Financial Market Transaction - Research Paper Example

Financial Market Transaction Name: University affiliation TABLE OF CONTENT: INTRODUCTION……………………………………………………………………………3 MARKET’S PROFILE………………………………………………………………………………………3 Money Market……………………………………………………………………………………3 Capital Market……………………………………………………………………………………4 LITERATURE REVIEW………………………………………………………………………………………4 Financial Markets’ Instruments……………………………………………………………………………4-7 Financial Markets’ participants………………………………………………………………………………7 Subsidizing Financial Markets’ Instruments……………………………………………………………………………8 Risks in Financial Markets’ Instruments………………………………………………………………………………9 METHODOLOGY………………………………………………………………………………9 ANALYSIS……………………………………………………………………………………10 Executing and reporting financial market transactions…………………………………………………………………………………….11 CONCLUSION…………………………………………………………………………………13 Implications of Financial Markets……………………………………………………………………………………………13 Significance of Financial Markets………………………………………………………………………………………………14 REFERENCE LISTS………………………………………………………………………………………………………………………………….16 Financial Market Transaction INTRODUCTION Capital and Money markets are financial markets which actually shapes the performance and perpetuation of a company or a firm. A financial market is a market where purchasers and sellers converge to exchange financial assets and commodities like stockpiles, bonds, currencies as well as derivatives. Although there are many financial markets, the most common ones are capital and money markets. MARKET’S PROFILE Money Market Money markets are financial transaction procedures that are mainly implemented for a short duration especially for assets for a maximum of one year and at least a day. This kind of market is actually accessed in conjunction with the capital markets. Mostly, the financial instruments which are used in money markets include the treasury bills, bankers’ acceptances, bills exchange, repurchase agreements, deposits and municipal notes. These instruments actually bear varying maturities, currencies, credit risks as well as formation therefore, is used to distribute exposure. Money markets are termed to be markets which raise short termed finances, especially loans which are supposed to run for duration of less than a year. The finance that is borrowed from money markets are majorly used for common working expenses, which actually covers the periods of illiquidity. Money markets constitutes of financial organizations and merchants in money as well as credit who can borrow and lend out the finances. Money markets actually exchange for a short period duration of financial instruments generally known as paper, unlike the capital market which trades in long-term financing abounding by bonds and equity. The foundation of the money market comprises of interbank loan provision that is banks borrowing and loaning for each other via profitable paper, repurchase contracts and such like instruments. Capital Market The capital market is the financial market for the provision, issuing, granting and transacting of long-term securities. For this instance, in order for the scurrility to be recognized as a instrument for the capital market it should reach maturity of beyond 3 years. Therefore, capital markets are the financial markets which involve buying as well as selling equity and debt securities. However, during the time of exchange and trading process of the capital market instruments, the securities are mainly categorized into either short-term, middle-term or long-term basing on its maturity duration. For instance, when the maturity term is between the duration of 5-10 years, the security is said to be middle-term capital market instrument while where the duration exceeds 10 years, the capital market instrument is categorized as a long-term capital market instrument. Capital market is divided into two spheres; the primary and the secondary markets. The primary market is the one which involves the initial issuing of securities. It is more often done through a public or private issuing and placement respectively. The secondary market on the other hand is the market which involves the application and trading of securities which have once been improvised. The secondary market plays a fundamental role on the issues which take place in primary market simply because the market charges and averages are determined in the secondary market. Issues under primary market, especially at below market tempo actually resolute in the secondary market, would in most cases be issued at money off on the ostensible value of the capital market instrument. In case the volumes exchanged in the secondary market are premium, it is an indicator of the excess long-term currency availability in the market therefore; it could be a golden chance to supply new securities to the market via primary market. Consequently, for instance let say the liquidity in the secondary market is greater, therefore, the opportunities are; new issues will be more and more successful compared to market that is illiquid. Literature Review for the Financial Markets Financial Market Instruments Money Market Instruments Money market instruments supply the equipment by which the company can operate in the money market. Money markets instruments complement short run prerequisites of the borrowers as well provides liquidity to the lenders. There are most common money market instruments which are used in the real life. There are several instruments which are used in money market. These include: 1. Certificate of deposit: this are time set down which are generally given to customers by commercial institutions such as banks, thrift organizations along with credit unions. 