Money, foreign exchange, finance

Mirleth Galilea Oviedo Ibarra

1. What is a financial system? 

It's the exchange of money between savers (household/corporate sector), investors (corporate sector), lenders (financial institutions), borrowers (individuals/financial institutions) 

2. What are the functions of a financial system?

- One of the main functions is to integrate the 

 stakeholders for the transaction purposes and to exchange the money between them.  

- Links the financial institutions and markets in order to give it's financial services to stakeholders to eventually maximize their return 

- For corporate investments, it provides the mechanism to pull the funds in terms of household savings 

- Facilitates the participants to liquidate their investment and provides avenues to minimize the risks 

- Determines the prices of  the stocks, bonds 

- Helps to reduce the transaction problems derived from asymmetric information (seller wants more and buyer wants less in terms of payment) 

 

3. How are the main types of financial institutes categorized? Describe each one 

A. Financial institutions: 

     i.  Regulatory( regulates banks, stock markets,                pension funds, insurance companies, etc)

     ii. Intermediaries( banks, etc)

     iii.Non intermediaries

     iv. Others (specialized organizations in the                      market )

B. Financial markets 

     i.  Organized

   a. Money market (call money market, Treasury             bills, commercial papers, etc.) 

   b. Capital market (stock market, debt market,                 derivatives market)

   c. Foreign exchange market

     ii. Unorganized

4. Which are the main classes of financial instruments issued in financial system? Describe them in detail 

i. Banking and non-banking: 

they provide the transaction services and fulfill requirements/regulations. They can give loans. 

ii. Intermediaries vs non-intermediaries: 

they intermediate between savers and investors;  non-intermediaries don't obtain their resources from the savers, i stead they obtain then from other financial societies from the government

5. What are the distinctions between various types of financial markets according to their function? Explain them 

i. Money and Capital markets: the difference between them is the period of maturity of financial assets (money markets deal in short-term and Capital markets in long-term)

ii. Primary and second markets: the primary market deals with the new financial claims; once the money comes to the system, depending on its demand and supply, the secondary market fluctuates the price 

6. What does the "flow of funds" refer to? Explain in detail 

The flow of funds are financial accounts that are used to track the net inflows and outflows of money to and from various sectors of a national economy