1. Financial Markets and Instruments: An Overview

2. Objective of this session SA: Financial Markets and Instruments: An Overview To introduce major features of financial markets, market participants, financial securities, and investment process.

3. Financial Markets SA: Financial Markets and Instruments: An Overview Primary Markets: Deal with Initial Public Offers Versus Secondary Markets: Deal with post IPO securities Money Markets: Deal with short-term securities Versus Capital Markets: Deal with long-term securities

4. Participants of Financial System SA: Financial Markets and Instruments: An Overview The Government Sector The Household Sector The Business Sector

8. Implications of Clientele Demands SA: Financial Markets and Instruments: An Overview Investment Banking Financial Intermediation Financial Innovations Responses to Taxation and Regulations

15. SA: Financial Markets and Instruments: An Overview Capital Market Instruments Longer-term and riskier securities Fixed income market Instruments Instruments for long-term borrowings Government bonds Conventional, Index linked Corporate bonds

16. SA: Financial Markets and Instruments: An Overview Capital Market Instruments Longer-term and riskier securities Equity market Instruments Ordinary shares Residual claim and limited liability Preference shares Stock market indices Equally weighted / value weighted

17. SA: Financial Markets and Instruments: An Overview Capital Market Instruments Derivative market Instruments A security whose value depends on the value of another security or asset. Options A security that gives the holder the right to buy (call) or sell (put) an asset at a specified price on or possibly before a specific date. Futures An agreement between two parties to trade a specific asset or security at a future date, with the terms and price agreed upon today.

19. Initial Margin SA: Financial Markets and Instruments: An Overview Initial Margin (IM) is amount required to be deposited with the broker (as % of total value of securities purchased) Actual Margin (AM) = Consider Number of shares purchased (N): 200 Price per share (P): £60 Initial margin requirement (IM): 50% How much the investor could borrow (B)?

20. Maintenance Margin SA: Financial Markets and Instruments: An Overview Maintenance Margin (MM) is required to minimise the risk of default. When share price declines below certain level MM is called by the broker. Consider N = 200 Purchase price per share: £60 Borrowing: $6000 (initial margin 50%) Maintenance margin: 40% What should be the price for margin call? How much you need to deposit if share price falls to £40?

22. The Investment Process SA: Financial Markets and Instruments: An Overview Source: Levy and Post (2005). 1. Investor characteristics 2. Investment vehicles 3. Strategy development 4. Strategy implementation 5. Strategy monitoring 5. Strategy monitoring

28. SA: Financial Markets and Instruments: An Overview Z. Bodie, A. Kane and A. J. Marcus, Investments , McGraw-Hill. Chapters: 1,2,3 Levy, H. and T. Post (2005), Investments , FT Prentice Hall. Chapters 1,2 and 3. Essential Readings