IIMFC201T116-V007500

Summary

This week's course delves into financial markets, which are platforms for trading financial instruments of varying maturities. It distinguishes between short-term (money markets) and long-term (capital markets) markets, highlighting instruments like Treasury bills and corporate bonds. The course will explore specialized markets including foreign exchange, derivatives, private equity, and mortgage markets, examining how they operate and the factors influencing financial instruments' pricing and yields.

Takeaways

• 🏦 Financial markets are platforms for trading financial instruments with varying maturities.
• 📈 These markets facilitate price discovery, determining prices and yields based on factors like cash flows and risk.
• 💼 Markets are categorized into short-term (money markets) and long-term (capital markets) based on the maturity of traded instruments.
• 💵 Short-term markets include instruments like call money, Treasury bills, and commercial paper, with maturities up to one year.
• 🏢 Long-term markets involve government securities, corporate bonds, and equities, with maturities from one year to perpetual.
• 🌐 Specialized markets include foreign exchange, derivatives, private equity, and mortgage markets.
• 🔄 Financial markets are dynamic, influenced by macroeconomic factors, investor sentiment, and issuer risk profiles.
• 🌐 The distinction between short-term and long-term markets is based on the maturity of the instruments, not the holding period of the investor.
• 💹 Equity prices, interest yields, and exchange rates are driven by both fundamental theories and market forces.
• 📚 Upcoming sessions will delve into the nature, composition, and structure of money and capital markets, and how they operate.

Q & A

What are financial markets?

Financial markets are real and virtual marketplaces where financial instruments of varying maturities are traded, including instruments that can be bought and sold such as overnight instruments, short-term instruments, long-term instruments, and perpetual instruments like equity shares.

What is price discovery in financial markets?

Price discovery refers to the process by which markets determine prices and yields for financial instruments based on factors like projected cash flows, risk profile of the issuer, interest rate expectations, liquidity, and news flows in a free and transparent manner.

How are financial markets classified based on the maturity of instruments?

Financial markets are broadly classified into short-term markets (money markets) and long-term markets (capital markets) based on the maturity of the instruments traded, ranging from overnight to a maximum of 180 days in the short term and from one year to perpetuity in the long term.

What are some examples of instruments traded in short-term markets?

Short-term markets, also known as money markets, trade instruments such as call money, Fed Funds, Treasury bills, commercial paper, and certificates of deposits.

What is the significance of long-term markets in financial markets?

Long-term markets, also known as capital markets, primarily include the government securities market, the equity stock market, and the corporate bond market. They facilitate the raising of financial resources used by firms for long-term capital investments and by governments for fiscal deficits and long-term infrastructure investments.

What are specialized financial markets?

Specialized financial markets include the foreign exchange market, the derivatives market, the private equity market, and the mortgage market. These markets deal with specific types of financial instruments and transactions, such as currency trading, complex financial derivatives, private investments, and real estate loans.

What is the role of the private equity market?

The private equity market involves institutional investors and high net worth individuals investing in private equity funds (PE funds), which in turn invest in the equity and sometimes debt of listed and unlisted companies. These investments are typically held for a long period and sold for profit when the firm's financial performance improves.

How does the mortgage market function in the context of financial markets?

In the mortgage market, individuals and organizations take loans to buy property. These loans are then packaged by lenders as mortgage-backed securities (MBS) and sold to financial institutions, which trade these securities.

What factors drive the prices and yields in financial markets?

Equity share prices, yields on interest-bearing instruments, and exchange rates are driven by underlying theories of finance and market forces such as global and country-specific macroeconomic factors, investor sentiments and expectations, risk profiles of issuers, and news flows.

How does the maturity of an instrument differ from the holding period by an investor?

The maturity of an instrument refers to the time until its final payment is due, while the holding period is the duration for which an investor holds the instrument before selling it. An investor can buy a long-term instrument, like a 15-year corporate bond, and sell it after a short period, making a short-term trade.

