Question

Business involves the interaction of individuals and individual organizations for the exchange of products, services, and capital through markets. The global capital markets are critical for the conduct of this exchange. The authors suggest that one way to characterize the global financial marketplace is through its assets, institutions, and linkages. Explain how each of the three dimensions characterize the global financial marketplace?

Answer 1

Assets include financial assets like cash, money market instruments, bonds, loans, equity shares & derivative products (interest rate swaps, currency swaps & CDO's)

Institutions include: banks, non-bank finance companies, mutual funds, insurance companies & pension funds

Banks across the globe sell liability products and lend to other banks/corporates/financial institutions. These liability products include deposits/bonds/equity. Institutions subscribe to liability products of banks to earn interest (deposits/bonds) or become partner in profits (equity).

Pension funds receive annuities from customers each year or single fixed payment which they have to repay after a fixed tenure. To repay those amounts, they have to grow their money at a reasonable rate of return. Therefore they have many investment classes available like deposits/bonds/equity which they may invest in banks or mutual funds

Insurance companies also receive premiums (in the form of annuity/one-time payment) & have to pay the insured amount on any contingent event (like death/accident). They also have to ensure that the premiums they receive grow at a reasonable rate of return to stay profitable.  

Mutual funds collect money from investors & invest them into various assets like deposits/bonds/equity. This how financial institutions raise money from one institution & invest in the assets of other institutions.

This investment process carries out cross-border as well