INTEGRATED CASE TH BARRYCOMPANY Assume that you recently gra

INTEGRATED CASE TH BARRY&COMPANY; Assume that you recently graduated with a degree in finance and have reported to work as an investment adviser at the brokerage firm of Smyth Barry &Co.; Your first assignment Varga, a professional tennis player who recently Financial Markets and Institutions to explain the nature of the US. financial markets to M came to the United States from Mexico. Varga is a highly ranked tennis player who expects to invest substar amounts of money through Smyth Barry. She is very bright, therefore, she would like to understand in general terms what will happen to her money. Your boss has developed the following questions that you must use to explain the US. financial system to Varga. a. What are the three primary ways in which capital is transferred between savers and borrowers? Describe each spot markets versus futures markets, money markets versus capital markets d. What are derivatives? How can derivatives be used to reduce risk? Can derivatives be used to increase one What is a market? Differentiate between the following types of markets physical aset markets vensus financial asset b. primary markets versus secondary markets, and public markets versus private markets risk? Explain. equity companies. c Why are financial markets essential for a healthy economy and economic growth? e. Briefly describe each of the following financial institutions investment banks, comercial banks, financial services corporations, pension funds, mutual funds, eaxchange traded funds, hedge funds, and private f. What are the two leading stock markets? Describe the two basic types of stock markets s l Apple Computer decided to issue additional common stock, and Varga purchased 100 shanes of this stock from Smyth Barry, the underwriter, would this transaction be a primary or a secondary markst transaction? Would it make a difference if Varga purchased previously oubstanding Apple stock in the dealer market? Explain h. What is an iniial public offering (Io i What does it mean for a market to be efficient? Explain why some stock prices may be more efficient than others After your consuitation with Michelle, she wants to discuss these twn possible stock purchases: 1. While in the waiting room of your office, she overhcard an analyst on a financial TV network say that a particular medical research company just received FDA approval for one of its products. On the basis of this \"hot intormation, Michelile wants to buy muny shares of that company\'s stock Assuiming the stock market is highly etficient, what advice would you give her? 2. She thas read a number of newspaper articdles about a huge ITO bering carnied out by a leading technology company, She wants to purchase as many shares in the IPO as possibie and woukd even be willing to buy he shares in the open market imemedialely afher the issae. What advice do you have for her? k. How doss behavioral tinuince esplain the real world inconsistondies of the eficient markets hypothesis (EMH? Don\'t enable Choose addo d-ons are ready for uve up

Solution

a). Ways in which money is transferred between savers and borrowers:-

1. Direct transfer of money and securities

2. through an investment banking house

3. through a financial intermediary.

Direct transfers of money and securities occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution.

Transfers may also go through an investment banking house which underwrites the issue. An underwriter serves as a middleman and facilitates the issuance of securities. The company sells its stocks or bonds to the investment bank, which in turn sells these same securities to savers.

Transfers can also be made through a financial intermediary. Here the intermediary obtains funds from savers in exchange for its own securities. The intermediary uses this money to buy and hold businesses’ securities.

b). A market is a venue where assets are bought and sold. There are many different types of financial markets, each one dealing with a different type of financial asset, serving a different set of customers, or operating in a different part of the country. Financial markets differ from physical asset markets in that real, or tangible, assets 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. Spot markets are markets in which assets are bought or sold for “on-the-spot” delivery, while futures markets are markets in which participants agree today to buy or sell an asset at some future date.

c). A sound economy is reliant on proficient assets exchanges from individuals who are net savers to firms and people who require capital. Without productive exchanges, the economy just couldn\'t work. Clearly, the level of work and efficiency, consequently our way of life, would be much lower. Thusly, it is significant that our money related markets work proficiently—rapidly, as well as with ease.

d). Derivatives are any budgetary resource whose esteem is gotten from the estimation of some other \"basic\" resource. Subsidiaries can be utilized either to lessen chances or to hypothesize. For a case of hazard diminishment, assume a merchant\'s costs rise and its net pay falls when the dollar falls in respect to the yen. The organization could diminish its hazard by buying derivatives whose esteems increment when the dollar decreases. This is a supporting operation, and its motivation is to decrease hazard introduction. Hypothesis, then again, is done in the expectation of exceptional yields, yet it raises hazard introduction.

e). Commercial banks are the traditional department stores of finance serving a variety of savers and borrowers. Commercial banks are providing an ever-widening range of services, including stock brokerage services and insurance. Investment banks are organizations that underwrite and distribute new investment securities and help businesses obtain financing.

Investment banking houses help companies raise capital. Such organizations underwrite security offerings, which mean they (1) advise corporations regarding the design and pricing of new securities, (2) buy these securities from the issuing corporation, and (3) resell them to investors.

Traditional pension funds are retirement plans funded by corporations or government agencies. Pension funds invest primarily in bonds, stocks, mortgages, hedge funds, private equity, and real estate.

Mutual funds are corporations that accept money from savers and then use these funds to buy financial instruments. These organizations pool funds, which allows them to reduce risks by diversification and achieve economies of scale in analyzing securities, managing portfolios, and buying/selling securities.

Hedge funds raise money from investors and engage in a variety of investment activities. Unlike typical mutual funds, which can have thousands of investors, hedge funds are limited to institutional investors and a relatively small number of high–net-worth individuals.

Private equity funds are similar to hedge funds in that they are limited to a relatively small number of large investors, but they differ in that they own stock (equity) in other companies and often control those companies, whereas hedge funds usually own many different types of securities.

f). The two leading stock markets today are the New York Stock Exchange and the Nasdaq stock market. There are just two basic types of stock markets: (1) physical location exchanges, which include the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and several regional stock exchanges, and (2) electronic dealer-based markets that include the Nasdaq stock market, the less formal over-the-counter market, and the recently developed electronic communications networks (ECNs).

g). If Varga purchased newly issued Apple stock, this would constitute a primary market transaction, with Smyth Barry acting as an investment banker in the transaction. If Varga purchased “used” stock, then the transaction would be in the secondary market. in secondary market simultaneous buying and selling activity is done.

h). The initial public offering (IPO) market is a subset of the primary market. Here firms “go public” by offering shares to the public for the first time. Microsoft had its IPO in 1986. Previously, Bill Gates and other insiders owned all the shares. In many IPOs, the insiders sell some of their shares and the company sells newly created shares to raise additional capital.

i). Efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market. According to the EMH, as prices respond only to information available in the market, and because all market participants are privy to the same information, no one will have the ability to out-profit anyone else.

J). I ADVICE HER TO PURCHASE SHARE AND LOOK FOR SHORT TERM PROFIT IN THAT.

Not all IPOs are well received. And, even if you are able to identify a “hot” issue, it is often difficult to purchase shares in the initial offering. So looking for the company profile before investing is very important before investing your money in IPO.