Financial Markets Institutions amp Derivative Instruments ECO 473 Money amp Banking Dr D Foster Economic Functions of Financial Markets Match savers and investors Savers want to wealth ID: 762908
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Financial Markets, Institutions & Derivative Instruments ECO 473 – Money & Banking – Dr. D. Foster
Economic Functions of Financial MarketsMatch savers and investorsSavers want to wealthInvestors want to create wealth Spread/share risk.Successful strategy - diversificationSavers seek out mutual fundsSavers seek out financial intermediariesInvestors seek OPM
bankscredit unionsS&Lsthriftssavings banks pension funds Insurance companies mutual funds mortgage brokers investment bankers finance companies Why - Intermediation Who . . . Financial Markets - Why & Who
New - Primary Marketsstocks (IPO), bonds, mortgages, other. Used - Secondary Marketsexchange of ownership.Where: NYSE,NASDAQ, OTC . . . Financial Markets - New & Used
Short - Money MarketsA financial instrument that matures w/in one year. Used to facilitate liquidity demands.Need funds soon.Have excess cash. 3 mo. & 6 mo. T-Bills Commercial paper Bank CDs Fed’l funds Repurchase agreements Bankers’ acceptances Euro$ funds Financial Markets - Short & Long
Money Market Instruments Outstanding, 2000-2012
Long - Capital MarketsMaturities of more than one year. Used for capital purchases (investment).Less liquid & more risk than MM. Corporate stock Corporate bonds U.S. Treasury bonds Other U.S. & Munis Mortgages Comm./Con. loans Financial Markets - Short & Long
Capital Market Instruments Outstanding, 2012
Sell diversification to individual savers.Government regulations limit risks.8,000 mutual funds in the United States. Raise money from wealthy people/institutions Largely unregulated Use leverage which magnifies gains/losses. Trade in derivative instruments. Mutual Funds Hedge Funds Financial Institutions
A broker buys and sells securities for others May be “full service” or “discount.”A dealer buys and sells for itself, making a market in these securities. Underwrites and advises companies on mergers and acquisitions. Investment banks buy and sell securities and derivatives. Brokers and Dealers Investment Banks
The End of Investment Banks? 1930s regulations2008 - collapse of the MBS market.Bear Stearns - couldn’t roll over debt.Lehman Brothers - $639 bill. in assets. Merrill Lynch - sold to BoAGoldman Sachs & Morgan Stanley- converted to commercial banks.
Google structured IPO as a “ Dutch ” auction. Google saved on investment bank services. Presumption is Google will earn more $$. Had touted a price of $135 earlier.Ended up with a price of $85.Earned $1.67 billion on sale.Conclusion: Investment underwriters are not biased!Case Study – 2004 Google IPO
After After IPO, IPO, traded traded at $106 at $106 After After IPO, IPO, traded traded at $106 at $106 8/2012 trading at about $542 At peak, traded at At peak, traded at almost $715 almost $715 At peak, traded at At peak, traded at almost $715 almost $715 $ 1095 – 2/8/2019 Case Study – 2004 Google IPO
Financial Markets, Institutions & Derivative Instruments ECO 473 – Money & Banking – Dr. D. Foster