Financial Markets and Institutions - Lecture 04

all right next thing is financial institution so what I did so far was the survey of financial instruments we now need financial institutions okay number one you studied how shortly for tom is in commercial banks commercial banks are financial institutions which make commercial loans and accept deposit that's it accept deposit usually we say accept demand deposit number two threats let's see what we have these will be number one to a in the form of savings Association associations so they'll be providing some sort of savings folks relative flex savings fast to say thanks again notice we've got a commercial bank and here's a savings man here Bank has the meaning of accepting deposits and a savings bank means you accept deposit usually some sort of saving and making some other loans meaning making non-commercial laws making farming loans they could be making some consumables whatever something else you did making commercials now they're not the savings man they are a commercial next one credit union but in a financial institution a group of people with common characteristic it may be for retirees could be credit union of Teachers Credit Union of policemen credit union of some you know some kind of a school some kind of a job some kind of a profession and then we call them these depositors are not departed their owners of the credit union and the credit union will make loans to its phone owners to its own we'll just call them members so all teachers will put the money in the credit union and then the credit union will land back to the police or make loans to the teachers well assume maybe have two separate right so okay meaning next time number three insurance we'll be a financial institution which provides insurance contracts and provides different types of insurance it could be auto insurance meaning for cars it could be auto insurance for motorcycles with insurance life insurance meaning in the case of death and so on that's one for a the : in general securities firms okay that's a generic term there will be two times investment bank investment bank is a financial institution which we say intermediate or support or which let's say what just intermediates issuance of financial securities so they help businesses corporations they help other others to issue security as they are an intern okay so if that's the back is lot of thing they don't accept deposits investment back is nothing to do it's a name that was designed to mislead me back in your old days which is called a securities firm because it's a business firm that will issue securities the key is that they operate the investment that operates on the primary market the market where securities are issued bonds are raised for B will be brokerages will be a financial institution that operates on the secondary markets secondary financial markets in other words the market for already existing securities they help people buy and sell existing securities they help and provide we call liquidity so the function of these is liquidity if you own or a chair they'll help you sell it here if you need money they'll help you get does this process of raising is called funneling so the primary function of investment and system funding under primary markets and for brokerages is providing liquidity on the secondary markets finance companies number five yes yes but the mission is simply payments for a certain service usually is a payment rate sales says whenever you make a sale the compensation for making the sale is called a commission okay so each firm will have all commission okay so whatever they charge you go guys give you over to lates for today okay finance they will be providing loans sometimes consumer loans okay the main difference they can make consumer loans they can make business loans they can make commercial loans but they're not a commercial that's because they can not accept deposits the key differences accepting deposits now these banks will accept deposits but will not be making commercial loans so commercial bank will accept deposits may close some will accept deposits but not make commercial the heirs will win commercial it is a financial institutions that specializes in investing in securities for return to the investor they will usually be set there will be financing by selling shares so if it's a mutual fund when you buy the mutual you buy ownership in the neutral and together share if the mutual fund makes ten percent positive return you get 10 percent positivity and minus costs but if the one who loses 20% you lose 20 percent and I what you take all the profits or all the losses of the original month minus the costs of management whatever you gotta pay we call it management fee okay you made mutual funds are highly regulated they may not borrow mine they are highly regulated they can not invest in commodities in other words they are told what they can do what they cannot do in they're supposed to be relatively safe a special type of a fund investment fund is called a hedge fund and hedge fund is an unregulated funders it doesn't mean it hedges it doesn't mean it lowers risk a lot of times hedge funds are speculative they take bigger risks hoping for higher returns a lot of times they take bigger losses there is no engine in a hedgehog back in the old days some of those unregulated hedge funds used certainly hedging strategies okay but that's not the characteristic of a hedgehog the characteristic is that his on regulated they can invest in gold in the oil in copper in Vice they can invest in current says they can invest in commodities they can invest in risky bonds recall these junk bonds they can invest in anything they can also borrow money and to to leverage their returns or their losses so hedge funds are a special type of a mutual fund and yet another special type which they give you is a separate and this pension fashion is a money given for retirement is a money which is given to a person after it completes work usually for old age usually after a certain things like 62 but it could be nine could be 65 okay and usually given for life meaning from 62 until you die okay and usually it's a it's the same fixed amount may be adjusted for inflation okay so the tricky part of the pension fund is that you don't you know how many people you have you don't know how many will with 400 so you don't know if you're gonna be paying five years or 15 years or maybe nothing at all because the person dies so here you don't know the so these are the primary Seventeen's financial institutions and there may be hours they may be don't have to be all financial institutions they may be a little different from country to country but you need to understand the basic characteristics of those questions again they go out well that's what they do pension funds invest first and foremost in bonds boss supposedly to be relatively low risk so pension funds will you he'll be expected to invest in relatively low risk relatively long term security so they'll be investing in 20 and 30-year bonds they'll be investing in a wider range of other bonds supposedly lower risk they'll be