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Financial Market Essay

2061 words - 9 pages

sFinancial Markets. Homework.
Suslova Maria

1) Financial system helps to provide a steady flow of funds from surplus to deficit units as efficiently as possible. Surplus units( individuals,companies etc) wish to invest funds, while deficit units need to borrow them and as there exist enormous amount of heterogeneity between these agents, there appears a need in financial system. Surplus units usually want to make a short terms investment, also they need a compensation for risk and prefer to have an ability to access funds (high liquidity), however deficit units wish to borrow for long term and do not wish to pay too high percents for the loan. For these reasons financial ...view middle of the document...

3) There are several reasons why emerging markets may not prove popular with international investors, such as : poor accounting standarts (in developed financial markets there are usually strict regulations and standards regarding reporting the financial positions of companies, while in many emerging markets, however, standards are often relatively poor making it extremely difficult for investors to ascertain a clear picture of the financial worth of a company.). Governance of companies. (in developed financial markets companies are run by directors who act as agents for shareholders and are selected on merit and can be replaced. While in emerging markets, control of companies is often exerted by a board made up of founding family shareholders who are not necessarily best suited to the job). Information costs (in developed financial markets, most quoted companies are subject to detailed financial analysis and the costs of acquiring good quality information are relatively low. When investing in emerging markets, however, there are language barriers and also far less dissemination of information, which means that the costs of acquiring good quality information are relatively high.) Political risks. (in developed financial markets governments are relatively stable and the election of the opposition to government does not necessarily have any significant influence on financial markets. In emerging markets, however, foreign investors face the risk of controls being imposed which will restrict the outflow of their investments, and often face withholding taxes) (that is, taxes on dividends and interest paid to foreign investors) or the threat of such taxes. Foreign exchange risk.(investment in emerging markets may result in a capital and income gain measured in the currency of the emerging market economy. However, these investments need to be converted back into the developed country’s currency for a comparison to be made with domestic investments. The currency change may provide a gain or loss representing an additional risk that is not present with domestic investments.) Controls on foreign investments. (in many emerging markets, governments can impose costly restrictions on how foreigners can invest and manipulate their investments.) Higher transaction costs (in developed financial markets, deregulation and greater competition have had the effect of greatly reducing brokerage commissions. In most emerging markets these costs are significantly higher, and there are also additional costs associated with foreign exchange commissions and communication for the execution of orders).

4) A financial institution will have a stock of financial liabilities, falling within four categories known as Type I, Type II, Type III and Type IV liabilities
Consider some examples of the various liabilities. A commercial bank may have a £1 million deposit that it will have to pay with a fixed interest payment of 8 per cent one year from now; this is an example of a...

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