2. Repurchase agreements: it’s a short-run loan which is within q duration of two weeks and below but mostly claims a day. It is agreed by advertising securities to a shareholder accompanied by a contract of purchasing these securities at a fixed charge as well as a fixed date. 3. Commercial paper: it is a short termed promissory draft given by an organization at a discount to counter value and trade in at a face worth. 4. Municipal notes: these are Dubai short run notes provided by the municipalities in expectation of tax receipts as well as other revenues. 5. Treasury bills: these are short-term money owing and liability of a state government that are provided to establish in 3-12 months. 6. Money Funds: it is a pooled short-maturity, premium investment which specifically procures money market securities on behalf of vend or organizational depositors. Capital Market Securities/instruments Capital market instruments unlike that of money market are physical certificates where the issuer of these securities preserves the registry of the owners. This register helps the borrower to repay the interest back to the owner of the security (the lender) on the exact date specified on the interest imbursement dates which are normally indicated on the certification document. For instance, when the security is traded to a brand owner in the secondary market, the buyer in this case is therefore registered to be the new owner during the payment date of the business deal. There are some differing features and characteristics which distinguish different instrument issued and exchanged in the capital market. They include: Term of maturity Interest charge paid on the so-called assessment Interest compensation date Nominal amount in issue The examples of capital market instrument include: 1. Stocks The stock market plays a significant role by enabling the companies to generate finances for their enterprises as well as the investors to empower by depositing the securities. The participants in stock markets are institutions but not individuals. Stock market operates under the principle of institutionalization. Stock market is either real or virtuous. Real stock market (open outcry) takes place in physical demarcation of location where the stock exchange occurs on a trading floor. Virtuous stock market, the exchange is conducted online by buyers and sellers who are interconnected to one another by networked computers. 2. Bond Market The bond market is the pecuniary market where trading of debt instruments takes place. Bond market serves as a medium of collecting finances for public division companies, government and conglomerates. The common bond market contributors include; government, institutional depositors, traders and private shareholders. As a result of this fact, there are 5 types of bond markets. These are: a) Corporate Bond Market b) Municipal Bond Market c) Government and Agency Bond Market d) Funding Bond Market e) Mortgage Backed and Collateralized Debt Obligation Bond Market. 3. Debentures This is an elongated term liability securities which is not backed up by Collaterals. Instead, they are unsecure liabilities backed by debt merit and repute built by the debenture supplier and acknowledged by a contract known as indenture. 4. Forex Market This is an international foreign exchange market where global currencies are exchanged and traded. Has no central authoritative power (decentralized) therefore is regarded as an “Over The Counter” market (OTC). OTC gives chance for the participants to purchase, sell, trade and hypothesize on currencies. The key determinant of the trade rate is the money power of the currencies. The major participants in Forex Markets are: a) Banks b) Forex fixing c) Central Banks d) Retail forex traders e) Commercial companies f) Money transfer companies g) Investment management firms Financial Markets’ participants Participants of Money Market The firms involved in the money market include the following: Programmed commercial banks. Non-scheduled commercial banks. Foreign banks Corporative banks Discount and Finance House of Dubai (DFHD) Securities Training Corporation of Dubai (STCD) Participants of Capital Market Capital market comprises of abundant participants such as: Individual investors Institutional depositors e.g. pension finances and shared funds Metropolises and Government Companies and Associations Banks and Financial firms Suppliers of the capital usually require optimum potential interest at the lowly probable risk. On the other hand, the borrowers or rather the users of the capital need to lift up the capital at a lowly significant cost. Subsidizing Financial Markets’ Instruments Subsidizing Money Market Money market is largely used by diverse assortment of contributors’ right from the company level who raises the money through selling of commercial paper to the shareholder who is purchasing certificate of deposits as an appropriate and effective place to save