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financial system (financial markets - provide a forum for the creation and…

- - - - bid/buy, offer price and spread
      - quoting ways - indirect and direct
- - - - characteristics - out-the-counter, not standardized to regulate
    - - characteristics - standardised and regulated; are exchange-traded; the price is determined by a competitive bidding process; make contracts with a clearing house, need to make deposits - margin calls
        
        advantages: low credit risk and high liquidity; disadvantages - lack of customization, limited range of contracts, holders need to pay margin calls
    - - strike/exercise price - the price at the physical security can be sold or bought when the option expires.
        premium - purchase price of the option contract
- - - - examples: savers deposits $100 in her savings account and the bank on-lends those funds to a borrower
      - advantages；
        
        credit risk diversification: savers' credit risk will be limited to the intermediary, which has expertise and information
        
        liquidity transformation: liquidity refers to the ability to convert the assets to cash. intermediation satisfies the different preferences of liquidity from both parties.
        
        economic sale: it provides the operational and financial benefits of organizational size and economy scale
        
        asset transformation: borrowers and savers are offered with a range of asset
        maturity transformation: borrowers and savers are offered with a range of terms of maturity
    - - advantages: greater flexibility in the range of shares; avoid the cost of intermediary; increase the access to a diverse range of markets
      - disadvantage: the search and transaction cost may be high; the matches of different preferences may be difficult; the liquidity and marketability will be dependent upon the other party and the risk, especially the default risk will be difficult to assess.
      - examples: underwriting services by investment bankers. BHP issuing shares and raising capital directly form shareholders
    - - investment funds: are collective investment vehicles, and gather funds from savers for investment in capital market, money markets or real estate
      - managed investment funds: refer to money that investors have put with professional managers through trust vehicles.
      - advantages: investments are professionally managed; investors gain access to a wide menu of assets types; enhanced liquidity
        disadvantages: fund managers can exhibit short-termism and herd behavior; the investors may face principal-agent problem
      - investment strategies: active - to seek to 'outperform' the market. they do this by selecting assets classes, individual investments and by trading frequently. passive - offered by index funds. an index fund is a mutual fund with a portfolio constructed to match or track the components of a market index. and an index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
  - - - commercial banks: the heart of banks is to collect deposits - form liability and make loans - banks asset - asset refers to the funds used to make loans or purchase investments
        
        bank regulation
        
        why does bank need to be regulated? financial institutions provide goods and services that economy needs to function well. and the cost of bank failure will be high, so the regulation need to be focused on reducing the risk of this occurance. banks can fail due to illiquidity and inadequate capital. it is utmost important to ensure there is sufficient liquidity of bank in the crisis. and there should be adequate capital as this acts as the buffer when there is unexpected crisis. - capital aquadecy ratio (CAR) - 8% . the government and RBA will provide liquidity support in the cirisis and also banks need to have their own liquidity management strategies.
        
        bank risk - credit risk - monitoring the loans' performance - like adverse deposit balance, credit rating and delaying or failure of making loan payments;
        interest rate risk - make sure earn the spread between the borrowers interest rate and the rate that it earn. - IRM
        
        banking activities: retail banking and wholesale banking
        
        off-balance-sheet activities: transactions which generate income but which do not give rise to an asset or liability on the bank's balance sheet, like funds management, guaranteeing bank bills these activities increase the return earned by the bank without increasing the size of its balance sheet
        
        banks performance：denomination transformation, maturity transformation, liquidity creation; in payment system - cheque deposits and clearing, credit and debit card, international/internet payment
      - non-bank institutions
        
        characteristics - asset-loan/liability/capital, issues what, income, ownership, profits
        
        building societies characteristics: focus on making mortgage loans; the main asset consist of residential mortgages, capital is raised by their members and the traditional building societies owed by the members and the profits plays a large proportion; profits are accumulated not paid out in dividends, main income for building societies are interest incomes.
        
        credit unions: issues short-term customer loans; assets mainly consist of loans to members, liabilities come from member savings accounts, credit unions do not hold shareholder's equity-shares-ownership, capital consists of retained earings.
    - - managed funds
        
        public unit trusts
        
        superannuation companies
        
        superannuation funds - a type of managed fund, which pools investors resources and invests these in various instruments to achieve returns for its clients.
        
        types: defined contribution funds - pay a benefits determined by the fund's performance, investment risk is borne by the member
        defined benefit funds - have a pre-determined final payout, investment risk is borne to the employer
        
        purpose: to provide retirement and death benefits to members. it is set up as an indefinitely continuing fund.
        superannuation funds are managed by a trustee and are regulated by APRA AND ASIC. it is govenment-controlled investment strategy aiming to provide resources that can be used in retirement. superannuation and managed funds work in the same way, both of them use the time value of money to grow their cash balance over time and it is an example of annuity
        
        hedge funds - taking high risk and get high return
      - non-bank institutions - finance companies - not ADIs - more diverse interests than building societies and credit unions; specialized in consumer finance and leasing (also some same products as other financial institutions); emerged as a way for banks to circumvent certain regulatory restrictions #