of money and the demand for goods and services in the
economy.
Financial Assets
Assets - is anything of value that can be converted into
money.
Debt Instrument - used by the companies to provide finance for
their growth, investments and future planning and comes with
an agreement to repay the same within the stipulated time
period.
Financial Instruments - is a real or virtual document
representing a legal agreement involving any kind of monetary
value.
Intangible Assets - is an asset which does not have
physical existence and cannot be touched.
Maturity Value - is the amount to be paid on the due date of a
loan or the amount to be paid to an investor at the end of the
period for which an investment has been made.
Real Assets - are physical assets that have an intrinsic worth
due to their substance and properties.
Shareholders - is an individual or an institution that owns
shares in a public or a private corporation and, therefore,
are legal owners of the company.
Tangible Assets - are assets with significant value and are
available in physical form.
Financial Assets is any asset that is:
a. Cash
b. A contractual right to receive cash or any other financial
asset from another entity.
c. A contractual right to exchange financial instruments with
another entity under conditions that are potentially
favourable.
TYPES OF FINANCIAL ASSETS
Certificate of Deposit (CD) - This financial asset is an
agreement between an investor and a bank institution. The
customer keeps a set amount of money deposited in the bank for
the agreed term in exchange for a guaranteed interest rate.
Bonds - This financial asset is usually a debt instrument sold
any by companies or the government to raise funds for short-term
projects. A bond is a legal document that states the money the
investor has lent the borrower, the amount it needs to be paid
back, and the bond’s maturity date.
Stocks - Stocks do not have any maturity date. Investing in
stocks of a company means participating in the company’s
ownership and sharing its profits and losses. Stocks belong to
shareholders until and unless they sell them.
Cash or Cash Equivalent - are securities that are meant for
short term investing.
Bank Deposits - are funds put in a bank account that may earn
interest.
Derivatives - are financial contracts whose value is linked to
the value of an underlying asset.
Loan Receivable - represent the amount of money that has been
lent out of by an entity and is expected to be returned by the
borrowers.
Current Assets - Current assets are considered short-term
assets because they generally are convertible to cash within a
firm ' s fiscal year, and are the resources that a company
needs to run its day-to-day operations and pay its current
expenses. Current assets are generally reported on the balance
sheet at their current or market price.
Non-current Assets - Non-current assets are a company’s long-
term investments that have a useful life of more than one
year. Noncurrent assets cannot be converted to cash easily.
They are required for the long-term needs of a business and
include things like land and heavy equipment.
ADVANTAGES
• Some of these assets, which are highly liquid, can easily be
used to pay bills or to cover financial emergencies.
• It gives investors more security when they have more capital
parked in liquid assets.
• It serves as a major economic function of financing tangible
assets. • It represents legal claims to future cash expected
generally at a defined maturity and rate
DISADVANTAGES
• Financial assets that are liquid are greatly limited in
their return on investment, as there are no restrictions for
their withdrawal.
• These assets may prevent withdrawal for months or years as
per the agreement, or they are callable.
• It comes with a maturity date in the contract.
Interest Rate and its role in Finance
Interest - Interest is the monetary charge for the privilege
of borrowing money.
Rate - a rate is a measure of the quantity in relation to
another unit, often expressed as a percentage.
Interest rate - The interest rate is the amount a lender
charges a borrower and is a percentage of the principal (the
amount loaned). Role - describes the objectives and
responsibilities related to an idea in a specific context.
Finance - the term finance describes the international
management of money and other financial assets. Interest rate
and its role in finance.
In finance, interest rates function similarly to money’s
price. They affect the cost of borrowing as well as the return
on your investments or savings.

