Chapter 1

Overview of
Financial Assets
 Concept of Financial
Assets

 Financial assets are the products that are

traded in the financial markets.
 Some financial assets are Equity, Bonds,
Debentures, Derivatives instruments and so on.
 A financial asset is a liquid asset that represents
—and derives value from—a claim of ownership
of an entity or contractual rights to future
payments from an entity.
 Financial Assets Vs
Tangible Asssets

Financial Assets Real / Tangible

 An instruments that Assets
represents right on  Assets which posses
income or on other productive capacity
asses to the investor
and an obligation to
the issuers.
 Debt Vs. Equity
Instruments

 Debt Instruments  Equity Instruments

 The assets that make  The assets that give
fixed payments to the ownership rights to
holders the holders
 Derivative Securities

 A derivative is a financial security with a

value that is reliant upon or derived from,
an underlying asset or group of assets
 The derivative itself is a contract between
two or more parties, and the derivative
derives its price from fluctuations in the
underlying asset.
 The Price of Financial
Assets and Risk

 Cash Flow  Risk

The stream of cash The chance that the
payments that financial assets will not
financial assets produce cash flows as
produces over time promised.
1. Default Risk
2. Inflation Risk
3. Foreign Exchange
Risk
 The Role of Financial
Assets

 Transfer of Funds: The financial assets link

between surplus units and deficit units and define the
terms and conditions of the transfer of funds.
 Redistribution of Risk: The financial assets
redistribute the risk associated with such financial risk to
other parties.
 Financial Market
 Financial markets, from the name itself,
are a type of marketplace that provides an
avenue for the sale and purchase of assets
such as bonds, stocks, foreign exchange,
and derivatives.
 Simply put, businesses and investors can
go to financial markets to raise money to
grow their business and to make more
money, respectively.
 The Role of Financial
Markets

 Providing a mechanism for trading

 Price Discovery
 Reducing the cost of transaction
 Classification of Financial
Markets

A. Classification by nature of claim

i. Debt Market : Market for trading debt
securities
ii. Equity Market : Market for trading equity
securities
iii. Derivative Market : A market for derivative
instruments which derive their value from an
underlying asset. Option, Future/ Forward
contracts
 Classification of Financial
Markets

B. Classification by maturity of claim

i. Money Market : Market for trading of short
term securities. Debt instruments with
original maturities of one year or less.
ii. Capital Market : Market for long term
securities. Securities could be debt or equity
securities.
 Classification of Financial
Markets

C. Classification by seasoning of claim

i. primary Market : Market for new issues of
securities. This market is considered
important in creating the assets of a nation.
ii. Secondary Market : Market for previously
issued securities to re-sale.
 Classification of Financial
Markets

D. Classification by Organizational Structure

i. Organized stock Exchange/ Auction Market :
Market for trading of listed securities and
take transaction set through bidding
process.
ii. Over The Counter Market : Market for stock
which are not listed in stock exchange.
 Classification of Financial
Markets

E. Classification by Delivery of securities

i. Spot Market : The market in which the
instruments or commodities are traded for
immediate delivery.
ii. Future Market : The Market in which the
instruments / commodities are traded for
future delivery.
 Market Participants

Market Participants refer to buyer and sellers

of the securities in a financial market.
Different entities buy and sell securities.
Some market participants are ;
Households
Business Entities
 Financial business entities
 Non- Financial business entities
 Market Participants
continue…

 Federal Government- Government of

Nepal
 Government Agencies- such as NOC, NEA,
Nepal Airlines etc.,
 State & Local Governments –
7 Provience,753 local government units
 Supranational- The world Bank, The Asian
Development Bank etc.,
 Globalization of Financial
Markets

 Globalization of financial market means

the integration of financial markets into an
international financial market. There are
no regulatory barriers for financial
transactions between two markets.
 A number of factors have led to the
globalization of financial markets.
Factors for Globalization of
Financial Markets

 Liberalization of Financial Markets

 Technological Advancements
 Institutionalization of Financial Markets
 Retail Investors- individual
 Institutional Investors- pension funds, mutual
funds, insurance companies, commercial
banks etc.,.
 Classification of Global
Financial Markets

 Internal Market/ National Market

Internal market are those market where the securities
are traded within a single nation. National Market can
be further classified into;
Domestic Market ( 3/]n' ahf/)
The domestic market is where issuers domiciled in a
country issue securities and where these securities are
subsequently traded.
 Classification of Global
Financial Markets

 Foreign Market (lab]zL ahf/)

The foreign market is where the securities of issuers not
domiciled in the country are sold and traded. For e.g. if a
Japanese company issuing securities in the U.S. market, it is
issuing securities into foreign market.
 International Market/ External Market
When securities are issued in more than one market and outside
the jurisdiction of any single country, the securities are said to
be issued into international market. Offshore Market and
Eurodollar market are example of international market.
 Motivation for using
foreign markets

 Size of funds
 Globally Competitive terms
 Lower cost of the funds
 Diversification of sources of funds
 Role of Government in
Financial Market

 Justification for Regulation

 To protect the market from the impact of market failures, the
government steps in the financial market with regulations.

 Forms of regulation
 Establishment & functioning of the securities markets and its
regulator
 Promotion of competition & Fairness in the trading of financial
securities
 Disclosure of information with equal access to market
participants
 Protection of investors’ rights
 Regulations to regulate foreign companies
 Regulation of Financial
Market in Nepal

 Nepal Rastra Bank

 Securities Board of Nepal (SEBON)
 Insurance Board (Beema Samiti)
 Financial Innovation(ljQLo k|jt{g)
 Financial innovation is the process of creating new
products, services, or processes related to the finance
 sector. They occur with the advancement in financial
instruments and payment systems with time.
 The Economic Council of Canada classifies financial
innovations into the following three broad categories;
 Market Broadening instruments (ljQLo la:tfl/t pks/)f)- it
increase the liquidity of markets and the availability of funds by
attracting new investors and offering new opportunities for
borrowers.
 Risk Management instruments (hf]lvd Aoa:yfkg pks/)f)- It
relocate financial risks to those who are less averse to them, or
who have offsetting exposer and thus are presumably better able
to shoulder to them.
 Financial Innovation (ljQLo k|jt{g)

 Arbitraging instruments & Process( cfla{^\]h ug]

{ pks/)f)- It enables investors and borrowers to take advantage
of differences in costs and returns between markets and which
reflects differences in the perception of risks, as well as
information, taxation, and regulations.
 Based on more specific function suggested by
Bank for international settlement;
 Price- risk transferring innovation
 Credit-risk transferring instruments
 Liquidity generating innovation
 Credit –generating instruments
 Equity-generating instruments.
Financial Innovation
Motivation for Financial Innovation
(ljQLo k|jt{gsf] nflu pTk|]/)ff)