FINANCIAL

MARKETS
FINANCIAL MARKETS
Financial markets are organized institutional structures or
mechanism for creating and exchanging financial assets.
An economy which relies on interactions between buyers
and sellers to allocate resources is known as market
economy.
FUNCTIONS OF FINANCIAL
MARKETS
1. The raising of funds in the capital market.
2. The transfer of risk in the derivative market.
3. International trade in the currency market.
KINDS OF FINANCIAL MARKETS
The following are kinds of financial markets from simple to complex:
1. Capital Market
2. Commodities market which facilitate the trading of commodities.
3. Money market which provides short term debt financing and investment
a. Hedge of Funds
4. Mutual Funds
5. Derivatives market which provides instruments for the management of financial risks
a. Futures market
6. Options
CAPITAL MARKET
TYPES OF CAPITAL MARKET
STOCK MARKET- which provides capital through the
issuance of shares allows the subsequent trading thereof in
the secondary market.
BOND MARKET- which facilitates financing through the
issuance of bonds and enables the subsequent trading
thereof.
COMMODITIES MARKET
A market whose primary products such as raw materials are traded
on a regulated commodities exchange in which they bought and sold
in standardized contracts.
COMMODITIES EXCHANGE
REGULATORS
New York Board of Trade
National Futures Association
Chicago Board of Trade
Chicago Mercantile Exchange
Kansas City Board
How commodities futures markets
functions?
It is similar to a market place where commodities are
contracted for either purchase or sale at an agreed price for
delivery at future specified date.
The purpose of commodity exchange is to provide an
organized market place in which members can freely buy
and sell various commodities.
CLEARING HOUSE
Each futures exchange has its own clearing house . All
members of the exchange provide the facilities and ground
rules for its members. They are supposed to deposit with
the clearing house the amount of money to cover the
membership debt balance.
MARGINAL REQUIREMENT
When a trader enters a commodity futures market whether it is long
or short, he is required to make a deposit with the broker an amount
sufficient to protect the broker against loss in the event the trade
becomes unprofitable. This deposit is called margin requirement.
MONEY MARKET
Money market is a segment of the financial market in which
financial instruments are traded. It is used by participants as
a means of borrowing and lending in short-term from
several days to less than a year.
KINDS OF MARKET SECURITIES
NEGOTIABLE CERTIFICATE OF DEPOSIT (CD)
TREASURY BILLS
BANKERS ACCEPTANCES
COMMERCIAL PAPERS
MUNICIPAL AND NATIONAL GOVERNMENT NOTES
MUTUAL FUND
REPURCHASE AGREEMENTS
TREASURY BILLS
These are the most marketable money market securities. Their popularity
is due to their simplicity. The issuance of treasury bills by the government
is one of the common ways by which they raise funds from the public.
These treasury bills are short term securities having maturities of less than
a year. Their maturities run from three (3) months, six (6)months to less
than one (1) year. Treasury bills are bought for a price below their face
value. At maturity, the government pays holder of the TBs the full amount
of par value. They are issued in a competitive bidding process at an auction
sale. If you want to purchase a Treasury bills you have to submit your bid.
Bidding may be competitive or non-competitive.
They are issued in denominations of 1,000, 5,000, 10,000, 25,000,
50,000 and 100,000 and 1,000,000. They are considered the safest
and risk-free among all investments since it is the government that
backs it. Besides it is also tax-free from both the national and local
governments.
MUTUAL FUND
A mutual fund is a form of a collective investments that
pools money from several investors and invest it in stocks,
bonds, money market instruments and other securities.
Here the fund manager trades the fund securities earning
capital gains and collecting dividends or interest income
from their investments. The fund manager is known as
portfolio managers since he maintains the portfolio of the
mutual fund.
The mutual fund’s net asset value per share is the value per
share of the fund as calculated daily based on the total
value of the fund’s assets divided by the number of shares
issued and outstanding . The net asset value is the current
market value of the fund less the fund’s liabilities.