Outlines

00:00

📈 Introduction to Financial Markets

This paragraph introduces the third week of a course focusing on financial markets. It explains that financial markets are places where financial instruments of varying maturities are traded, including short-term instruments like Treasury bills and long-term instruments like government securities and corporate bonds. The paragraph also discusses the concept of price discovery, where markets determine the prices and yields based on factors such as cash flows, risk, and news. It distinguishes between short-term markets (money markets) and long-term markets (capital markets), and mentions specialized markets like foreign exchange, derivatives, private equity, and mortgage markets. The paragraph sets the stage for future discussions on the structure and dynamics of these markets.

05:03

📊 Maturity and Holding Period in Financial Markets

Paragraph two delves into the concept of maturity and holding period in financial markets. It clarifies that 'short-term' and 'long-term' refer to the maturity of the instruments, not the holding period by investors. For instance, an investor might buy a long-term corporate bond and sell it after a short period, making a trading profit or loss. The focus of future videos will be on understanding the nature, composition, and structure of both short-term (money markets) and long-term (capital markets), and how various financial metrics like equity prices, yields, and exchange rates are influenced by financial theories and market forces, including macroeconomic factors, investor sentiments, and issuer risk profiles.

Keywords

💡Financial Markets

Financial markets are platforms where financial instruments are traded. They can be physical or virtual and are essential for price discovery, where market forces determine the prices of various financial instruments. In the video, financial markets are categorized into short-term and long-term markets, each with specific instruments traded, reflecting the video's focus on the structure and function of these markets.

💡Maturities

Maturities refer to the time until a financial instrument becomes due for payment. The video explains that financial markets deal with instruments of varying maturities, from overnight to up to 30 years or even perpetual for some instruments like equity shares. This concept is central to understanding the different types of markets and instruments discussed in the video.

💡Price Discovery

Price discovery is the process by which the market determines the price of a financial instrument based on supply and demand. The video emphasizes that financial markets facilitate price discovery, which is crucial for understanding how market prices are set for instruments like government securities and equity shares.

💡Money Markets

Money markets are short-term financial markets where instruments with maturities ranging from overnight to one year are traded. The video mentions call money markets, Fed Funds, Treasury bills, and commercial paper as examples. These markets are significant for liquidity management and short-term investment.

💡Capital Markets

Capital markets are long-term financial markets where instruments with maturities over one year are traded. The video discusses government securities, corporate bonds, and equity shares as examples. These markets are vital for funding long-term investments and capital requirements for businesses and governments.

💡Interest Rate Expectations

Interest rate expectations are predictions about future movements in interest rates, which influence the pricing of financial instruments. The video suggests that these expectations, along with other factors like liquidity and risk profile, affect the financial markets, making this concept important for understanding market dynamics.

💡Derivatives Market

The derivatives market is a specialized financial market where complex financial instruments, such as options and futures, are traded. These instruments are used for hedging risks or speculating on movements in interest rates, exchange rates, etc. The video's mention of this market highlights the diversity of financial instruments and strategies available to market participants.

💡Private Equity Market

The private equity market involves investments by institutional investors and high net worth individuals in private equity funds, which in turn invest in companies, often for a significant period. The video notes that these investments are held for long periods, indicating the long-term nature of this market and its focus on value creation.

💡Mortgage-Backed Securities (MBS)

Mortgage-backed securities are financial instruments created when loans for purchasing real estate are bundled and sold to investors. The video explains that these securities are traded in the mortgage market, illustrating the process of securitization and the role of financial innovation in expanding investment opportunities.

💡Investor Sentiments and Expectations

Investor sentiments and expectations refer to the collective mood and outlook of investors, which can influence market behavior and prices. The video suggests that these factors, along with macroeconomic conditions and risk profiles, drive financial markets, emphasizing the psychological aspect of market movements.

💡Global and Country-Specific Macroeconomic Factors

Macroeconomic factors are economic indicators and events that affect the overall economy, such as GDP growth, inflation, and employment rates. The video mentions that these factors, both globally and specific to a country, impact financial markets, highlighting the interplay between the economy and financial markets.

Highlights

Introduction to week three focusing on financial markets aspects of the course.

Definition of financial markets as places where financial instruments are traded.

Instruments traded include overnight, short-term, long-term, and perpetual instruments.

Financial markets facilitate price discovery based on projected cash flows and risk profile.

Markets are classified into short term (money markets) and long term (capital markets).

Short term markets include call money, Treasury bills, and commercial paper markets.

