Structure of Financial Markets

• Balance of Payment factors:

  • Financial account
  • Current account
  • Capital account
• Current account:

  • Measures Trade balance
  • Income
  • transfer - paying other countries eg. helping in wars
• liquidity - ability to convert an asset into cash quickly without loss of value
• Money markets - assets with a maturity of a year or less e.g bonds, interbank lending

  • high liquidity
• Capital market - long term finance (more than one year) e.g stocks and shares, government bonds
• Primary capital market - where new issues are being offered for the first time eg. investment banks, stock exchange
• Secondary capital markets - existing issues bought and sold between investors , eg new bonds
• Spot currency market - at the current exchange rate and delivered now
• Future currency market - at the current exchange rate delivered in the future, eg. if exporters predict weaker currency in future
• Bond market - lenders can go directly to the Debt Management Office (DMO) to buy government bonds
• Foreign Exchange Market -where currencies are bought and sold
• Forward Market - a fixed price the buyer and seller have agreed on for a good, that doesn't change in price regardless of demand and supply

  • exists in commodities and foreign exchange markets
• Characteristics of money:

  • Portable
  • Acceptable
  • Durable
  • Divisible
  • Limited in supply
• Commodity Money - money that holds intrinsic value (asset) eg. gold
• Fiat Money - money with no intrinsic value but backed by the government eg. paper currency