TYPES OF MUTUAL FUNDS
1. OPEN-END MUTUAL FUND- this means the fund stands ready to
issue new shares to investors and is ready to buy back the shares
from those who choose to leave the fund. An open-end fund is
equitably divided into shares which vary in prices in direct proportion
to the variation in the fund’s net asset value.
2. CLOSE-END MUTUAL FUND- the fund issues a limited number of
shares/units in an initial public offering (IPO). New shares are rarely
issued after the fund launched. The shares are not normally
redeemable for cash or securities until the fund liquidates. The price
is determined by the value of the investments in the fund.
The distinction between a close-end mutual fund
and an ordinary open-end mutual are as follows:
A. The close-end mutual fund is close to new capital after it starts
operation.
B. Its shares are typically traded in the stock exchange not redeemed
directly by the fund.
C. It shares can be traded during the trading hours at any time while
in an open-mind mutual fund, shares are usually traded only at
the closing price at the end of the market day.
If the investors in a close-end mutual fund hold shares
directly, they may be entitled to shareholder’s perks such as
discounts on the company’s products, or right to attend
stockholder’s meetings and vote on matters. Investors in
collective investment schemes such as the open-end mutual
fund usually do not have these rights.
A collective investment scheme is a way of investing money
with other people participating in a wider range of
investment, than may be feasible for an ordinary individual
investor and all of them usually share in the cost of doing
so.
3. EQUITY FUNDS- these are the most common mutual funds which
consist mainly stock investments.
4. GROWTH FUNDS – these are the more conservative investments
which focus on stocks that pay dividends.
5. VALUE FUNDS- these are investments on stocks that are
undervalued. Value stocks have most often produced higher returns.
This is more of a compensation for the greater risk involved in the
investment.
ADVANTAGES OF MUTUAL FUNDS
1. Transaction cost is divided among all the mutual fund
shareholders, unlike the individual stock investor who
shoulders all the risk.
2. The investors in a mutual fund benefits from the expertise of a
professional fund manager.
A disadvantage of a mutual fund is that it is not immune risk. It
shares the same risk which others are also exposed to, although
the hiring of a professional fund the manager would lessen the
risk that an investor may have.
DERIVATIVES
Derivatives are financial contracts designed to create pure exposure
to an underlying commodity, asset, rate, index or event. In general,
they do not involve the exchange or transfer of title of the principal.
Instead their aim is to capture in the form of price changes, some
underlying price changes or events.
The term derivative refers to how the price of a particular contact is
derived from the price of an underlying commodity or security or an
interest rate, exchange rate of an index. Derivatives are devised as a
form of insurance to transfer risk among parties based on their
willingness to assume risk or hedge against it.
TYPES OF DERIVATIVES
1. OVER THE COUNTER (OTC) derivatives are contracts that are privately traded
between two parties without going through an exchange or another
intermediary. The commonly traded products are swaps, forward rate
agreements options.
2. EXCHANGE TRADED DERIVATIVES (ETD) are those derivative products that are
traded through a specialized derivative exchange. A derivative exchange acts as
an intermediary to all related transactions and takes initial margin from both
sides of the trade to serve as a guarantee.
The world’s largest derivatives are Korean Exchange, Eurex which lists a wide
range of European products, Chicago Mercantile Exchange and Chicago Board of
Trade.
ARBITRAGE
An arbitrage is the system of taking advantage of a price differential
between two or more markets. It occurs when one person buys a
product from one market and sells it for a higher price at the same
time to avoid exposure to market risk.
Market risk refers to the risk involved when there is a change in the
prices of the product. Only financial products such as securities are
traded electronically in an arbitrage. Arbitrage occurs by
simultaneously buying in one exchange and selling in another. The
person who engages is called arbitrageur.
 EXAMPLE OF ARBITRAGE
Borrowing at a lower short-term rate and investing it at higher long-term rate. The risk
here is when the short-term rate goes higher and the long-term rate remains the same.
Global Labor arbitrage- this is a term used by economist when manufacturing job flows on
countries where wages are lower per unit output. China and some Asian countries where
manufacturing jobs are brought because of their lower wages.
