Money, foreign exchange, finance

 Task 1

What is Finance?

Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting.

What is Financial System?

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

What are the functions of a financial system?

The job of the financial system is to make a relationship between the different stakeholders like the savers, investors, lenders for borrowers and to exchange the money between them and other market participants who are existing in this system.

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

1. Central Banks. Central banks are the financial institutions responsible for the oversight and management of all other banks. Individual consumers do not have direct contact with a central bank, only large financial institutions

2. Retail and Commercial Banks. Most large banks offer deposit accounts, lending, and limited financial advice to both demographics. Products offered at retail and commercial banks include checking and savings accounts, certificates of deposit, personal and mortgage loans, credit cards, and business banking accounts.

3. Internet Banks. Internet banks offer the same products and services as conventional banks, but they do so through online platforms instead of brick and mortar locations.

4. Credit Unions. Credit unions serve a specific demographic per their field of membership. While the products offered resemble retail bank offerings, credit unions are owned by their members and operate for their benefit.

5. Savings and Loan Associations. Financial institutions that are mutually held and provide no more than 20% of total lending to businesses fall under the category of savings and loan associations.

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

Cash Instruments

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

Derivative Instruments

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

Debt-Based Financial Instruments

These instruments last for one year or less. Securities of this kind come in the form of T-bills and commercial paper. Cash of this kind can be deposits and certificates of deposit (CDs).

Equity-Based Financial Instruments

Securities under equity-based financial instruments are stocks. Exchange-traded derivatives in this category include stock options and equity futures.

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

Stock Markets. These are venues where companies list their shares, and they are bought and sold by traders and investors.

Over-the-Counter Markets. These is a decentralized market meaning it trading is conducted electronically in which market participants trade securities directly between two parties without a broker.

Bond Markets. The bond market sells securities such as notes, and bills issued by the United States Treasury. The bond market also is called the debt, credit, or fixed-income market.

Money Markets. The money markets trade in products with highly liquid short-term maturities (of less than one year) and are characterized by a high degree of safety and a relatively low return in interest.

Derivatives Markets. Rather than trading stocks directly, a derivatives market trades in futures and options contracts, and other advanced financial products, that derive their value from underlying instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks.

Forex Market. The forex (foreign exchange) market is the market in which participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs.

Commodities Markets. Commodities markets are venues where producers and consumers meet to exchange physical commodities such as agricultural products, energy products, precious metals, or "soft" commodities.

Cryptocurrency Markets. The cryptocurrency is available and trade globally across a patchwork of independent online crypto exchanges. These exchanges host digital wallets for traders to swap one cryptocurrency for another, or for fiat monies such as dollars or euros.

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

Flow of funds (FOF) are national financial accounts that track the movement of money among industries or sectors of the economy. Figures measuring the scale and scope of flow of funds in a nation's economy are collected and disseminated by the central bank for economic analysis.