30. The composition of the global financial market: instruments, participants, sources of information. Состав глобального финансового рынка: инструменты, участники, источники информации.

Financial market is a market in which people and entities can trade fin. securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect S&D.

1) Capital markets consist of: a) Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. b) Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.

2) Commodity markets, which facilitate the trading of commodities.

3) Money markets, which provide short term debt financing and investment.

4) Derivatives markets, which provide instruments for the management of financial risk.

5) Futures markets, which provide standardized contracts to trade products at some future date.

6) Insurance markets, which facilitate the redistribution of various risks.

7) Foreign exchange markets, which facilitate the trading of currencies.

The capital markets may also be divided into primary markets and secondary markets. Newly issued securities are bought or sold in primary markets, such as during IPOs. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while in secondary market transactions exist among investors.

A market participant may either be coming from the Supply side, hence supplying excess money (in the form of investments) in favor of the demand side; or coming from the Demand side, hence demanding excess money (in the form of borrowed equity) in favor of the Supply side.

Types of participants: institutional and retail investors, governments. An institutional investor is an investor, such as a bank, real sector company, insurance company, hedge fund, pension fund or mutual fund that is financially sophisticated and makes large investments, often held in very large portfolios of investments. Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. A retail investor is an individual investor possessing shares of a given security. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow by issuing bonds.

Range of instruments used in the financial market varies depending upon the type of the market. For example, shares are traded on the stock market. Bonds, collateralized securities (CDOs), CDs are the instruments of debt capital market. Derivatives market stands for options, forwards, futures and others. Commodities market also involve futures and fwds as well as spot contracts, swaps, exchange-traded commodities. Money m’t: Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities, etc.

Financial markets are receptive to any information which might influence the asset price. Particularly important information is the corporate one, i.e. all internal processes within the company or related to it (management appointment, acquisition, info on dividends etc.); another type is industry info, i.e. events occurring in the same industry (competitors’ fines, increase of their assets etc); macro-statistics gives the overall understanding on organization’s environment (unemployment rate, IR etc); force-majeure have a great impact over the financial markets. Market participants prefer to rely on the most trust-worthy sources of information such as Bloomberg, Reuters and Worldwide known media channels. There also exists insider information - knowledge about a company that could be used to an investor's advantage, if only a few people know about it.

31. Bank-based and market-based financial systems: salient features, classification, advantages, and disadvantages of both systems. Финансовые системы, основанные на банках и на рынках капитала. Характеризующие признаки, преимущества и недостатки обоих систем.

In bank-based systems (as in Germany and Japan) banks play a leading role in mobilizing savings, allocating capital, overseeing the investment decisions of corporate managers, and providing risk management vehicles. Advantages: 1) the positive role of banks in mobilizing resource, identifying good projects, monitoring managers, and managing risk; 2) banks have advantages over markets in the early stages of economic development when the institutional environment is unable to support market activities effectively; 3) powerful banks can still force firms to reveal information and pay their debts, thereby facilitating industrial expansion. Disadvantages: 1) by acquiring expensive information about enterprises, banks can extract large payments from firms. This reduces the incentives for firms to undertake high-risk, high-return projects because firms will lose an excessively large proportion of the potential profits to banks; 2) since banks make loans; they have an inherent bias toward low-risk, and therefore, low-return projects. Thus, bank-based systems may retard innovation and growth; 3) powerful banks may collude with firm managers against other investors, which deadlocks competition, effective corporate control, the emergence of new firms, and economic growth

In market-based systems (as in England and the United States) securities markets share center stage with banks in getting society's savings to firms, exerting corporate control, and easing risk management. Advantages: 1) markets facilitate diversification and the customization of risk management devices; 2) markets will reduce the inherent inefficiencies associated with banks and thereby enhance new firms formation, the ease with which firms and industry attract capital to expand, and overall economic growth; 2) Disadvantages: 1) well-developed markets quickly reveal information in public markets, which reduces the incentives for individual investors to acquire information. Thus, greater market development may impede incentives for identifying innovative projects and thereby hinder efficient resource allocation; 2) liquid markets create a myopic investor climate. Specifically, in liquid markets, investors can inexpensively sell their shares, so that they have fewer incentives to monitor managers rigorously

Salient features: 1) Banks, nonbanks, and stock markets are larger, more active, and more efficient in richer countries. Financial systems, on average, are more developed in richer countries. 2) In higher income countries, stock markets become more active and efficient relative to banks. There is some tendency for national financial systems to become more market oriented, as they become richer. 3) Countries with a Common Law tradition, strong protection of shareholder rights, good accounting regulations, low levels of corruption, and no explicit deposit insurance tend to be more market-based. 4) Countries with a French Civil Law tradition, poor protection of shareholder and creditor rights, poor contract enforcement, high levels of corruption, poor accounting standards, restrictive banking regulations, and high inflation tend to have underdeveloped financial systems.

This subsection creates four categories of countries based on the structure and level of development of their financial systems. The four categories are (1) underdeveloped and bank-based, (2) underdeveloped and market-based, (3) developed and bank-based, and (4) developed and market-based.

For example, both Germany and Pakistan are bank-based systems, but in Pakistan banks cannot perform the functions expected of a bank-based system because they are not as well developed as German banks. Similarly, the United States and the Philippines are both market-based systems, but the markets in the Philippines are not as effective at providing financial services.