Arbitrage tends to reduce price discrimination by encouraging people to buy goods where
prices are high as long as people where prices are low and resell them where higher prices
are high as long as people are not prevented from reselling and that the cost of transacting
holding and reselling the goods are small in relation to the difference in prices in various
markets.
Arbitrage can move different currencies towards purchasing power parity.
OPTIONS
An option is a contract or commitment to buy and sell financial products
known as the option underlying interest. For equity option, the underlying
instrument is a stock, Exchange Traded Funs (ETF) or similar product.
The contract itself is very precise. It establishes a specific price called the strike
price at which the contract may be exercised or be acted on, and it has an
expiration date. When an option expires it no longer has value and no longer
exists.
Options buyers have right and option sellers have obligations. Option buyers
have the right to buy (call) or sell (put) the underlying stock or futures contract
at a specified price until the third Tuesday of their expiration month.
If you buy an option you are not obligated to buy or sell the underlying
instrument, you simply have the right to do so.
TWO KINDS OF OPTIONS
1. CALL (BUY)
Call options give you the right to buy the underlying asset. There are
no margin requirements if you want to purchase an option because
your risk is limited to price of the option. In contrast, option sellers
receive a credit in worthless. Calls are similar to having a long
position on a stock. Buyers of calls hope that the price of the stock
will increase much before the option expires. Buying an option
creates a credit in the amount of the premium to the buyers trading
account.
2. PUT (SELL)
Put options gives the holder the right to sell an asset at a certain
price within a specified period of time. If you sell an option and the
option is exercised, you are obligated to deliver the underlying asset.
Puts are very similar to having a short position on a stock. Buyers of
puts hope that the price of the stock will fall before the options
expires. Selling an option creates a credit in the amount of the
premium to the sellers trading account.
CHARACTERISTICS OF AN OPTION
1. Option give you the right to buy and sell the underlying instrument.
2. If you buy an option, you are not obligated to buy or sell the underlying
instrument you just have the right to do so.
3. If you sell an option and option is exercised, you are obligated to deliver the
underlying asset (call) or take delivery of the underlying asset (put) at the
strike price of the option regardless of the current price of the underlying
asset.
4. Options are good for a specified period of time, after which they expire and
you lose your right to buy or sell the underlying instrument at the specified
price.
5. Options when sold are done by debiting the account of the buyer.
6. Options when sold are done by crediting the sellers account.
7. Options are available in several strike prices representing the price of the underlying
instrument.
8. Options specify the settlement terms that is whether the writer will deliver the asset or
simply give the equivalent cash amount.
9. Options indicate the terms at which the option is quoted in the market.
10. The cost of an option is called option premium. The price is determined by factors such as:
A. The price of the underlying asset
B. The strike price of the option
C. The time remaining until the expiration date
D. The volatility
E. Options may not be available in all stocks. Each stock option represents 100 shares of stocks.
Strike price refers to the price at which underlying stock can
be sold or purchased if the option is exercised.
Expiration date refers to the date option expires. Premium
refers to the price of an option.
 CLASSIFICATIONS OF OPTION
1. STOCKS OR EQUITY OPTION- is a contract where the underlying
asset is a stock.
2. BOND OPTION- is an option contract where in the underlying asset is
a bond.
3. COMMODTY OPTION- is an option contract wherein the underlying
asset is a particular commodity or group of commodities.
4. OPTION ON FUTURES CONTRACT- is a contract that conveys the right
(but not obligation) to the buyer to purchase a specific futures contract.
5. OVER THE COUNTER OPTION- it is a dealer’s option, traded between two
private parties and is not listed on an exchange. The terms of the over-the-
counter options are unrestricted and may be tailored to meet the business
needs. Most often one of the counterpartys’ to an OTC option is an institution
that is well capitalized.
TYPES OF OPTION OVER THE COUNTER OPTION
A. Interest rate option
B. Currency cross rate option
C. Options on swap
D. Employees stock option issued by companies to its employees as
compensation.
