Financial Markets and Institutions

AIMS AND OBJECTIVES

To describe each type of financial markets, with a focus on its globalization, its utilization by
financial institutions. Each type of financial institution is also described, with a focus on its
management, performance, regulatory aspects, use of financial markets, and sources and uses of
funds.
SYLLABUS

1. Role of Financial Markets and Institutions

Overview of Financial Markets, Securities Traded in Financial Markets, Valuation of Securities

in Financial Markets, Financial Market Regulation, Financial Market Globalization, Role of
Financial Institutions in Financial Markets, Overview of Financial Institutions, Global Expansion
by Financial Institutions.

2. Determination of Interest Rates

Loanable Funds Theory, Economic Forces That Affect Interest Rates, Evaluation of Interest
Rates Over Time, Forecasting Interest Rates.

3. Structure of Interest Rates

Characteristics of Debt Securities That Cause Their Yields to Vary, Explaining Actual Yield
Differentials, Estimating the Appropriate Yield, A Closer Look at the Term Structure,
International Structure of Interest Rates.

4. Functions of the Fed

Organization of the Fed, Monetary Policy Tools, Impact of Technical Factors on Funds, Fed
Control of Money Supply, Money Control Act of 1980, Global Monetary Policy.

5. Monetary Theory and Policy

Monetary Theory, Tradeoff Faced by the Fed, Economic Indicators Monitored by the Fed, Lags
in Monetary Policy, Assessing the Impact of Monetary Policy, Integrating Monetary and Fiscal
Policies, Global Effects of Monetary Policy.

6.Money Markets

Money Market Securities, Institutional Use of Money Markets, Valuation of Money Market
Securities, Risk of Money Market Securities, Interaction Among Money Market Yields,
Globalization of Money Markets.

7. Bond Markets

Background on Bonds, Treasury and Federal Agency Bonds, Municipal Bonds, Corporate Bonds,
Institutional Use of Bond Markets, Globalization of Bond Markets.

8. Bond Valuation and Risk

Bond Valuation Process, Relationships between Coupon Rate, Required Return, and Bond Price,
Explaining Bond Price Movements, Sensitivity of Bond Prices to Interest Rate Movements, Bond
Investment Strategies Used by Investors, Return and Risk of International Bonds.

9. Mortgage Markets

Background on Mortgages, Residential Mortgage Characteristics, Creative Mortgage Financing,

Activities in the Mortgage Market, Institutional Use of Mortgage Markets, Valuation of
Mortgages, Risk From Investing in Mortgages, Use of Mortgage-Backed Securities, Globalization
of Mortgage Markets.

10. Stock Valuation and Risk

Stock Valuation Methods, Determining the Required Rate of Return to Value Stocks, Factors That
Affect Stock Prices, Role of Analysts in Valuing Stock, Stock Risk, Applying Value at Risk,
Forecasting Stock Price Volatility and Beta, Stock Performance Measurement, Stock Market
Efficiency, Foreign Stock Valuation, Performance, and Efficiency.

11. Financial Futures Markets

Background on Financial Futures, Interpreting Financial Futures Tables, Valuation of Financial

Futures, Explaining Price Movements of Bond Futures Contracts, Speculating with Interest Rate
Futures, Closing Out the Futures Position, Hedging with Interest Rate Futures, Bond Index
Futures, Stock Index Futures, Risk of Trading Futures Contracts, Regulation in the Futures
Markets, Institutional Use of Futures Markets, Globalization of Futures Markets.

12. Options Markets

Background on Options, Speculating with Stock Options, Determinants of Stock Option

Premiums, Explaining Changes in Option Premiums, Hedging with Stock Options, Using Options
to Measure a Stock’s Risk, Stock Index Options, Options on Futures Contracts, Hedging with
Options on Futures, Institutional Use of Options Markets, Globalization of Options Markets.

13. Interest Rate Derivative Markets

Background, Participation by Financial Institutions, Types of Swaps, Risks of Interest Rate Swaps,
Risks of Interest Rate Swaps, Pricing Interest Rate Swaps, Factors Affecting the Performance of
Interest Rate Swaps, Interest Rate Caps, Floors, and Collars, Globalization of Swap Markets.

