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TEACHING STAFF

Unit chair and Lecturer


Dr. Amirul Ahsan
PhD in Finance, Monash University
MBA in Finance, Monash University

Office: lb 4.208
Tel: + 613 9244 6571
Email: amirul@deakin.edu.au

Consultation:
TBA
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What we expect from you ?

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WEEKLY YOU ARE ALL EXPECTED TO:

attend the 3 hour Lecture + Seminar every week


Solve the seminar questions
do the required readings
regularly check CloudDeakin site
to use all CloudDeakinbased resources and links to
resources
Spend on average 10 hours on this unit per week

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ASSESSMENTS

Items Weight Due


On-line Test 1 5% In week 6 (7 am 21st to 11.59 pm 22nd April)
On-line Test 2 5% In week 10 (7 am 19th to 11.59 pm 20th May)
Assignment 40% In week 8 (by 11.59 pm 1st May)
Final Exam 50% (T1 Exam Period)
Total 100%

*Assignment details will be uploaded in next two weeks

*Hurdle requirement: achieve at least 50% of the marks available on the examination

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Lecture 1
Dr Amirul Ahsan

TOPIC 1
INTRODUCTION TO THE GLOBAL FINANCIAL MARKETS
-INSTITUTIONS, INSTRUMENTS AND MARKETS

Chapter 1:
A Modern financial 6
system: an overview
LETS PLAY A GAME

WHICH FINANCE TERMINOLOGY


CAN EXPLAIN THIS PHOTO BEST?

Time value of Money


WHICH FINANCE TERMINOLOGY
CAN EXPLAIN THIS PHOTO BEST?

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LECTURE- SEMINAR OUTCOMES
To have gained a broad understanding of modern
financial systems
To have a rudimentary understanding of the
various financial assets
To appreciate the level of integration that exists
between financial systems

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FINANCIAL SYSTEM
A financial system comprises three principal
elements which facilitate the flow of funds:
financial institutions

financial markets

financial instruments

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Financial System
the financial system allows both lenders and borrowers to
trade-off between the different attributes to achieve their
desired portfolio structure needs

Regulators and Supervisors

Institutions Instruments Markets

Banks Debt Money


Building societies Equity Capital
Credit unions Hybrids Equity
Insurance offices Derivatives Foreign exchange
Superannuation funds Derivatives
Merchant banks
Investment banks
Finance companies 11

Unit trusts
FINANCIAL SYSTEM
A financial system facilitates financial
transactions through the creation, sale and
transfer of financial assets

FUNCTIONS OF A FINANCIAL SYSTEM


facilitates the efficient conduct of transactions for
goods and services
facilitates the flow of funds between lenders and
borrowers
allows the management of portfolios of assets and
liabilities
encourages economic development 12
FINANCIAL INSTRUMENTS- FINANCIAL ASSETS
Currency or a financial instrument which
represents a claim to future cash flows. Examples
include:
shares issued by a company

government treasury bonds

bank term deposits

ATTRIBUTES OF A FINANCIAL ASSET


return or yield
risk

liquidity
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time pattern of cash-flows
FINANCIAL INSTRUMENTS

1. Equity
shares issued by a company which represent an
ownership position for the shareholder
shareholder has an entitlement to receive a share
of any distribution of profits of the company -
dividends
2. Debt
debt instruments are contractual claims to periodic
cash flows in the form of interest payments and
principal repayments
may be issued with a fixed or floating interest rate, or
at a discount; secured or unsecured; short to longer- 14
term
FINANCIAL INSTRUMENTS
3. Hybrids
combine the elements or characteristics of both
debt and equity
example - an instrument issued which makes
periodic interest payments, but offers a future
ownership entitlement (example: convertible
notes)
4. Derivatives
a product whose pricing is derived from an existing
product (e.g. gold)
not issued for raising funds

a tool for managing risk (e.g. the risk that the price of
gold may change in the future) 15

types: futures, options, swaps, forwards


HOW DERIVATIVES WORKS (AN EXAMPLE)
i. Option
ii. Forward
iii. Future
iv. Swap

Derivatives

A contract to buy or
sell in advance

Forecasting (NEWS)

Today Buy(Call) Future


Derivatives
Share-1

Share-2
Sell(Put)

Derivatives
Share-3

Portfolio Portfolio 16
FINANCIAL MARKETS

1. Matching principle
short-term assets should be funded with short-term
liabilities
medium-to-longer-term assets should be funded with
equity and/or medium-to-longer-term liabilities
seeking to match the cash-flows on both sides of the
balance sheet

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FINANCIAL MARKETS
2. Primary and secondary markets
primary markets involve the issue of new
financial instruments (e.g. IPO)
secondary markets trade existing instruments
(securities). No new funds are raised by the
original issuer
deep and liquid secondary markets strengthen
the primary markets

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FINANCIAL MARKETS

3. Direct and intermediated markets


government, business and individuals access
finance to meet funding needs
access to funding may be categorised as:
direct finance, or
intermediated finance

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SURPLUS UNITS AND DEFICIT UNITS

Economic units can be classified as:


Households
Businesses
Financial Institutions
Government Institutions

A surplus unit is a unit whose income exceeds planned


expenditure.

A deficit unit is a unit whose expenditure exceeds its


receipts.

