Financial Management

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Financial Management
This document placed forward is to aid in the explanation of the nature of the Jamaican financial markets to Valentino Rossi, a professional motorcyclist who recently came to the Jamaica from Italy. Valentino is a highly ranked cyclist who expects to invest substantial amounts of money through the Jamaica Money Market Brokers. He is keen on financial matters and would like to understand in general terms what will happen to his money. So a set of questions and scenarios have been used to better to explain the Jamaican financial system to Valentino by the consultancy team of JMMB.

What are the three primary ways in which capital is transferred between savers and borrowers?

Capital may be defined as the money, property, and other valuables which collectively represent the wealth of an individual or business. Capital can be transferred by 3 primary methods, which are by:

(1) Direct Transfer
(2) Investment Banking House
(3) Financial Intermediary

Direct Transfer
A Direct Transfer is where a business sells its stocks or bonds directly to investors (savers), without going through any type of institution. The business borrower receives dollars from the savers, and the savers receive securities in the form of bonds or stock in return

Investment Banking House
If the Investment Banking House method is used to transfer capital, an investment bank serves as a middleman. The business sells its securities to the investment bank, which will in turn sell the securities to the savers. Although the securities are sold twice, the two sales constitute one complete transaction in the primary market.

Financial Intermediary
In the Financial Intermediary method of Capital transfer savers invest funds with a intermediary, which then issues its own securities in exchange. Banks are one type of intermediary, receiving dollars from many small savers and then lending these dollars to borrowers to conduct various financial transactions, also the money received is lent to businesses and government agencies. The savers receive a certificate of deposit or some other instrument in exchange for the funds deposited with the bank. Mutual funds, insurance companies, and pension funds are other types of intermediaries.  

What is a market? Differentiate between the following types of markets: physical asset markets versus financial asset markets, spot markets versus futures markets, money markets versus capital markets, primary markets versus secondary markets, and public markets versus private markets.

A market can be seen as any area that facilitates the meeting of buyers and sellers to trade their wares for monetary value, this area can be physical or virtual. Physical in the sense it is a “brick & mortar” operation (actual building) while virtual in the sense that it is a mode or tool by which players of the market has access to the happenings in real time which can be done by methods such as the internet. There are various types of financial markets, dealing with diverse financial assets, serving a wide array of customers, or operating in a different part of the country. Financial markets differ from physical asset markets in that real, or tangible, asset such as machinery, real estate, and agricultural products are traded in the physical asset markets, but financial securities representing claims on assets are traded in the financial markets.

The difference between a Physical Asset Market & Financial Asset Markets.

Physical Asset Market is considered to be a real or tangible medium, where actual products such as real estate, computers, and machinery etc are exchanged for cash. Financial Asset Markets, on the other hand, deal with stocks, bonds, monetary notes, mortgages, and other claims on real assets, as well as derivative securities whose values are derived from changes in the prices of other assets. These financial assets are not able to be touched by...
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