The interest rate - is the amount a lender charges for the use
of assets expressed as a percentage of the principal. Interest
is essentially a rental or leasing charge to the borrower for
the use of an asset. The interest rate is applied to the
principal, which is the amount of the loan. Interest rates
apply to most lending or borrowing transactions.
Types of Interest Rate
Simple Interest - is a set rate on the principal originally
lent to the borrower that the borrower has to pay for the
ability to use the money.
Formula
Simple Interest - P x r x t
P - Principal
R - Investment Rate
T - Time in Years
Compound Interest - it essentially means “interest on
interest.” The principal and the compounding interest paid on
that loan.
Accrued Interest - is the interest that has been earned but
not yet paid.
Effects of Interest rate in Finance
Cost of Borrowing - Interest rates have an impact on how much
borrowing money costs. Higher rates have an impact on both
consumers and businesses by raising the cost of credit cards,
mortgages, and loans.
Investment Decision - When making investment decisions,
businesses and investors take interest rates into effect.
Higher rates could discourage investment, while lower rates
frequently encourage it.
Consumer Spending - Interest rates have an impact on how much
consumers must borrow. Higher rates may discourage consumer
borrowing and spending, lower rates might promote spending by
making credit more available.
Savings - Savings accounts, certificates of deposit, and other
interest-bearing investments have returns that are affected by
interest rates. For savers, higher rates typically mean more
alluring returns.
Central Bank Policy - Interest rates are a tool that central
banks employ to implement monetary policy. The purpose of rate
adjustments is to accomplish economic goals like limiting
inflation, fostering job growth, and maintaining the stability
of the financial system.
A contractionary policy - is applied when central banks raise
interest rates and reduce the money supply to avoid inflation.
It's a macroeconomic weapon against growing inflation. An
important tool in contractionary monetary policy is an
increase in interest rates. The cost of borrowing goes up when
the central bank raises its standard interest rate. When
borrowing becomes more expensive, this results in a decrease
in business and consumer spending. Increasing interest rates
reduces inflation by limiting the amount of active money
circulating in the economy.

Expansionary Monetary Policy - A central bank may use an
expansionary monetary policy to boost economic growth by
decreasing interest rates, increasing the money supply, and
promoting borrowing and spending. In difficult economic times,
a central bank may implement an expansionist monetary policy
to lower unemployment and boost growth.
Personal Finance - is the process of planning and managing
personal financial activities such as income generation,
spending, saving, investing, and protection. The process of
managing one’s personal finances can be summarised in a budget
or financial plan.
Components of Personal Finance

Finance - is a specialised branch of economics concerned with 1. Income

the origination and management of money, credit, banking, and 2. Spending
investment. Typically, finance revolves around corporate 3. Saving
finance, investments, financial institutions, and risk 4. Investing
management. 5. Protection

