Financial Markets and Institutions

Financial Markets and Institutions Essay example
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Finance & Accounting
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FINANCIAL MARKETS AND INSTITUTIONS Financial Markets and Types of Transactions A financial market is a place where individuals and firms can exchange financial securities at low transaction cost. The prices in financial markets are determined by the forces of supply and demand…

Introduction

The derivative market can be further sub-divided into the OTC (over the counter) market and the exchange traded derivatives market. While the former is more customized and offers tailor made innovative instruments in the later all transactions take place via exchange. The OTC market transactions are done mainly by the investment banks that heir traders or agents to market derivative instruments to clients. Some instruments of OTC market include forward contract, swaps (interest rates and currency), credit derivatives, and hedge funds. The derivative market transactions in US are mostly dominated by large multinational financial institutions. The global economic importance of derivatives market is that they are important instrument for determining current and future prices of underlying asset. In addition, a derivatives market also helps to reduce the risk of transaction by bringing certainty in to expected cash flows. The derivatives market encourages speculative trading and arbitrage. A derivatives instrument reduces transaction costs and also offers liquidity of the instrument in market (Parsons, 2013, pp.2-6). Factors Affecting Interest Rates Interest rates are amount payable by the borrower to the lender for using capital for certain amount of time. They are also referred to as financial cost of borrowings. ...
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