14. Foreign Exchange Derivative Markets

Background on Foreign Exchange Markets, Factors Affecting Exchange Rates, Movements in

Exchange Rates, Forecasting Exchange Rates, Forecasting Exchange Rate Volatility, Speculation
in Foreign Exchange Markets, Foreign Exchange Derivatives, International Arbitrage, Explaining
Price Movements of Foreign Exchange Derivatives.

15. Commercial Bank Operations

Bank Participation in Financial Conglomerates, Bank Sources of Funds, Uses of Funds by Banks,
Off-Balance Sheet Activities..

16. Bank Regulation

Background, Regulatory Structure, Regulation of Deposit Insurance, Regulation of Capital,

Regulation of Operations, Regulation of Interstate Expansion, How Regulators Monitor Banks,
The “Too Big to Fail” Issue.

17. Bank Management

Goal of Bank Management, Managing Liquidity, Managing Interest Rate Risk, Managing Credit,
Risk, Managing Market Risk, Operating Risk, Bank Capital Management, Management Based on
Forecasts, Bank Restructuring to Manage Risks, Examples of Bank Mismanagement.

18. International Banking

International Expansion, Global Bank Regulations, Global Bank Competition, Risks of

Multinational Banks, International Debt Crisis, Asian Crisis, Country Risk Assessment.

19. Thrift Operations

Background on Savings Institutions, Sources of Funds, Uses of Funds, Regulation of Savings

Institutions, Exposure to Risk, Management of Interest Rate Risk, Valuation of a Financial
Institution, Interaction with Other Financial Institutions, Participation in Financial Markets,
Performance of Savings Institutions, Savings Institution Crisis.

20. Consumer Finance Operations

Types of Finance Companies, Sources of Finance Company Funds, Uses of Finance Company
Funds, Regulation of Finance Companies, Risks Faced by Finance Companies, Captive Finance
Subsidiaries.

21. Mutual Fund Operations

Background on Mutual Funds, Load Versus No Load Mutual Funds, Open-End Versus Closed-End
Funds, Stock Fund Categories, Bond Fund Categories, Growth and Size of Mutual Funds,
Performance of Mutual Funds, Money Market Funds, Hedge Funds, Real Estate Investment
Trusts, Interaction with Other Financial Institutions, Use of Financial Markets, Globalization
Through Mutual Funds.

22. Securities Operations

Investment Banking Services, Brokerage Services, Allocation of Revenue Sources, Regulation of
Securities Firms, Risks of Securities Firms, Valuation of a Securities Firm, Interaction with Other
Financial Institutions, Participation in Financial Markets, Globalization of Securities Firms.

23 Insurance Operations

Background, Types of Life Insurance Policies, Provision of Health Care Insurance, Sources of
Funds, Uses of Funds, Regulation, Exposure to Risk, Asset Management, Property and Casualty
Insurance, Reinsurance, Valuation of an Insurance Company, Performance Evaluation, Interaction
with Other Financial Institutions, Participation in Financial Markets, Multinational Insurance
Companies.

24. Pension Fund Operations

Background on Pension Funds, Types of Private Pension Funds, Pension Regulations, Pension
Fund Management, Performance of Pension Funds, Interaction with Other Financial Institutions,
Participation in Financial Markets, Foreign Investment by Pension Funds.

25. Credit Unions

Background of Credit Unions, Sources of Credit Union Funds, Uses of Credit Union Funds,
Regulation of Credit Unions, Insurance for Credit Unions, Credit Union Exposure to Risk,
Performance of Credit Unions.

ESSENTIAL READING

William F. Sharpe, INVESTMENTS (Six Edition), Prentice Hall, 1999.

John C. Hull, Fundamentals of Futures and Options Markets (Fifth Edition), Prentice Hall,
2000.

Frank J. Fabozzi, Capital Markets ,Institutions and Instrument, Prentice Hall, 1996.

Anthony Saunders, Financial Institutions Management, Prentice Hall, 2000.

TEACHING AND LEARNING METHOD

Three hours a week. There will be a combination of lectures, case study, guided study and
exercises.

ASSESSMENT

In-Course 30%

Examination 70%
In-Course assessments include case study, questions, and Interpreting Financial News.