[ECODEV]MODULE 7

• Three main roles of Money


  • Medium of exchange
  • Store of value
  • Unit of account
• Financial System


  A network of institutions, markets, and contracts that bring together lenders and borrowers – the two main players in the system
• Lenders


  Those who believe that money that they now have the potential of snowballing in the future; they lend it to a financial institution like a bank
• Borrowers


  A household that needs to buy a house or a car but does not have enough money on hand to acquire it; a firm that needs more capital to fund an asset to bring more income; or the government that typically spends more that it owns
• Ways lenders and borrowers agree to fulfill their goals


  • The banking system where depositors are considered lenders
  • Those who loan funds for themselves
  • The bond market
• Investment


  Committing funds to one or more assets, which can be financial or real assets. Most individuals and firms make this decision to increase their wealth and secure the future
• Savings


  A part of the wealth that may be used to fund the investment of another
• Financial assets


  Someone else's liability and are manufactured by the stock market or any financial institution
• Real assets


  Valuable pieces of jewelry, machines, or other physical assets that may be traded in a hard market
• Five Investment Assets/Investment Classes

  • Short-term instruments (money market)
  • Long-term instruments (capital market)
  • Financial derivatives
• Money


  Coin, pieces of stamped metal used as a trading medium; any currency used in the same way
• Capital Market


  The market for longer-term loanable funds
• Cash


  Money on hand
• Debentures


  An instrument issued as evidence of a borrower's debt to a lender. These are used by companies to raise finance repaid over the long term
• Top-down portfolio


  Building the portfolio by country or region, as well as the type of asset
• Bottom-up portfolio


  Looking at specific company/ies then investing in it, with the tendency of investing in just one country and/or one class
• Investment management


  Channeling funds by means of financial intermediaries, transferring and scheduling risks, appropriation of the investment class, and managing ownership of funds
• Ownership and management


  Exist in a separation concept and deal with agency issues, of principal and agent roles. Hence, in order to mitigate the issues, there must be good corporate governance in place and regulated by the government or state.
• Corporate governance


  The examination of the control of a company as exercised by its directors
• Characteristics of a competitive market

  • How risk and return are optimized
  • How efficient is the investment market
  • How appropriate is the style of investment, whether active, passive, or a combination
• Key players in Financial System

  • The firm
  • The household
  • The government
  • The financial intermediaries
• Flourish Savings and Investment Relationship

  The existence of a lively financial system in one country provides facilities for individual and firm savings. When there are more savings and investments, there is more production of goods and services. Firms may enjoy a suitable interest rate that would entice them to borrow money and have more production and distribution of goods and services
• Develop Labor and Employment


  More manufacturing companies can boost their working capital, thereby, they are able to employ more individuals for their production. Furthermore, there are opportunities for banks, other financial institutions like funds, and others to have more skilled workers
• Growth in Capital and Securities Markets

  Capital markets issue debentures and shares to the public and other fund institutions that are expecting good returns from their fixed capital or fixed assets. Short-term loans are available for daily business operations and help in the continuity of the business and trade. Foreign exchange markets help address transactions that involve foreign currencies, help raise funds for these companies, and support the forex requirement of some companies that are dealing with other countries
• Trade Development


  Advance business, both domestically and internationally, allows capital goods to be sold through hire purchases and installment schemes. For those firms that engage in shipments, financial institutions allow the issuance of letters of credit, finance them and even offer to discount some financial instruments like bills
• Infrastructure and Technology Development

  Countries that are not dependent on natural resources such as oil and gas, financial institutions allow financial prosperity by the governments. Economic liberalization is set as a policy establishing development banks and merchant banks to raise funding for infrastructure buildings. In addition, venture capitalists allow companies with inevitable funds to invest in highly risky information and technology businesses
• Uphold Fiscal Policy


  The existence of a worthy financial system in one country helps in the control of inflation, recession, and even depression through a sound policy on finance. The system is regulated by the Bangko Sentral ng Pilipinas. Laws and other legislation may be enforced to mitigate the risks of unwanted and speculative transactions
• Attract Foreign Investment


  Vigorous financial systems in one economy entice potential investors in various sectors and provide more production opportunities and investment prospects that can lead to economic growth and development
• Foster Economic Integration


  In the inevitable integration of countries in proximal distances or regions, forming economic integration tends to have a common investment, trader practice, and even legislation. In terms of market having one common currency is practiced, just like the European Union
• Balance Regional Development


  Provide various concessions and stock ownership plans (SOPs) that eventually help avoid political risks in regions. Equitable interest rates offered in various places would discourage migration from rural to urban areas
• Sustain Macroeconomic Balance


  Having a good financial system allows balance in the industrial, agriculture, and service sectors, ensuring that contributors to the national income benefit from the financial resources
• Compute and describe each of the following in the example equity market prices: Average return, Variance of return, Standard deviation of return
• Role of Finance


  • Link the savers and investors
  • Screen and monitor investments
  • Smoothen consumption
  • Manage risks
  • Manage payment systems
• Financial development has been considered an efficient mechanism for sustainable economic growth and development of emerging markets
• The study by Thang et al. in 2019 published in the Journal of Risk and Financial Management, implied that income inequality may rise at the early stage of financial development and fall after a certain level is achieved. In other words, financial development is essential for reducing income inequality.
• Sound legal system


  Generates trust because this affects the borrowing and lending behavior of individuals and firms
• Effective corporate governance


  The examination of the control of a company as exercised by its directors. The directors of public companies are accountable for their actions to the company shareholders
• There is a shared recognition of the benefits of an independent governing body, especially in situations of conflict of interest
• Nevertheless, there are different views on the adequate number of independent members across countries. In Oman, the Philippines, and Thailand, most members should be non-executive with at least one-third (1/3) being independent according to their governance codes.
• With respect to the rights and equitable treatment of shareholders and key ownership function, the Philippines goes beyond the standard set by the OECD principles and promotes a vote by proxy and use of electronic means to facilitate shareholder participation in general meetings