money in the short duration of time. Money market is actually the best and the safest place to store money outstanding the extreme liquid temperament of the securities as well as those of diminutive maturities. Subsidizing Capital Market Capital markets mostly channel investments and reserves between the lenders of capital for example; the retail financier and organizational shareholder and the people who use the capital lend i.e. the borrowers such as businesses, government and persons. Capital markets include the primary markets i.e. places where the brand stocks and bonds issues are traded to depositors as well as secondary markets where trading of already thriving securities take place. Apart from the equity and debt, capital market is subdivided into primary and secondary categories of markets. In primary markets, the issuing of the bonds and stock is directed traded from the company (the lender) to the users such as the investors, businesses, government and any other firm. In secondary capital market, the borrowers such as the investment banks and other organization, private investors sell their equity and debt instrument again to investors. This process takes place on the bond market or stock market. Risks in Financial Markets’ Instruments Risks in Money Market Despite the fact that short-term securities borrowed on the money market involve less or minimal risks compared to long-term debt, they are exceptional to risk. As a matter of fact, banks sometimes do fail, as well as the fortunes of an organization can be altered at a high speed. Actually, the low risk is dependent with the lender selectivity. The lender who gives finances with an instant maturities for example by tomorrow, is not susceptible to spend much time to meet the requirements of borrowers and enables him to choose only the blue-chip borrowers. Borrowers who have few recommendations have difficulty in achieving money from money market unless via a well made fund. Risks in Capital Market For instance, bonds are commonly precise to private issues thus they lack liquidity. Bond markets are mostly decentralized and in contrast to stock, there is no common substitute for the bond market. The bond market is less unpredictable in nature compared to stock market hence the shareholders buy the bond coupon then they keep it until it matures. Because the risk which is associated with bond deposition is low, consequently, its interest return is also low. The unpredictable alterations in capital market are the major threat. The interest charges and worth of capital market has an inverse relationship. When the rate of return is high, the capital value goes down significantly while the new issues shell out a greater yield and the vice versa is true. The interest rise and fall mainly is dependent on the monetary and capital market. METHODOOGY For the assessment of this report, the comparison between the two major financial markets: capital and money markets were put into consideration. The fundamental ideal for such assessment comparison was aimed at performing a technical evaluation for the two financial markets and get to know which one is the best. In the research, we based our studies in United Arab Emirates more specifically to Dubai. ANALYSIS OF THE FINANCIAL MARKETS Capital Market Analysis Value determination of bonds Zero-rated coupon bonds The simplest way of getting to know the exchange worth of the assets is actually through expression of the insignificant assessment of the coupon as a percentage of the insignificant assessment adding the capitulate that the financier aspire to get on his savings over the time, for example: TV = NV/(1+i)^n                 (for clarity  x^n = x to the power of n) TV     - trading value NV     - insignificant value i         -  capitulate in expressions of rate (for the business) n        -  times left to liberation date (To be articulated in the similar time zones as capitulate charge times) Example: An investor needs to get 12% interest on his savings and the outstanding period to liberation is 2 years, therefore the sum total that he would be enthusiastic to disburse for a 0-rated coupon with a insignificant worth of R2 million would be: TV = R2 000 000/(1+0.12)^2 TV = R1 590 000 Money Market Analysis Sometimes the outcomes for the short-term markdown instrument are annualized with no compounding of the interest. This kind of uncompounded interest is known as annual interest rate mostly referred to as the bond equivalent yield (BEY). Mostly, the BEY is used when calculating the interest charge in money market instruments. The formula is simplified as below: BEY=interest rate per term x No. of terms per annum. The formula of the BEY to the face value, price paid and days remaining to maturity is as shown Interest Rate Per Term Number of Terms per Year BEY = Face Value - Price Paid Price Paid × Actual Number of Days in Year Days Till Maturity For example: A four-week Treasury bill having a face value of $1,000 for $996.50, calculate the BEY, presumptuous it is not a leap year. ($1,000-$996.50)/$996.50 × 365/28 = 4.58% (rounded) Therefore to evaluate the discounted money market instrument compounded rate of interest: 1. Average the equivalence value by the discounted price. 