Ch visi En sabl

1 LEONARDO DA VINCI Transfer of Innovation VALDON DAR KUVIEN Vytautas Magnus University financial Markets Leonardo da Vinci programme project Development and Approbation of Applied Courses Based on the Transfer of Teaching Innovations in Finance and Management for Further Education of Entrepreneurs and Specialists in Latvia, Lithuania and Bulgaria 2010 2 TABLE OF CONTENTS Table of 1. financial MARKETS: STRUCTURE AND ROLE IN THE financial financial system structure and financial markets and their economic financial intermediaries and their financial markets financial Classification of financial financial market Key Further Review questions and 2.

2 INTEREST RATES DETERMINATION AND Interest rate The rate of Interest rate theories: loanable funds Interest rate theories: liquidity preference The structure of interest Term structure of interest Theories of term structure of interest Expectations Liquidity premium Market segmentation The preferred habitat Forward interest rates and yield Key Further Relevant Review questions and 3. MONEY Money market purpose and The role of money Money market Money market Money market Treasury bills and other government The interbank market Commercial Certificates of Repurchase International money market Money market interest rates and Key 3 Further Relevant Review questions and 4.

3 DEBT Debt market instrument Bond Bond market Bond market Bond Discounted Bond duration and Bond price Behavior of Macaulay s Bond Bond Inverse floaters and floating rate Callable Convertible Key Further Review questions and 5. EQUITY Equity Common Preferred Private Global shares and American Depository Receipts (ADR)..78 Primary equity Primary public Secondary equity Organized Over-the-counter (OTC) Electronic stock Secondary equity market Cash vs forward Continuous markets and auction Order-driven markets and quote-driven Hybrid Equity market Bid-ask Placing Margin Short Stock trading Equity market Stock Stock market Stock market Transaction execution Stock market 4 Stock Fundamental Technical Processes of consolidation of stock Key Further Relevant Review questions and 6.

4 DERIVATIVES Hedging against Description of derivatives Forward and futures Principles of forward and futures Forward and futures Use of forwards and Futures contracts: stock index Contracts for difference (CFD)..130 Options Components of the Option Determinants of the Option Option pricing Mixed strategies in options Key Review questions and 5 INTRODUCTION Motivation for developing the course Research by the members of the project consortium Employers Confederation of Latvia and Bulgarian Chamber of Commerce and Industry indicated the need for further education courses in the field of finance and managerial decision making.

5 Innovative content of the course The course has been developed to include the following innovative content: Key concepts of financial markets, which are explained from an applied perspective, including with examples and problems from current financial markets practices from EU integration and development perspective; Analytical techniques to be applied in financial markets provide with understanding and tools to decision makers in the firm; Applied exercises, which cover topics such as money market, debt market, equity market instruments, as well as decision making rules in the financial markets; Summaries are provided at the end of every chapter, which aid revision and control of knowledge acquisition during self-study; Innovative teaching methods of the course The course is developed to utilise the following innovative teaching methods: Availability on the electronic platform with interactive learning and interactive evaluation methods; Active use of case studies and participant centred learning; Availability in modular form.

6 Utilising two forms of learning - self-study and tutorial consultations; Availability in several languages simultaneously. Target audience for the course The target audience are: entrepreneurs, finance and management specialists from Latvia, Lithuania and Bulgaria and, in the longer term, similar groups in any other European country. The course assumes little prior applied knowledge in the area of financial and operation analysis. The course is intended for 32 academic hours (2 credit points). Course objective The objective of the course is to provide entrepreneurs with the knowledge in the area of financial markets, specific financial market instruments, behavior in order to enable them to understand the financial markets processes and their factors, and to make successfully financial decisions on the individual as well as company level.

7 6 1. financial MARKETS: STRUCTURE AND ROLE IN THE financial system Mini contents The structure of a financial system Functions of a financial system The structure and key features of financial markets The key features of financial intermediaries Major financial market participants financial system structure and functions The financial system plays the key role in the economy by stimulating economic growth, influencing economic performance of the actors, affecting economic welfare. This is achieved by financial infrastructure, in which entities with funds allocate those funds to those who have potentially more productive ways to invest those funds.

8 A financial system makes it possible a more efficient transfer of funds. As one party of the transaction may possess superior information than the other party, it can lead to the information asymmetry problem and inefficient allocation of financial resources. By overcoming the information asymmetry problem the financial system facilitates balance between those with funds to invest and those needing funds. According to the structural approach, the financial system of an economy consists of three main components: 1) financial markets; 2) financial intermediaries (institutions); 3) financial regulators.

9 Each of the components plays a specific role in the economy. According to the functional approach, financial markets facilitate the flow of funds in order to finance investments by corporations, governments and individuals. financial institutions are the key players in the financial markets as they perform the function of intermediation and thus determine the flow of funds. The financial regulators perform the role of monitoring and regulating the participants in the financial system . Figure 1. The structure of financial system Firms Stock market Bond market Short term fixed securities market Banking sector Governments 7 financial markets studies, based on capital market theory, focus on the financial system , the structure of interest rates, and the pricing of financial assets.

10 An asset is any resource that is expected to provide future benefits, and thus possesses economic value. Assets are divided into two categories: tangible assets with physical properties and intangible assets. An intangible asset represents a legal claim to some future economic benefits. The value of an intangible asset bears no relation to the form, physical or otherwise, in which the claims are recorded. financial assets, often called financial instruments, are intangible assets, which are expected to provide future benefits in the form of a claim to future cash. Some financial instruments are called securities and generally include stocks and bonds.