Money, foreign exchange, finance. Exersice 5

What is Finance?

 It is an area of economics that helps to control the management of money for investment or savings.

What is Financial System?

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

The financial system provides financial services to the various actors operating in the financial system, such as savers, lenders, borrowers, government and others; the financial system tries to integrate these actors in order to carry out transactions and also to exchange money among them, to maximize their return or to meet requirements in terms of financial needs.

What are the functions of a financial system?

Supports savings and enables financial transactions between savers and investors.

 It provides a payment system for the exchange of goods and services. It provides the mechanism for attracting funds in terms of household savings to business investments. Provides financial capital for long-term capital formation. Facilitates investors and other market participants in liquidating their investment alternatives, such as stocks and bonds. Addresses the short- and long-term needs of market participants.

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

Banking and non-banking: there is a difference between this because banks provide transaction services, it creates the deposit or the credit what others financial institutions cannot and, they can give more loan whatever deposits they have because they can create the money and the second ones are basically takes the money from us, but they are not able to create the money in the system.

Intermediaries - It is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers).

Non intermediaries - These include insurance firms, venture capitalists, currency exchanges, some microloan organizations, and pawn shops. These non-intermediaries financial institutions provide services that are not necessarily suited to banks, serve as competition to banks, and specialize in sectors or groups

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

Derivative Instruments : The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates, or indices.

 Cash Instruments: The values of cash instruments are directly influenced and determined by the markets. These can be securities that are easily transferable.

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

 Money and capital markets

While money markets deal in short-term claims, capital markets deal in long-term claims. It is related to differences in the maturity period of financial assets traded in these markets. Primary and secondary markets Primary markets deal with new financial credits or new securities. Secondary markets deal with already issued or existing securities or securities in circulation.

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