2. Power the product by the number of terms in a year, and then deduct 1. For instance when a 4-week Treasury bill is bought for $996.50 and receives $1,000 4 weeks afterward, the valuable yearly compounded interest rate gotten is: Solution: $1,000/$996.50 = 1.0035 (rounded) Since there are 13 4-week periods in a year, this T-bill rate compounded 13 times would equal: (1.0035)13 - 1 = 1.046 - 1 = 4.6% (rounded) Abu Dhabi Securities Exchange Top Gainers COMPANY   PRICE CHANGE % CHANGE COMM BK INTL 0.21 15.00 % RAK POULTRY FEED 0.31 14.29 % AD NATL ENERGY 0.04 9.09 % AD ISLAMIC BK 0.13 3.45 % Data delayed at least 15 minutes Top Losers COMPANY   PRICE CHANGE % CHANGE DANA GAS -0.01 -2.04 % SUDATEL -0.01 -1.89 % RAK CERAMICS -0.05 -1.47 % WAHA CAPITAL -0.03 -1.39 % Data delayed at least 15 minutes Top of Form Bottom of Form CONCLUSION AND IMPLICATIONS OF FINANCIAL MARKETS Significance of Financial Markets Instruments In United Arab Emirates, the money markets include the usage of trading firms such as bankers’ acceptances, retailers and organizational money markets finances, banks such as central bank, monetary management activities and merchant banks. Especially in Dubai and Abu Dhabi, money markets are of great importance. It serves the following purposes: to give funds to traders, provide funds for industries, and invest advantageously, to boost commercial banks’ independence and finally to enhance smooth running of central bank policies. a. Financing Trade It is the responsibility of money markets to offer funds and finances to the both domestic and international trade. These funds are presented as commercial finances through bills of exchange bargain basement priced by the bill market. More specifically, acceptance houses as well as discount markets aid in providing funds for overseas trade. b. Financing Industry There are two fundamental ways that money markets contribute to the establishment and advancement of industry: 1. Money market enables the industries to get short –term finances to complete the working capital prerequisites via the organization of finance bills, money-making papers etc 2. Industries commonly require long-term finances in form of loan, which are facilitated by capital market. On the other hand, the capital market is dependent on the temperament of and the circumstances within the money market. For instance, the short-term significance charges of the money markets affect the long term importance rates of the capital markets. Consequently, money market in one way or the other lends a hand for the industries via its linkage with an effect on long term capital market. c. Profitable Investment The money markets enlighten the commercial banks on how to utilize their overindulgence treasury in a lucrative investment. The key purpose of commercial banks is to ensure gain from the reserves and to uphold liquidity to reach the tentative cash requirement of the shareholders. Therefore, in money markets, the surplus deposits of the money-making banks are converted in almost money assets; temporary bills trade, which are liquid and easily convertible to cash. Therefore, the commercial banks gain interests without much forfeiting the liquidity. d. Independence of Commercial Bank When the money markets develop to its fullest, stabilizes commercial banks hence making it self-reliable. In case of emergency whereby the commercial bank run short of funds, they do not necessarily lend from central bank at a higher charge but rather they can congregate their prerequisites by summoning up their previous short-termed loan from the money market. This will actually help the commercial banks from lending money which sometimes leads to bankruptcy. e. Lubrication of Central Bank Even though the central bank can thrive well with absence of money market, this kind of financial instrument is necessary to smoothen the running and more so improves the competence of the central bank. Bearing this in mind, therefore, money market support central bank in the following ways: 1. Short-term profit charges acts as a pointer to the monetary and banking terms and regulations. In so doing, it nevertheless guides the central bank to take on the most convenient banking approach. 2. Responsive and incorporated money markets aid the central bank to gain fast and extensive authority on the mini markets, hence leading to effectual policy realization. From the analysis made, it is healthy to conclude that both money and capital markets are the key indicators of the financial performance of any country. Reference Lists Fabozzi, F., Mann, S. & Choudhry, M. (2002). The global money markets. Hoboken, N.J: J. Wiley. Palicka, J. (2012). Fusion analysis merging fundamental, technical, behavioral, and quantitative analysis for risk-adjusted excess returns. New York: McGraw-Hill. Choudhry, M. & Beehler, B. (2011). The Money Markets Handbook a Practitioner's Guide. Chichester: John Wiley & Sons. Levinson, Marc (2003.) Guide to Financial Markets. Bloomberg Press, Madura, Jeff (2006). Financial Markets and Instruments. Thomson South-Western. Choudhry, M. (2001). The bond and money markets strategy, trading, analysis. Oxford Boston: Butterworth-Heinemann. cks, R. (1992). Money, markets, and trade in early Southeast Asia : the development of indigenous monetary systems to AD 1400. Ithaca, N.Y: Southeast Asia Program, Cornell University. Read More