6. FOREIGN EXCHANGE (FOREX) OPTION- it is a financial contract
giving the forex option buyer the right (but not the obligation) to
purchase or sell a specific forex spot contract (the underlying) at a
specific price (the strike price) on or before specific date. The
amount the forex option buyer pays to the forex option seller for the
option is called premium. Once the premium is paid, the forex option
holder has no other financial obligation until the option is offset or
allowed to expire.
Thank you for listening 
GLOBALIZATION AND
INTERNATIONAL
CORPORATE
MANAGEMENT
 DIFFERENTIATE
GLOBALIZATION TO
INTERNATIONALIZATIO
N?
Internationalization recognizes the different peoples,
languages, cultures, economics borders and ecosystems
exist between and among nations.
Globalization defined as the complex of forces that trend
towards single world society and such forces could be
commerce, ease of travel, better communication among
nations, the increasing use of English as a worldwide
language, access to the internet, and the development of
new wide culture.
GLOBALIZATION
Globalization is the internationalization of everything related to
different countries.
It is used in the sense of being “world wide” that is the process of
spreading various goods and experiences to people at all corners of
the earth.
 FAVOURABLE EFFECTS OF
GLOBALIZATION
INDUSTRIAL- emergence of world wide production markets and broader access to range of
foreign products for consumers and companies.
FINANCIAL- emergence of a world wide financial markets and better access to external
financing for corporate needs, national and sub-national borrowers.
ECONOMIC- realization of global common market, based on the freedom of exchange of
goods and capital.
INFORMATIONAL – increase in informational flows between geographically locations.
CULTURAL- the growth of cross cultural contacts, the advent of new categories of
consciousness and identities such as Globalism which embodies cultural diffusion, the desire
to consume and enjoy foreign products and ideas, and adopts new technology and practices.
ECOLOGICAL- advent of global environmental challenges that
cannot be solved without international cooperation, such as climate,
cross boundary water and air pollution, over fishing of the ocean,
spread of invasive species.
TECHNOLOGICAL AND LEGAL- development of global
telecommunications infrastructure and greater data-flow using such
technologies as communication satellites, internet, and use of fiber-
optic cable, wireless telephone, and broad bond.
 UNFAVORABLE EFFECTS OF
GLOBALIZATION
Poor countries are disadvantaged in that while globalization encourages trade
among countries on an international level, there are also negative
consequences.
Developing economies are forced to open up their markets to foreign
competition before they are ready to do so.
The workers poorer countries are being exploited for cheap labor from
powerful industrialized nations.
There is the shift of manufacturing and out sourcing of service work from one
higher cost country to another low cost country.
International Investors have a tendency to engage in momentum trading and hording,
which can be destabilizing for developing countries.
International investors may together with domestic resident investors engage
speculative attacks of the developing countries currencies, thereby causing instability
that is not warranted, based on economic and policy fundamentals of these countries.
A government even if democratically elected, may not be give sufficient weight to
protect the interest of future generations.
For newly developing countries or developed countries that find it difficult to compete
for lower cost of labor, more corporations locate their businesses in countries where the
cost of labor is cheaper.
There is also that fear that globalization may lead to global monopoly or oligopoly.
Importance of International Environment
The protection of global environment has become one of
the central objectives of the international community in
recent years.
Multinational and Transactional
Corporations
Multinational corporations are corporate entities that are engaged in
production or delivery of services of at least two countries.
Multinational corporations have great influence on international
relations on local economies, politicians, representative districts and
even extensive resources of a country because their budget is huge
and at times even exceed those of many countries. Multinational
companies play an important role in globalization. Multinational
corporations can be divided into broad groups according to the
deliverance of their product facilities.
HORIZONTALLY INTEGRATED MULTINATIONAL CORPORATIONS- manages production
establishments located in different countries to produce the same or similar products. Ex. Pfizer,
Coca-cola, General Motors
VERTICALLY INTEGRATED MULTINATIONAL CORPORATIONS- manages production
establishments in certain country/ies to produce products that services input to its production
established in other countries. Ex. Toyota, Intel, Nokia
DIVERSIFIED MULTINATIONAL CORPORATIONS- manages production establishments located in
different countries that are neither horizontally, vertically or straight. (Non-straight integrated)
Ex. Microsoft
Transactional Corporations refer to economic entities operating in more than one country. It is
also referred to a cluster of economic entities operating in two or more countries.
