5  Money, foreign exchange, finance

 

Name: Juan Carlos Ibarra Gaspar 

 

Answer the questions.

 

What is Finance?

 Finance is a term for matters regarding the management creation, and study of money and investments. Specifically, it deals with the questions of how an individual, company or government acquires money and how they spend or invest that money. 

What is Financial System?

 The financial system deals with the financial transactions and the exchange of monet between savers, investor, lenders, and borrowers. 

What are the functions of a financial system?

·       It provides payment system for the exchange of goods and services in the economy.

·       It provides the mechanism to pull the funds in terms of household savings for corporate investments.

·       It provides the financial capital for long-term capital formation for the government and business organizations.

·       It facilitates the investors and other market participants to liquidate their investment alternatives like stocks and bonds etc.

·       It provides the avenues for managing the risks faced by the market participants.

·       It takes care of both short-term and long-term needs of the market participants.

·       It supplies the required financial capital to government for public expenditure on the social welfare activity, infrastructure development etc. 

·       It provides the price information which helps to coordinate the decentralized decision-making process in the various sectors.

·       It helps in reduction of asymmetric information and moral hazard problems which in turn facilitates in reducing the transaction costs.

·       It creates different investment opportunities for the investors to maximize their return.

·       It helps in efficient allocation of financial resources.

·       It plays a significant role for economic growth as it helps to create the demand and supply of the funds through which interest rates are determined in various markets. Changes in interest rates affect the money supply, inflation rate and also the possibility of the foreign investments. 

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

·       Regulatory- Any government-based institution, like banks or pension funds 

·       Intermediaries- Banks and other. 

·       Non-intermediaries

·       Other 

 

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

·       Cash instruments 

·       Derivative Instruments 

·       Debt-Based Financial Instruments

·       Equity-Based Financial Instruments 

 

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

Capital markets are any markets that involve the movement of capital from entity to entity, usually with those who have capital providing it to those who need capital in exchange for some value.

Money market investments are typically considered short-term, and the risks really depend on what type of investment you are making.

Future markets, you are investing in an asset or commodity in the future.

Commodity markets involve buying and selling of primary products, such as raw materials.

Insurance markets are just that, markets in which you can purchase insurance products or invest in insurance. 

 

What does the “flow of funds” refer to? Explain in detail. 

Flow of funds (FOF) are financial accounts that are used to track the net inflows and outflows of money to and from various sectors of a national economy. Macroeconomic data from flow of funds accounts are collected and analyzed by a country's central bank.