Financial-relating to finance
The management and study of money along with monetary systems. It also applies to currency and capital assets.
Within a financial system, assets are bought, sold or traded as financial instruments (or products). These are often securities that were brought to market by investment banks. Buyers make the acquisition based upon the financial goals being pursued.
Types of Financial Assets
Investors and traders will enter certain positions based upon their risk appetite.
Some examples of financial assets are:
Derivatives are often created to help investors. They are commonly used for two purposes:
Depending upon the risk management strategy, derivatives can be used to reduce the risk associated with a financial transaction, or expand it. Many like to leverage their position to increase their return on investment.
These are actually an important part of not only the financial system but also for commerce. For example, multi-national corporations will use Foreign Exchange Derivatives (FED) to reduce their exposure swings in currency which ends up affecting their financial statements.
Major Financial Sectors
- personal - money management and investment for individuals
- corporate - issues faced by corporations including venture capital, funding, taxation, and equity structures
- public - deals with the finances of national, state, and local governments. This also can encompass the role these entities play in the economy through regulation and policy.
There is also international finance which focuses on the management of multinational corporation finances and understanding international markets and financial regulations.
Financial Services
There are a number of financial services that are put forth by financial institutions. These institutions are financial intermediaries, companies between the financial product and the buyers.
List of financial services:
- banking
- insurance
- accounting
- investment
- money management
- asset management
- private equity
- venture capital
- audit services
- financial planning
- FOREX services
- real estate services
- retirement
- FinTech
Importance of Financial Services
Financial services provide an essential role to the economy. The benefits are:
- Economic Growth - this is dependent up on saving and investment. Finance is what channels the capital into productive businesses and ventures.
- Promotion of Savings - savings can be the basis for capital formation. To achieve this, services such as custodial can assist in this.
- Capital Formation - this is a fundamental of economic activity. This is done with intermediary services in capital markets.
- Creation of Employment Opportunities - some of the largest firms in the world are finance related
- Contribution to GNP - the financial sector is a large part of any economy, contributing to national economic output levels
- Provision of Liquidity - non-liquid assets are like an oil tanker. They are slow and not agile. Liquidity is the answer to this.
- Minimizing Risks - derivatives can provide risk reduction as shown by commodity producers who hedge their products through the use of futures contracts.
- Maximizing Returns - derivatives can also enhance returns by allowing those with a bigger risk appetite to fulfill it.
- Benefit to Government
- Promotion of Domestic and Foreign Trade
- Balanced Regional Development
Eurodollar System
There is no financial service more important than funding. For global trade, this is done through the Eurodollar System. It is an international financial system established by the banks to facilitate trade around the world.
This operates outside of any central bank or government. It was a private network that grew outside the view of the general public. All transactions are ledger based with collateral being the main funding mechanism. Balance sheet capacity is an essential characteristic for those involved in this market.
We see both bilateral and tri-lateral (known as tri-party repo) transactions happening. The repo market is one facet of this that was brought under the Federal Reserve. Daily volume is around $5 trillion.
There are no hard figures on the volume of bilateral agreements that are made. These are often conducted using off balance sheet assets.
The most valued asset are US Treasuries. These are viewed to have the lowest risk. Liquidity is an issue, meaning on the run treasuries are most desirable. Bills always fit this description.