Long term markets primarily refer to government securities, equity stock, and corporate bond markets.

Specialized markets include foreign exchange, derivatives, private equity, and mortgages.

Private equity market involves investments in private equity funds by institutional investors and high net worth individuals.

Mortgage market involves loans for property, which are packaged as mortgage-backed securities.

The distinction between short term and long term markets is based on the maturity of instruments, not holding period.

Investors can trade long term instruments in a short period, affecting the market dynamics.

Upcoming videos will explore the nature and composition of money and capital markets.

Discussion on the structure of financial markets and the instruments they trade.

Analysis of factors driving equity share prices, yields, and exchange rates.

Emphasis on the influence of macroeconomic factors, investor sentiments, and risk profiles on financial markets.

Transcripts

hi welcome to week three of this course

you will recall in the first two weeks

we looked at the banking aspects of this

course from here on we would be looking

at the financial markets aspects of the

course financial markets are basically

markets both real and virtual where

financial instruments of varying

maturities are traded by that I mean

these instruments can be bought and sold

instruments traded in the financial

markets include overnight instruments

such as coal money and Fed Funds

short-term instruments with maturities

up to one year such as Treasury bills

commercial paper etc long-term

instruments with maturities up to 30

years such as government securities

corporate bonds and so on and last but

not the least perpetual instruments such

as equity shares financial markets

facilitate price discovery and by that

we mean markets determine prices and

yields for interest bearing instruments

price for equity shares etc based on

factors such as projected cash flows and

risk profile of the issuer interest rate

expectations liquidity news flows etc in

a free and transparent manner across

markets they are broadly classified into

short term markets and long term markets

short term markets include call money

markets or fed funds as it is known in

the United States Treasury bills market

the repo market bankers acceptance or

commercial bills market as it is known

in some countries commercial paper

market certificate of deposits markets

and so on there one thing important

about the short term markets is the

maturities for instruments traded in the

short term market vary from overnight to

a maximum of 180 days

in some cases up to one year these

markets almost universally or also

commonly referred to as money markets

the long-term market on the other hand

primarily refers to the government

securities market the equity stock

market and the corporate bond market in

the long term markets the maturities for

instruments traded vary from one year to

perpetuate in other words they don't

have a maturity date these markets are

commonly referred to as capital markets

because financial resources raised in

these markets are often used by firms to

fund their long term capital investments

and by governments to fund their fiscal

deficit as well as long term investments

in infrastructure development so on and

so forth in addition to the markets that

we saw there are some very specialized

markets these include the foreign

exchange market or the currency market

where different currencies are bought

and sold the derivatives market where

more complex instruments such as options

and futures are traded either to hedge

or to speculate on the movement and

interest rates exchange rates etc then

there is the private equity market which

is very recent in origin by the way when

compared to the other markets this is

where institutional investors and high

net worth individuals invest in private

equity funds popularly referred to as PE

funds these P funds in turn invest in

the equity shares and sometimes in the

debt of listed and unlisted companies

such investments are generally held for

a long period 5 years or more and sold

off for a profit once the financial

performance and consequently the value

of the firm or the share price

of the investing improves and finally we

have the mortgages market where

individuals and organizations take loans

to buy property ie

real estate these loans are then

packaged together by the lenders as

mortgage backed securities MBS for short

and sold to financial institutions who

in turn trade in these securities do

bear in mind that short term or long

term in the context of financial markets

and instruments refers to the maturity

period of the instruments issued they do

not refer to the holding period by the

investor for example an investor could

buy a corporate bond of 15 years

maturity which is a long term instrument

and sell it at the end of 90 days ie in

a short period and he books his trading

profit or loss in this case the

instrument is a long term and hence part

of the long term market or capital

markets but the holding period is in the

short-term in several videos to follow

we will look at the nature and

composition of each of these markets

both short term ie money markets and

long term ie capital markets we will

look at the structure of each of these

markets and the instruments traded in

these markets we will also look at how

equity share prices yields on interest

bearing instruments exchange rate

between currencies etc are driven both

by the underlying well rooted theories

of finance and market forces such as

global and country specific

macroeconomic factors investor

sentiments and expectations risk profile

of the issuers news flows etc all of

which are dynamic and vary with time