Chapter 5 Financial Market 金融市场

Learning Objectives:

1.To learn about the elements of financial market.

2.To grasp the instruments of money market and capital market.

3.To know about the types of derivative market. 

5.1 Overview of Financial Market 金融市场概述

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The Definition of Financial Market 金融市场定义

Financial market is the market in which funds are transferred from people who have an excess of available funds to people who have a shortage. One party transfers funds in financial markets by purchasing financial assets previously held by another party.

金融市场是资金盈余者向资金短缺者转移资金的市场。

一方通过购买另一方以前持有的金融资产，在金融市场转移资金。

Financial markets facilitate the flow of funds from surplus units to deficit units and thereby facilitate financing and investing by households, firms, and government agencies. In finance, financial markets facilitate the raising of capital(in the capital market), the transfer of risk(in the derivative market), and international trade(in the currency market).

The Elements of Financial Market  金融市场要素

1. The participants of financial market 金融市场参与者

1) Central bank

Central bank’s primary responsibility of participating financial market is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized loan interest rates, and acting as a lender of last resort to the banking sector during times of financial crisis. It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.

2) Lenders

Lenders are people who have available funds in excess of their desired expenditures that they are attempting to loan out.

出借人（贷款人）是指那些拥有超出其预期支出的可用资金的人，他们正试图借出这些资金。

3) Borrowers

Borrowers are people who have a shortage of funds relative to their desired expenditures. Borrowers attempt to obtain funds from lenders by selling to lenders newly issued claims against the borrowers’real assets.

借款人是相对于他们想要的支出而缺乏资金的人。借款人试图通过向贷款人出售新发行的针对借款人实物资产的债权，从贷款人那里获得资金。

4) Financial intermediaries 

Financial intermediaries are financial institutions that engage in financial asset transformation.

金融中介机构是从事金融资产转化的金融机构。

Financial intermediaries purchase one kind of financial assets from borrowers—generally some kinds of long-term loan contracts whose terms are adapted to the specific conditions of the borrower—and sell a different kind of financial asset to lenders, generally some kind of relatively liquid claim against the financial intermediaries.

2. Financial instruments 金融市场工具

1) The definition of financial instrument

Financial instrument is a legally enforceable agreement between two or more parties, certifying the amount, the maturity date and the price of a financial transaction.

Broadly speaking, all documents used in financial transactions may be regarded as financial instruments, such as bonds, stocks, checks, promissory notes（本票）, bills of exchange（汇票）, and etc.

2)The characteristics of financial instrument

Financial instruments commonly have three characteristics: liquidity(流动性）, risk（风险性） and profitability（收益性）.

Financialin struments can be traded on a market and turned into cash easily, which aredescribed as being liquid, and having liquidity, if there are enough buyers and sellers to absorb sudden shifts in supply and demand without price distortions. 

Allfinancial instruments carry a certain level of risk, which gives rise to thepossibility that holders of financial instruments will lose money.

Financialinstrument holders will make profit from holding financial instrument, which isthe profitability of financial instrument.

3) The types of financial instruments

①Original financial instrument vs. derivative financial instrument

Original financial instruments, such as paper currency, bonds and stocks, whose value are determined directly by markets.

Derivative financial instruments are financial instruments, whose value derives from the value of some other financial instruments, such as an underlying commodity, security, index, rate or event, which determine the price of derivative instruments.

②Debt instrument vs. equity instrument

Debt instruments are particular types of securities that require the issuer (the borrower) to repay the fund on the maturity date and generally pay interest at regularly scheduled intervals until the maturity date to the holder(the lender), regardless of success or failure of any investment projects for which the borrowed funds are used.

In contrast, equity instruments are shares of ownership or stocks in a company, which confers on the holder an ownership interest of the issuer.

③Money market instrument vs. capital market instrument

Money market instruments are those instruments which are traded in the money market and they usually mature in less than one year and have good liquidity. Examples are treasury bills, certificates of deposit, commercial paper, repurchase agreements, banker’s acceptance, etc.

In contrast, capital market instruments are generally traded in capital market, and their maturity terms are longer than one year. Examples are stocks and bonds. 

3. The prices of Financial Instruments 金融工具的价格

The price of financial instruments are the prices that well-informed and investors must pay for them in a free and competitive market. Financial markets provide vehicles by which prices are set both for newly issued financial assets and for the existing stock of financial assets.

4.The trading mechanisms of financial market 金融市场的交易机制

Floor trading is where traders or stock brokers meet at a specific venue referred to as a trading floor or pit to buy and sell financial instruments using open outcry method to communicate with each other.

Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. OTC market is the market in which dealers at different locations have an inventory of securities and stand ready to buy and sell securities “over the counter” to anyone who comes to them and is willing to accept their prices.

The Types of Financial Market 金融市场的类型

1. Money market & capital market

The money market is the market for short-term securities, generally those mature in one year, while the capital market is the market for long-term securities, generally those with the maturity of more than one year.

2. Primary market & secondary market

The primary market is concerned with the new securities which are traded in this market. This market is used by the companies, corporations and national governments to generate funds for different purpose.

Secondary market is a financial market in which securities that have been previously issued can be resold. Here investors can buy a security from other investors instead of the issuer. So, the secondary market should be liquid. All the securities are first created in the primary market and then, enter into the secondary market.

3. Domestic financial market & international financial market

Domestic financial markets involve participants within a country and they operate in markets that are regulated by domestic rules and standards.

Instead, international financial markets allow a number of traders who are not only across the country but also around the world to make transactions. There was a relative absence of uniform international standards to govern international transactions made by participants from jurisdictions at different stages of financial sophistication.

Checkpoint:

Why are financial markets so important to the health of the economy?