Roles of Finance Rate in Finance Corporate Finance - is a field of study that concerns all
financial decisions that companies make on a daily basis. It
Interest is a concept in finance where a borrower pays a cost relates to all decisions that aim at converting capital (e.g.,
for using the lender's money, or an investor receives a return tangible and intangible assets) owned by the company into
for depositing funds. It keeps the economy moving by profit.
encouraging people to borrow, to lend, and to spend.
Types of Corporate Finance
Types of Finance
1. Equity Financing
Public Finance - Deals with the revenue and expenditure of the 2. Debt Financing
government.
Philippine Financial System
Types of Public Finance
Banking- is the business of protecting money for others.
1. Public Revenue Private Banking - caters to wealthier customers who want
2. Public Expenditure personalised service and tailored guidance on how best to
3. Public Debt manage their money.
4. Financial Administration
Government Banking - is a shared government function which
provides critical banking services across central government
and for wider public sector customers.
Monetary - means relating to money, especially the total
amount of money in a country.
Finance - is a term for matters regarding the management,
creation, and study of money and investments.
Financial System - a set of institutions, such as banks,
insurance companies, and stock exchanges, that permit the
exchange of funds.
Money - a commodity accepted by general consent as a medium of
economic exchange.
Paper Money - is a country's official, paper currency that is
circulated for the transactions involved in acquiring goods
and services.
Coins - a piece of metal put out by a government authority as
money.
Deposits - is a sum of money that is held in an account.
Loans - is a monetary loan that is usually repaid in regular
payments over a set period of time.
History of Banking
Banking in the Philippines began in the 16th Century This was
the establishment of Obras Pias (Pious Works) by laymen
associated with the religious orders. Funded from legacies and
donations of wealthy individuals, The Obras Pias was the
source of credit and its funds were invested in mortgage
financing loans, trade with Acapulco and maritime insurance.
Obras Pias profits were channelled to the construction of
churches, government buildings and other charitable and
religious projects. Among the first banks that emerged in the
19th was the Rodriguez Bank which was considered more of a
loan association than a regular bank. The need for more
extensive banking services and facilities led the board of
authorities (Junta de Autoridades) in Manila to establish on
August 1, 1851 the first state bank in the Philippines. The
Banco Espanol-Filipino de Isabel II was the first state bank
and Obras Pias provided 50% of its bank capital.
In 1873, British-Orient banks opened in the country as a
result of the expanded Philippine -European trade that
followed the opening of the Suez-Canal in 1869. The Chartered
bank of India, Australia and China opened in Manila in 1872.
Hongkong and Shanghai Banking Corporation established its
Manila branch in 1875. The first mutual savings in the country
is Monte de Piedad Y Caja de Ahorros - a unique combination of
savings banks and pawnshops opened in 1882. Initial
capitalization was also provided by Obras Pias. The bank was
later renamed to Monte De Piedad and Savings Bank. The Banco
Espanol-Filipino de Isabel II changed its name to Bank of the
Philippine Islands on January 1, 1912. BPI established
correspondent arrangements with a Paris bank for servicing of
client transactions with counterparts in Europe and other
parts of the world. BPI is considered as the oldest bank in
the country.
During the American Occupation, seven domestic private banks
came to existence. Branches of Japanese a well as Chinese
banks were also opened during the early part of the period.
The Postal Savings Bank was put up in 1906. The first
agricultural bank was established in 1908 but its assets and
liabilities were transferred to the Philippine National Bank
which was organised in 1916. Three years after the American
regime ended, the Central Bank of the Philippines was created,
establishing a managed monetary system in the Philippines. It
was given the sole authority to issue the country's paper
money, regulate and supervise the country's banking system.
Financial System - a set of institutions, such as banks,
insurance companies, and stock exchanges, that permit the
exchange of funds provides channels to transfer funds from
individual and groups who have saved money to individuals and
group who want to borrow money Bangko Sentral ng Pilipinas
(BSP) is the financial supervisory authority. BSP supervises
banks, finance companies and non-bank financial institutions
performing quasi-banking functions.
Classification of Philippine Financial System
1. Universal/Commercial Banks
2. Thrift Banks
3. Rural Banks
4. Non-Bank Financial Intermediaries
Financial System Participants
Households - or consumers are generally described as that
group receiving income, majority of which typically come from
wages and salaries. Gross savings are equal to current income
fewer current expenditures. Such income is spent on goods and
services and a part is saved. Goods that are consumed within a
current period are termed non-durable consumer goods. Goods
that will last for more than a year are termed durable
consumer goods. Consumers or households purchase non-durables
from current income and borrow for the durables like cars,
washing machines, air-conditioners and houses.
Financial Institutions/ Intermediaries - Financial
institutions channel the funds from lenders to borrowers. They
can also be the lenders and borrowers themselves. If they buy
securities, they are lenders but if they are the ones issuing
the securities, they are borrowers.
Non-Financial Institution - Non-Financial Institution are
businesses such as manufacturing, extractive industries,
construction and genetic industries. Non-financial
institutions can also be the lender and borrowers just like
financial institutions.
The Government - is the national, provincial, city and towns
comprising the Philippines as a whole. The Central Bank is an
institution that manages a state currency, money supply and
interest rate.
Central banks – also usually oversee the commercial banking
system of their respective countries.
Foreign Participants - Foreign participants refers to the
participants from the rest of the world such as households,
government, financial and non-financial firms, and central
banks. They exchange goods and services across national
boundaries. International trade and international finance are
parts of globalisation.
Bangko Sentral ng Pilipinas - The BSP was created under
section 2 of RA 7653 better known as "The New Central Bank
Act" It traces the roots and fundamental structure from its
predecessor, The Central Bank Philippines. The bank began Financial Banking Institution - can be categorised as private
formal operations on July 3,1993. banking and government banking. Are entities that manage
financial transactions, offering services such as deposits,
Bangko Sentral ng Pilipinas (FUNCTIONS) - The Money Manager- loans, and financial advice to individuals and businesses.
The BSP manages the amount of money available to public to
keep the prices increasing more than usual. The Supplier of Private Banking Institutions -these companies perform the
Money- Only BSP can legally issue money in paper notes and services of safekeeping funds through the acceptance of money
coins and in amounts consistent with the country's economic deposits and the provision of credit through lending of money.
program. The Bankers Bank - The BSP grants loans and accepts
only from banks. The Supervisor of all Banks-The BSP regularly 1. Commercial Banks cover the widest range of functions among
monitors and examines the operations of banks as well as their all financial intermediaries.
compliance and banking rules and regulations. The Main Bank of
the Government- The BSP is the official depository of the The services include:
government. • receiving
• collecting
Bangko Sentral ng Pilipinas (MONETARY BOARD) - Is the policy- • transferring
making body of the bank. It is headed by the governor who is •lending
concurrently the chairman of the Board with five full-time • investing
members from the private sector and one from the member of the • dealing
cabinet. • exchanging and handling money
• safe deposit custodianship
A deputy's Governor heads each of the bank's three major • trusteeship
operating sectors. • and money claims domestically and internationally
1. Banking Services Sector 2. Thrift Banks are savings and mortgage banks, stock savings,
2. Supervision and Examination Sector and loan association, and private development banks.
3. Resource Management Sector Functions:
• grant loans
Bangko Sentral ng Pilipinas (OBJECTIVES) - is to maintain • invest in readily marketable bonds
price stability conducive to a balanced and sustainable growth • and other debt securities
of the economy and employment. It shall also promote and 3. Rural Banks operate primarily to serve the needs of people
maintain monetary stability and the convertibility of the in the provinces and sub-urban areas.
peso.

