CAPITAL MARKETS. OVERVIEW OF MARKET PARTICIPANTS AND FINANCIAL INNOVATION. GROUP MEMBERS. KEZBAN ŞAHİN 060207013 ZEYNEP ŞAHİNER 060207028 ÖZNUR UZLAŞAN 060207048 GİZEM VERGİLİ 070207041. CONTENTS. ISSUERS AND INVESTORS
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OVERVIEW OF MARKET PARTICIPANTS AND FINANCIAL INNOVATION
These entities borrow funds in the debt market and raise funds in the equity market.
In the last category businesses produce same products or provide the same services as corporations,but are not incorporated.Financial businesses more popularly referred to as financial institutions provide one or more of the following services.
Investorspurchasingfinancialassetsmustdevelopskillsnecessarytoevaluate an investment. Thoseskillsaredeveloped, investors can applythemwhenanalyzingspecificfinancialassetsforpurchase.
Investorswhowanttomake a loanto a consumerorbusinessneedtowriteloancontract. Althoughsomepeoplemayenjoydevotingleisure time tothistask, most of us findleisure time to be in shortsupplyandcompensationforsacrificing it. The form of compensationcould be a higherreturnobtainedfrom an investment.
The costs of writing loan contracts are referred to as contracting costs. Another dimension to contracting costs is the cost of enforcing terms of loan agreement.
So that, economies of scale can be realized in contracting and processing information because of amount of funds managed by financial intermediaries.
The lower costs increase to the benefit of investor who purchases asset and the issuer of financial assets.
The previous three economic functions may not be immediately obvious. This last one should be. Most transactions made today are not with cash. Payments are made using checks, credit cards, debit cards and electronic transfers of funds. Financial intermediaries provide these methods for making payments.
At one time, noncash payments were restricted to checks. Payment by credit card was also at one time the exclusive domain of commercial banks, but now other depository institutions offer this service. Debit cards are offered by various financial intermediaries.
The ability to make payments without cash is critical for financial market. In short, depository institutions transform assets that cannot be used to make payments into other assets.
To understand why managers of financial institutions invest in particular types of financial assets and types of investment strategies employed. It is necessary to have a general information of asset/liability problem.
For example, depository institutions seek to generate income by difference between return that they earn on assets and cost of their funds. This difference is referred to as spread.
Both amount and timing are known. For example, depository institutions know amount that they are committed to pay on maturity date of a fixed rate deposit, the depositor does not withdraw funds prior to the maturity date.
TYPE II LIABILITY
The amount of cash outlay is known, but timing of cash outlay is uncertain. Life insurance policy can be an example for this liability. The most of basic many types of life insurance policy provides that, for annual premium, this company agrees to make a specified payment to beneficiaries upon the death of insured.
Timing is known, but amount is uncertain, such as when a financial institution has issued an obligation in which the interest rate adjust based on some interest rate benchmark.
Depository institutions, for example, issue liabilities called certificates of deposit with a stated maturity. The interest rate paid need not to be fixed over life of deposit but may fluctuate.
Both amount and timing are uncertain. Home insurance policy is an example. Whenever damage is done to an insured asset, the amount of payment that must be made is uncertain.
1. Financial Activity Regulation
2. Disclosure Regulation
3. Regulation of Financial
4. Regulation of Foreign
In recent years, expanded regulations restrict how financial institutions manage their assets and liabilities, in the form of minimum capital requirements for certain regulated institutions. These capital requirements are based on the various types of risk faced by regulated financial institutions and are referred to as risk-based capital requirements.
Government regulation of foreign participants limits the roles foreign firms can play in domestic markets and their ownership or control of financial institutions. Many countries regulate participation by foreign firms in domestic financial securities markets. Like most countries, the United States reviews and changes it policies regarding foreign firms’ activities in the U.S. financial markets on a regular basis.
Regulations that impede the free flow of capital and competition among financial institutions (particularly interest rates ceilings) motivate the development of financial products and trading strategies to get around these restirictions.
Twoextremeviewsseektoexplainfinancialinnovation.At oneextremearethosewhobelievethatthemajorimpetusforinnovationcomesout of theendeavortocircumvent (or “arbitrage”) regulationsandfindloopholes in taxrules.At theotherextremearethosewhoholdthattheessence of innovation is theintroduction of moreefficientfinancialinstrumentsforredistributing risk among market participants.
Ifweconsidertheultimatecauses of financialinnovation, thefollowingemerge as themostimportant:
1. Increasedvolatility of interestrates,inflation,equitypricesandexchangerates
2. Advances in computerandtelecommunicationtechnologies
4. Financial intermediary competition
5. Incentives to get around existing regulations and tax laws
6. Changing global patterns of financial wealth
Assetsecuritizationmeansthatmorethanoneinstitutionmay be involved in lendingcapital. Considerloansforthepurchase of automobiles.A lendingscenario can looklikethis:
1. A commercial bank originatesautomobileloans
2. Thecommercial bank issuessecuritiesbackedbytheseloans.
4. Thecommercial bank sellstherightto service theloanstoanothercompanythatspecializes in theservicing of loans
5. Thecommercial bank usestheservices of securitiesfirmtodistributethesecuritiestoindividualsandinstitutionalinvestors.
Financialinnovationincreaseddramatically since the 1960s, particularly in the late1970s.Althoughfinancialinnovation can be result ofarbitraryregulationsandtaxrules, innovationsthatpersistafterchanges in regulationsortaxrules, designedtopreventexploitation, arefrequentlythosethatoffer a moreefficientmeansforredistributing risk.