Financial Risk Management

Week # 1
Why Study Financial Markets
 Financial Markets
• Primary Markets
• Secondary Markets
• Money Markets
• Capital Markets
• Derivative Markets
• Foreign Exchange Markets
Primary Vs Secondary Markets
Money Vs Capital Markets
Money Market Instruments
Capital Market Instruments
Foreign Exchange Markets
 Derivative Security Markets
• A derivative security is a financial security
(such as a futures contract, option contract,
swap contract, or mortgage-backed security)
whose payoff is linked to another, previously
issued security such as a security traded in the
capital or foreign exchange markets.
 Financial institutions
• Institutions that perform the essential
function of channeling funds from those with
surplus funds to those with shortages of
funds.
Direct transfer
 Unique Economic Functions Performed by
Financial Institutions
• Monitoring Costs.
• Liquidity and Price Risk.
Services Performed by Financial
Intermediaries
Additional Benefits FIs Provide to Suppliers of
Funds
• Reduced Transaction Cost.
• Maturity Intermediation.
• Denomination Intermediation.
 Economic Functions FIs Provide to the
Financial System as a Whole
• The Transmission of Monetary Policy.
• Credit Allocation.
• Intergenerational Wealth Transfers or Time
Intermediation.
• Payment Services.
Risks Incurred by Financial Institutions