Tax Competition
There are many countries including sub-national regions competing
against each other for the establishment of multinational
corporations in their place. To compete they usually offer incentives
in the form of tax brakes, pledges of governmental assistance,
improved infrastructures or lax environmental or labor standards.
This process of becoming more attractive to foreign investments can
be characterized as race to the bottom, a push towards greater
freedom for corporate bodies or both.
Threat for market withdrawal
Since multinational companies are large in size and are well capitalized, they can
have a significant impact on a particular country's governmental policies by
threatening that country from market withdrawal. This withdrawal can have a
great impact on the country's labor, supply and prices of their product. Their
threat of withdrawal often causes the government to change their policies. For
example in the case of the Philippines, when congress passed the law on
generics, many local companies proliferated and they sold their drugs at a much
lower price than the multinational patented products. Many of these
pharmaceutical companies left the country and located their companies to other
South-East Asian Countries. Their leaving the country had a great impact on
employment and prices of drugs in our country.
Lobbying
Lobbying includes attempts to influence legislators and
officials whether through other legislators, constituents or
organized groups whose job is to lobby. Traditionally, people
wishing to influence the opinion of the legislators have
frequented the lobbies of congress/parliament seeking to
persuade members to the validity of a particular viewpoint.
The term lobbying took its name from lobbies or hallways of
congress parliament where the legislators gather before or
after debates on particular issue to persuade members in
their point of view. Nowadays, the term lobbying refers
more specifically to private companies or groups known as
lobbyist which are employed by organizations or businesses
to represent their views on particular issues. They either
arrange meetings or organize protests or provide briefing
materials
Government Power
There are some actions of governments that affect
multinational corporations. These are threats to
nationalization of companies by forcing these companies to
sell its local assets to the government or to other local
businessmen or make changes in local business laws, rules
and regulations intended to limit the multinational
corporation's power.
The Micro-multinational Corporations
A new breed of multinational corporations is growing in number. These
corporations are called micro-multinational companies and they start operating
in various countries from the early stages of the business. They are Internet
based communication tools. Micro-multinational companies are different from
the multinational companies in that they are small businesses. Some of these
micro-multinational companies particularly in the software business have been
haring employees in several countries. Many of them are now marketing their
products and services in various countries. These are the internet tools like
MSN, Yahoo, Google, Amazon and Ebay. They facilitated these micro-
multinational companies to reach customers in other countries.
Top corporate officers
There are countries which have a separate board.
Some European countries have an executive board
who manages the day-to-day business who is headed
by the CEO and the supervising board who governs
control of the business. These are elected by the
stockholders.
Chief Executive Officer (CEO)
the highest-ranking corporate officer, administrator, in-charge of total
management of the corporation, he reports to the board of directors. He is
responsible for planning, operating, directing, implementing, coordinating
and evaluating the overall activities and performance of the corporation.
The CEO has subordinate executives to assist him each of which has
specific functional responsibilities. They are the chief financial officer
(CFO), chief strategic officer (CSO), the chief operating officer (COO), the
chief marketing officer (CMO), the chief information officer (CIO), the chief
technical officer (CTO), the chief legal officer (CLO), the chief procurement
officer, and the director of human resources.
Chief Financing Officer (CFO)
is the corporate officer primarily responsible for managing the financial aspect
of the business. He makes the planning, budgeting, financial goals and
objectives, record keeping as well as financial reporting to higher management.
He oversees the investment of funds and management of associated risk,
supervision of cash management activities, execution of capital raising strategies
to support the firm's expansion and deals with mergers, consolidations and
acquisitions. In recent years, however, the role has expanded to encompass
communicating financial performance and fore- casts to the analyst officer (the
title is equivalent to finance director).
The CFO typically reports to the CEO and is frequently a member of the board
of directors.
