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1.Introduction

1.1. Credit Crunch1 Cause of financial meltdown: originate-to-distribute model- slicing and dicing risk and

selling it on

2 Adaptation of function of financial markets:

1. Original- financial markets as a means of channelling capital where it is most

needed i.e. companies and inestments

2. !ew- trading risk

a. "er#one is a risk taker$ betting their capital or the capital of others

b. %et on market or underl#ing factor

& City and financial markets are about risk and reward:

' (oo much riskwas taken b# people who

) *ocketed reward

+ ,et institutions pick up the tab- goernments with tapa#ers mone# had to bail

out the banks

2.City as a Market & Global Credit CrunchSummary:b

/ (he Cit# is like a market where companies 0customers bu# the use of mone#. unction

is to:

3 4aise capital5 6nest mone#

17 (rade financial products: fied income 0interest-rate$ debt 0credit$ e8uit#$ f and

commodit# products

11 ' main pla#ers: companies banks institutional in!estors and brokers

12 9one# is a medium of echange of !alue

1& market is the lar"est money market in the world- follows the sun

1' #i$uidity% measure of how eas# it is to bu#sell financial instruments;

1) oor li$uidity- large market impact i.e. trading in a market ma# moe prices

against #ou

1+ 'on%financial markets in the Cit# e.g. insurance (#loyd)s of #ondon*and shipping

0+altic ,-chan"e*

1/ Sub%prime credit crunch caused b# oer-aggressie lending to low credit borrowers in

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13 ousin" market turned- loans became worthless and banks stopped lending to each

other-cashflow crisis

15 Go!ernments% bailed out banks and restored consumer confidence

27 +anks stopped lendin" to businesses and global financial meltdownglobal

depression

2.1. Simple /ramework21 Companies0customers come to cit# for adice on how to raise capital and what

to do with it

22 +anks0stall%holders : commercial$ inestment or merchant banks

2& Institutional in!estors0wholesalers finance banks through capital inestment

proiding mone# that companies need

2' +rokers0porters

2.2. ri"in of Money

2) =temmed from bartering in echange for goods

2+ (rade depends on a double coincidence of wants

2/ Commodities echange- sheep and >roitwich salt 0from %irmingham

23 *recious metals

25 Currenc# proides:

&7 9edium of echange

&1 ,i8uid form of echange

&2 A unit of account

&& =tabilit#

&' =tandard of deferred pa#ments

&) 9one# is:

&+ ungible- interchangeabilit# with goodsassets of the same t#pe

&/ 6ts all about confidencein the alue of things

2.. /inancial Market3Markets

&3 =tocks used to mean the stocksbonds that goernment issued and shares the e8uit#that companies issue

&5 =tock echanges are businesses i.e. ,=" is listed on the ,ondon =tock "change

'7 9an# things traded on financial markets:

'1 %onds

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'2 Commodities 0hard and soft

'& =hipping 0%altic "change and 6nsurance 0,lo#ds of ,ondon

'' shippin" market is about the buyin"3sellin" of car"o capacity (charterparties*

2.4. /orei"n ,-chan"e Market') Currencies boughtsold

'+ Companies that go for direct in!estment abroad and institutional in!estors thatgo for indirect in!estmentabroad use the fore market.

2.4.1. 5irect in!estment'/ Companies need to change currencies when the# do business oerseas

'3 Customers oerseas who pa# in their local currenc#

'5 =ubsidiaries and businesses set up abroad need local currenc#- ergo f market

)7 ,ocal business generates profit and needs to be conerted back to home currenc#

0currenc# of account

2.4.2. Indirect3ortfolio In!estment)1 Institutional in!estors 0insurance companies$ pension funds and asset managers

inest in global companies through indirect in!estment through purchasing stocks in

companies

)2 Shares sold in local currenc#

2.4.. 6irtual37C Market)& %anks are biggest users of f market

)' market is all done O(C between banks$ companies and institutional inestors

)) %anks act as intermediaries between parties 8uoting bidask prices

2.4.4. Central +anks)+