1.Introduction 1.1.

1 2

Credit Crunch

Cause of financial meltdown: originate-to-distribute model- slicing and dicing risk and selling it on 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 in estments 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 risk was taken b# people who ) + *ocketed reward ,et institutions pick up the tab- go ernments with ta-pa#ers. mone# had to bail out the banks

2.City as a Market & Global Credit Crunch

Summary:b / (he Cit# is like a market where companies 0customers1 bu# the use of mone#. 2unction is to: 3 5 4aise capital 6n est mone#

17 (rade financial products: fi-ed income 0interest-rate1$ debt 0credit1$ e8uit#$ f- and commodit# products 11 ' main pla#ers: companies banks institutional in!estors and brokers 12 9one# is a medium of e-change of !alue 1& 2- 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# mo e 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-aggressi e lending to low credit borrowers in <= real estate

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 /ramework

21 Companies0customers come to cit# for ad ice on how to raise capital and what to do with it 22 +anks0stall%holders: commercial$ in estment or merchant banks 2& Institutional in!estors0wholesalers finance banks through capital in estment pro iding mone# that companies need 2' +rokers0porters

2.2.

1ri"in of Money

2) =temmed from bartering in e-change for goods 2+ (rade depends on a double coincidence of wants 2/ Commodities e-change- sheep and >roitwich salt 0from %irmingham1 23 *recious metals 25 Currenc# pro ides: &7 9edium of e-change &1 ,i8uid form of e-change &2 A unit of account && =tabilit# &' =tandard of deferred pa#ments &) 9one# is: &+ 2ungible- interchangeabilit# with goods:assets of the same t#pe &/ 6t.s all about confidence in the alue of things

2.2.

/inancial Market3Markets

&3 =tocks used to mean the stocks:bonds that go ernment issued and shares the e8uit# that companies issue &5 =tock e-changes are businesses i.e. ,=" is listed on the ,ondon =tock "-change '7 9an# things traded on financial markets: '1 %onds

'2 Commodities 0hard and soft1 '& =hipping 0%altic "-change1 and 6nsurance 0,lo#d.s of ,ondon1 '' shippin" market is about the buyin"3sellin" of car"o capacity (charterparties*

2.4.

/orei"n ,-chan"e Market

') Currencies bought:sold '+ Companies that go for direct in!estment abroad and institutional in!estors that go for indirect in!estment abroad use the fore- market.

2.4.1.

5irect in!estment

'/ Companies need to change currencies when the# do business o erseas '3 Customers o erseas 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 con erted back to home currenc# 0currenc# of account1

2.4.2.

Indirect3&ortfolio In!estment

)1 Institutional in!estors 0insurance companies$ pension funds and asset managers1 in est in global companies through indirect in!estment through purchasing stocks in companies )2 Shares sold in local currenc#

2.4.2.

6irtual317C Market

)& %anks are biggest users of f- market )' 2- market is all done O(C between banks$ companies and institutional in estors )) %anks act as intermediaries between parties 8uoting bid:ask prices

2.4.4.
)+

Central +anks