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Direct Finance
Financial
Money Shares/Debentures
instruments
Surplus Unit Deficit Unit
(Saver) Financial markets (Borrower)
Economic units can be classified as: Economic units can be classified as:
Households Households
Money-Capital markets
Businesses Businesses
Financial Institutions
Brokers, Dealers
Financial Institutions
Government Institutions Government Institutions

Financial intermediaries
Banks and other
financial institutes

CHANNELS FOR MOVING FUNDS 21


Direct Finance
Financial
instruments

Financial markets
Surplus Unit Deficit Unit
(Saver) (Borrower)
Money-Capital markets
Brokers, Dealers

Lenders Deposits Loans Borrowers


-Householders Fund Financial intermediaries Fund -Householders
-Companies Banks and other -Companies
-governments financial institutes -governments
-rest of the world -rest of the world

Deposit account in Banks Loan agreement with Banks


Financial
Financial Financial
Financial
instruments
instruments instruments
instruments

Intermediated Finance
CHANNELS FOR MOVING FUNDS 22
Direct Finance
Financial
instruments

Financial markets
Surplus Unit Deficit Unit
(Saver) (Borrower)
Money-Capital markets
Brokers, Dealers

Lenders Borrowers
-Householders Fund Financial intermediaries Fund -Householders
-Companies Banks and other -Companies
-governments financial institutes -governments
-rest of the world -rest of the world

Financial
Financial Financial
Financial
instruments
instruments instruments
instruments

Intermediated Finance
CHANNELS FOR MOVING FUNDS 23
FINANCIAL MARKETS

3.1 Direct markets


supplier of funds contracts directly with the user
of funds
creates an entitlement to dividends and capital
gains (losses) on shares; or interest receipts and
principal repayment on debt
direct finance issues include shares, discount
securities, bonds and government securities

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FINANCIAL MARKETS
3.1 Direct finance considerations:
Benefits:
removes cost of financial intermediary
diversify funding instruments and sources
raise profile in financial markets

Disadvantages:
documentation; prospectus
matching lender and borrower preferences
liquidity and marketability of securities
legal, financial and expert advice
credit ratings 25
FINANCIAL MARKETS
3.2 Intermediated markets
supplier of funds (investor) contracts with a
financial intermediary such as a bank (e.g. term
deposit);
user of funds (borrower) also contracts with the
intermediary (e.g. housing loan)
claims of each party are with the intermediary;
i.e. the investor has no claim against the
borrower

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ADVANTAGES OF INTERMEDIATION
Asset transformation:
range of products

pooling of funds

Maturity transformation:
liquidity

maturity

risk management

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FINANCIAL MARKETS
4. Wholesale markets and retail markets
wholesale markets - transactions by institutional
investors and borrowers. Typically in the millions
of dollars
retail markets - generally transactions of
household and small business sectors, using
financial institutions

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FINANCIAL MARKETS
5. Money markets
money markets in funds with less than 1 year to
maturity
deep secondary markets (e.g. bills of exchange market)

enable participants to manage liquidity

Participants include commercial banks, investment


banks, merchant banks, finance companies, insurance
offices, funds managers, large corporations, central
banks

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FINANCIAL MARKETS
5. Money markets
sub-markets include:

central bank managing financial system


liquidity and monetary policy
inter-bank market

bills market

commercial paper market

certificate of deposit market

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FINANCIAL MARKETS
6. Capital Markets
capital market instruments provide medium-to-
longer-term funding
encompass both the international and domestic
markets

sub-markets include:
equity market

corporate debt market

government debt market

supported by:
foreign exchange market

derivatives market
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GLOBALISATION OF THE FINANCIAL
MARKETS
the integration of financial institutions,
instruments and markets into an international
financial system
changing needs of market participants

use of technology and communication systems

removal of most regulations restricting the flow


of capital between countries
active foreign exchange markets

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FINANCIAL INSTITUTIONS
in a modern financial system, different types of
institutions provide a wide range of balance sheet
and off-balance sheet products and services
institutions are classified by their sources
(liabilities) and uses (assets) of funds
products and services provided vary between
institutions depending on regulation, markets
and competition
the following five classifications are used

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FINANCIAL INSTITUTIONS
1. Depository financial institutions
attract savings from depositors and investors to
provide loan facilities to borrowers
includes - banks; building societies; credit unions

2. Contractual savings institutions


liabilities (source of funds) are contracts that
generate periodic cash flows, such as insurance
contract instalments or superannuation savings
accumulated funds are used to purchase both
real and financial assets
includes - insurance offices and superannuation
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funds
FINANCIAL INSTITUTIONS
3. Finance companies
liabilities (funds) generated from the issue of
financial securities direct into the money markets
and capital markets
assets (use of funds) are mainly loans to retail
customers (individuals and small business)

4. Investment banks and merchant banks


(money market corporations)
generally raise short-term funds in the wholesale
money markets
provide short-to-medium-term loans to corporate
clients
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specialise in off-balance sheet financial services
to corporate clients and government
FINANCIAL INSTITUTIONS
5. Unit trusts and managed funds
investors purchase units in a trust

trustee (using funds managers) invests accumulated


funds in a specified range of investment types
include - cash management trusts; equity trusts; property
trusts; mortgage trusts

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TUTORIAL SEMINAR AFTER THE BREAK
Bring the seminar questions in your Tablet or in printed form in the
lecture/seminar. Weekly 3 hours teaching consists of Lecture and Seminar
sessions with a small break in between.

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