investing in relatively safer stocks usually non-latin ominous speculative stocks and they'll be investing also in a lot of real estate of all real estate like buildings in they'll be collecting rent on those so the characteristic of the pension fund first its investment it makes investment the second characteristic is that it they are selecting low risk and third they are selective lung maturity 10-year 20-year 30-year okay long maturities and of course similar to mutual funds they are highly regulated the government wants to make sure that the pension funds of people don't disappear they don't get lost so they will be high ready okay so these are the main characteristics up to here any questions related to what we're doing in financial economics and the financial system any questions exchange of etf okay okay we can do that number eight is very tricky very tricky e t f stands for an exchange-traded fund he has two meanings just like money market mutual fund an exchange-traded fund is technically a funnel it's an institution financial institution and it is also a financial instrument so as a financial institution it is an institution that invests in very specific predetermined securities for example they invest only in oil confidence so it's going to be in an oil ETF so it's going to be oil company easier they may be investing in oil commodity it's going to be again oil easier it may be masking in gold it's going to be a gold ETF an exchange-traded fund they invest in gold in their goal is to approximate the price of gold in other words the goal of the ETF is to correlate in price with the underlying assets okay so it's a financial institution it's an instrument or it is the instrument issued by that particular institution it may be the technology ETF was going to be a little financial institution again managed by another financial institution that invests in technology stocks it could be let's say hi you ETF it's gonna be investing in junk bonds we call this high-yield okay and they will be paying out whatever the bonds are paid now it's very important to understand we'll study a lot more in coming weeks that these are technically that their true meaning is that financial derivative it is not another line security which pays for itself skies on that if it's a gold ETF its value is driven based on the price of gold okay but they don't usually hold the gold will not always have to cover all hundred percent if it's technology maybe they own the technology stocks maybe they don't maybe they used other financial derivatives maybe use memory well that's important that's the most important part because he has financial derivatives they introduced an extraordinary amount of risk usually financial derivatives are the cost of a financial collapse financial derivatives will study the law well you usually cause financial instability and usually our triggers for financial crisis okay that's coming down the road so today the biggest disaster coming in the financial system is associated with the rise of ETFs I think somewhat three trillion dollars monstrous amount of money we'll talk about other questions for today hopefully if I can finish very difficult because I got one of the most important topics of finance and the most important topic and - is risk risk so we got what sometimes call them financial risks specialist usually means risks associated with financial institutions but you can also mean risk associated with financial instruments but it can also means risk associated with financial markets so you have more than 100 different types of graces until you understand risk but you don't understand - so finance understanding - requires expert understanding of rest everything else is just so potential risks let's say associated with financial institutions again but it could be with financial instruments such as stocks or bonds or most number one for us rain risk by for that say what's risk risk is a possibility a favorable outcome unfavorable is it something you don't want something you don't like the most common unfavorable outcome in finance is loss okay the favor of is called return profit gain okay unfavorable is lost so interest rate risk is risks associated or risk of loss associated from changes in interest rates sometimes interest rates go up and the price of bond goes down so you have a risk that your bonds will lose okay your real estate may lose so it's simply a risk of taking some kind of a loss that is caused by change in interest rate well it could be the opposite the interest rates can fall in before you are getting seven percent interest on your bond now you can take only one person so before you were collecting if interest rates fall you gotta really invest your own money and when you really invest if you take about lower return so one of the most common types of interest rate risk is called reinvestment risk is the risk that when your investment matures in get your money back when you want to reinvest that money the interest rate will be significantly more number two foreign exchange rates that's probably for you guys it easiest of all to understand foreign exchange risk is the risk of loss because foreign exchange is short for currency for paper money the risk of cost because the exchange rate of a currency or the value of acasi moves against you in other words may you have money okay in the money calls against the dollar so you take a loss on your local money okay or maybe you invested in you grow thinking that the euro is safe in then the price of euro Falls against the dollar or against your own currency okay so somewhere somehow you invested in the currency in that currency falls in there it could be the opposite you borrow in a currency for example you born in Japanese yen the Japanese M goes up and know how to pay any more expensive yet so one way or another the exchange rate was unfavorable you invested you were with a long currency or you were short in another currency and that currency when we said you know you the currency you were long depreciate or the parents you were short appreciate next one is market rest sometimes they call it price risk it's got two completely different meanings which makes it one of the most confusing market risk is associated with the risk with all prices in the stock market moving up or down it's the little tricky I'll try to get to that if I have time but here market risk simply means that the prices of securities you trade go unfavorable so it's the risk of loss from holding or trading particular securities you bought idea in went down you bought to trade Japanese yen in the Japanese yen went down you bought some bond the bond went down to bought a commodity so here this one is meant to be associated with the trade and what's called trading for Antonio it's associated with a trading of a financial institution just bought something and within the bigger do or meet the price went down so you're taking off loss that's the risk you're taking whenever you buy any answer okay whether it's real or financial you're exposed to the risk that it's price will fall credit risk is the risk that Ola might not be paid in time and