Question

1. Usually, basic financial markets have five basic functions in a capitalistic economy:

   For each of the functions cited below, explain how financial markets perform each function in detail.

   1. They make it possible for corporations and governmental units to raise capital.

   2. They help to allocate capital toward productive uses.

   3. They provide an opportunity for people to increase their savings by investing in them.

   4. They reveal investors’ judgments about the potential earning capacity of corporations, thus

giving guidance to corporate managers. 5. They generate employment and income.

Answer 1

1)Over-the-Counter Markets: over-the-counter (OTC) market is a decentralized market—meaning it does not have physical locations, and trading is conducted electronically—in which market participants trade securities directly between two parties without a broke

2) Bond Markets : bond is a security in which an investor loans money for a defined period at a pre-established interest rate. You may think of a bond as an agreement between the lender and borrower that contains the details of the loan and its payments.

3) Money Markets: Typically the money markets trade in products with highly liquid short-term maturities (of less than one year) and are characterized by a high degree of safety and a relatively low return in interest.

4)Derivatives Market :A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Derivatives are secondary securities whose value is solely derived from the value of the primary security that they are linked to

5) Forex Market :The forex (foreign exchange) market is the market in which participants can buy, sell, exchange, and speculate on currencies. As such, the forex market is the most liquid market in the world, as cash is the most liquid of assets