Functions:
• granting of short-term loans to farmers, merchants, and 4. Credit Unions
cooperatives. 5. Private Insurance
• They also accept savings and time deposits to accumulate 6. The Pawnshop
funds for local development. 7. Trust Companies
8. . Non-Stock Savings and Loans Association
Government Bank 9. Financing Companies
1. Development Bank of the Philippines was organised in 1963 10. Other Non-Bank Financial Institutions
to provide timely and adequate financial support to the
Agrarian Reform program. its lending activities are geared Government Non-Financial Institutions
primarily towards helping farmers acquire land under the
agrarian reform program. 1.Government Service Insurance System (GSIS) started its
2. The Land Bank of the Philippines was established in 1946 as operation on May 13, 1937 it was entrusted with the
the Rehabilitation Finance Corporation to attend to the administration of a life insurance fund and benefits to
requirements of rehabilitation and development after World War government employees of the country. Presently, GSIS
II. Today, its tasked and lending activities are concentrated administers the following:
on developing projects, such as agriculture, industry, and Life Insurance Fund Retirement Fund Health Insurance
low-cost housing. Fund/Employee's Compensation General Insurance Fund/Property
3. Philippines Amanah Bank -was established in 1974 to promote Insurance Barangay Official's Life Insurance
and accelerate the socio-economic development in Mindanao
especially in the predominantly Muslim province. it is also 2. The Social Security System (SSS) started its operation on
based on the Islamic concept of banking following the "no September 1, 1957. grants to its members those from private
interest and partnership" principles. sector benefits such as sickness, disability, death, and old-
age pension.
NON-BANK FINANCIAL INSTITUTIONS are organisations that provide
services but do not hold a banking licence. They can include
entities like insurance companies, investment firms, and
credit unions, offering various financial products and
services.

Private Non-Bank Financial Institutions

1. Investment House/Bank
2. Security Brokers/Dealers
3. Building and Loan Associations