in full credit risk is associated with credit usually means now if you go with US Treasury bills they have some credit risk that the u.s. government might not hey there is this very well maybe one in a million okay same thing commercial paper there is a credit risk you lend to for 90 days that the company will not be able to pay but the risk is relatively low the risk that they can't pay back same thing applies for devotion we'll see the same thing applies for any instrument has a credit risk as long as there's some lending involved except for stocks stocks do not involve any loan so stocks are the only one that is next this is the risk that when you own a security when you tried to sell it you cannot sell it well and I love it's the risk that you cannot get the full price of a security when you want to sell it or it's the rest that you cannot sell it for a security quickly for all for the price well that's the meaning of liquidity liquidity means ability to sell insecurity quickly for a full price meaning close to market price to its market bed well the risk is you will not be able to sell it if you want when you want that's the rest it happens a lot six now she rest is associated with usually liabilities which are not on the balance sheet but may have to be put on the balance sheet we call the Eastern I'll explain a little more we call these contingent liabilities it is a liability that is not certain it is a liability it may but it may not the best example is with shoeprints you insure this motorcycle for one here maybe the motorcycle gets stolen me it doesn't get stolen you expect it not to desktop maybe health insurance the person may get sick may not get set so contingent liabilities maybe you have to pay well the risk is that you expect not to pay but you will have to pay so you gotta make a payment did not expect this payment it was not a liability on the mountain she it was off balance sheet and you had to it had to become on the round shape so it was contingent contingent liabilities are off the balance sheet when they become real or actual life this you have to put them on damage okay next technology yes you have very many different types of technology but the basic definition is that technology risk is the risk that technology will not work as designed maybe technology will fail your bank and you have many deposits somebody hacks into your system okay it's feels the deposits from you well that could be also called operational risk but sometimes you expect to make by cell certain transactions the computer system is now the database gets somebody hacks your website so somehow you get a disruption or loss of business or a loss of value because you have a technology that's expected supposed to work in a certain way it has been working in that way for a while but then for some reason technology breaks it doesn't work the way you think supposed to work in your awful meter we play with these little iOS right back the iPhones it were small to the tap at sometimes it freezes sometimes sometimes you push the button that happens okay that happens to all sorts of Technology in computer systems let's see yeah I think we've gotta get these two guys separated it's about time right is it about I mean I see you having too much time gonna move which one yeah about six minutes that's good enough right for six minutes it's working right okay operational risk eight operational risk is actually the risk that operations may not work properly it could be that employee steals the money okay it could be that technology doesn't work so the technology risk is usually considered part of operational recipe operational risk would be something like there is a flood you know flood water comes in and fills the whole building and destroys important documents it could be some sort of a natural disaster okay these where they come from we call them in English it's a special word it's a legal word don't think of it it's called act of God acts of God will mean natural disaster like main earthquake okay this is just an English language legal term act of God we call these type of risks related to acts of God event risk usually associated with a natural disaster Oh a little different type of the event risk in a date fall under a different category like war like a revolution okay where suddenly people start shooting each other for some reason okay now midnight again could be part of it it's called country rest sometimes called southern salary written separate risk is the risk associated with the whole country in general the biggest one is a revolution suddenly political instability we just headed two years ago in Thailand well it may be civil war two different people mainly two different religions for whatever reason they start fighting against each other it could be a war with another country okay right now you got big sovereign risk associated with serious series in the form of war or internally in a civil war and then one side supported by the Americans and whoever another side supported by the Russians men are one of the biggest severing risks over the last couple of weeks is Turkey okay suddenly the government sees as a newspaper oh well this means sovereign risk is associated also with government taking your assets okay it's gold we call this expropriation or the laws change or it may be just a simple innocent thing like taxes change everyone was paying 10% tax and now everybody's got a pic in percent tax especially for it okay so somehow the risk is associated with the whole country and it does not have to be political it's somehow related could be economic rest could be social risk could be something else but it is related to that particular country it usually does not involve other countries for example whatever is happening politically in Turkey Bulgaria which is my home country neighbors Turk is not affected by Turkish internal developments okay so it's strictly to Turkey it does not affect grace does not affect them Carrie okay so that's typical country race next installments risk is the risk that the financial institution becomes insolvent now let's try to do the meaning of the word insolvent is a little confusing but it has one main meaning the meaning is that liabilities exceed SS in other words you have more obligations then you have assets to satisfy but different way of saying is that the company has a negative equity negative negative owner's equity the other words the company will not be able to meet its obligations and most likely the company will go bankrupt and now between insolvency we need to clarify what is bankruptcy but company may be bankrupt but not insolvent our company may be insolvent but not bad and a lot of times but insolvent company will become bankrupt bankrupt simply means a legal proceeding to recover obligations so bankruptcy is the legal procedure that a creditor asks the court for so bankruptcy is a procedure that involves the cords okay well these are the ten main the pain and primary risks

Channel: Krassimir Petrov

Views: 17,228

Rating: 4.9166665 out of 5

Keywords:

Id: J_ZGsBTLGO4

Length: 43min 36sec (2616 seconds)

Published: Wed Mar 09 2016