Chief Strategic Officer (CSO)
is an executive responsible for assisting the CEO with creating,
communicating, executing and sustaining strategic initiatives within a
corporation. Many strategic officers are considered doers and use
their past experiences to advice and execute. They are usually
executives who have held many managerial positions. Their vast
experiences enable them to such position.
A CSO is responsible for three critical jobs:
Must echo the CEO's strategy to every business unit with in the corporation so
that all the employees, partners and contractors understand the corporate wide
strategic plan and how it fits into to the company’s overall plan.
Must oblige immediate results within a corporation; The CEO is normally
responsible for driving long-term results and vision.
Must drive decision-making that creates immediate change within a
corporation as per the company's strategy; Today, many CEO's have less time de-
voted to executing strategies and as a result CEO's are appointing chief strategy
officers within their organizations. The CSO position is becoming popular among
many large multinational corporations.
Chief Operating Officer (COO)
is a corporate officer responsible for managing the day-to-day activities of the corporation.
The COO is one of the highest-ranking members of an organization monitoring the daily
operations of the company and reporting to the CEO and/or the Board of Directors.
The COO is usually an executive or senior vice-president.
 The COO is responsible for operations management (OM).
The focus of the COO is on strategic, tactical, and short term OM, which means he or she is
responsible for the development, design, operation and improvement of the system that
creates and delivers the firm's products/services. Managers need to understand the real work
behind the company's core operation and improvements of the systems that create and deliver
the firm's products and services. For some corporations the function of the COO is undertaken
by the vice president of operations.
 Chief Information Officer (CIO)
Is the head of the information technology group within an organization, who reports to the CEO. This position has in
recent years grown into a prominent position.
The CIO may be a member of the executive board of the organization depending on the structure of the organization.
Lately, the criterion for selecting a CIO is his leadership ability, business acumen and strategic perspective instead of his
technical competence, although still many of the CIOs were formerly technical staffs of the organization.
As information technology and systems have become increasingly important, the CIO is now seen as an important
contributor in the formulation of strategic goals.
 He is involved with analyzing and reworking existing business processes, with identifying and developing the capability
of the corporation to use new tools, with reshaping the company's capital infrastructure and network access and with
identifying and exploiting the enterprise knowledge resources.
He is in charge of integrating the Internet and the world wide-web into both the company's immediate business plans
and its long-term strategies.
Chief Technical Officer (CTC)
is an executive position whose holder is focused on scientific and technical
issues in the corporation. Most often the CIO oversees the technical staff
particularly the development of products and the creation of services that are
concerned with scientific technologies. In some instances the CIO will also
oversee the work of the research and development organization.
In other organizations the CIO reports to the CTO. In other companies the CTO
has the same rank as the CIO. There are also corporations whose CTO works in
the IT and reports to the CIO.
Despite the diversity of approaches to the role of the CTO, this IT department
executive is necessarily becoming the corporations senior technologist
responsible for overseeing current technology assets and more importantly, for
developing a technology vision for the business.
Chief Legal Officer (CLO)
is the highest-ranking corporate officer concerned with
corporate legal matters.
A person to be considered a CLO should have the following
qualifications: He must have leadership skills and should be
very decisive regarding legal challenges that the corporation
encounters.
He normally reports to the board of directors.
Chief Procurement Officer (CPO)
is an executive position which is focused on the
management of supply for the corporation. There is
now an increasing need for this position in many
enterprises.
Director for human resources
Every organization wants to attract the most qualified employees
and match them to jobs available in the corporation for which they
are best suited.
In large corporations, the director of human resources may
supervise several departments, each headed by an experienced
manager who most likely specializes in one human resource activity,
such as employment and placement, compensation and benefits,
training and development, or labor relations.
These managers report to a top human resource executive.
A general manager may advance to a top executive position such as
executive vice president (EVP), in their own firm or he may take a
corresponding position in another firm.
He may even advance to a peak corporate position such as chief
operating officer or even chief executive officer.
The chief executive officer oftentimes become a member of the
board of directors of one or more corporations or may even be the
chairman of the board.
Some top executives establish their own firms or become
independent consultants.