This pageBook title: UnderstandingFinancial Markets & InstrumentsAuthor:Chapter 1: Introduction to the FinancialMarkets1.11.21.31.41.51.61.71.81.91.10Introduction'Life in abundance' is probably one of thegreatest desires of mankind. In business, people strive to managetheir assets (and liabilities for that matter) to obtain maximum advantage,which they believe would eventually lead to true joy. Even the astronomerslook toward the heavens to try and find explanations that would enhanceour life on earth. The business world can almost be described withthe same philosophy with which Arno A. Penzias, Novel prize winner inphysics, described the universe: 'Astronomy leads us to a uniqueevent, a universe which was created out of nothing, and delicately balancedto provide exactly the conditions required to support life.' The business world of today is also delicatelybalanced with numerous determinants playing a part in trying to enhancehuman life.Markets in the financial systemPeople have different needs, and in tryingto fulfill these needs, opposite needs are matched. Where needsare matched on a large scale, markets for those needs develop.Market forces are thus:.the supply of an item or service wherethere is.a demand for that item or service.Trading of that item or service is createdthrough a price mechanism.
The price is based on the value of theitem or service to the traders (buyers and sellers), depending on certainmarket factors.There are different markets in a system,such as.the services market.the products market.the financial markets.A market is not necessarily a physical andgeographically identifiable place, and goods traded are not necessarilyphysical goods. Trading might take place over the telephone, andgoods traded might be knowledge, etc. Goods traded in markets aretraded through a price mechanism which expresses the interaction of demandfor and supply of these goods as a value. So, for instance, thetrading of apples uses the price mechanism of a monetary amount, for exampleR1,20 per apple.The different markets in the financial systemof a country are not isolated markets, but they interact with each other.With electronic communication and the revolution in computers andcomputer networks, the markets of the world are busy interacting on alarge scale. In a small country like South Africa, one could sometimesfeel lost in this 'universe' of supplies and demands. As astronomerBernard de Fontenelle (1657-1757) put it: 'Behold a universe soimmense, I am lost in it. I no longer know where I am.'
The effect of different markets on eachother can, however, clearly be seen in the South African context.The money supply in South Africa is, inter alia, influenced bythe gold price, because South Africa is a net exporter (seller) of gold.If the gold price should increase, the supply of money in the marketswill increase due to more money flowing into the country. Thiscould lead to a higher demand for products in the product markets becauseof the availability of money. A higher demand for products couldresult in prices of products going up (resulting in inflation), whichwould dampen the demand for products and money.
Interest: 12% of R1 000 000=R 120000Capital amount:R1 000 000TotalR1120 000The total cash flow discounted at the requiredyield of 15% for one year gives R973 913. For the investor to earn15% on his investment, he would be willing to pay only R973 913 for theinstrument.If the market rate and yield required bythe investor drops to 14% the instrument (using the same calculation methods)would trade at R982 456. Thus, it is clear that with a fixed interestand redemption payment, a lower monetary amount (consideration) wouldbe offered for an instrument if the yield goes up, because the investorwould want to earn more on his investment. The interest rate atwhich the instrument is eventually traded, is called the yield and coulddiffer from the market rate because of differing views, costs, etc.For trading to take place, a buyer and aseller must get together and negotiate. This could take place ona specifically allocated floor, or by means of a communication systemusing computer networks and telephones, for instance, the South AfricanFutures Exchange and the JSE. Where a transaction takes place withoutmaking use of an organised exchange, the transaction is called an 'over-the-counter'(commonly known as OTC) transaction.
Understanding South African Financial Markets 4th Edition by Casemate Publishers Understanding South African Financial Markets Fixed Income. The workshop is aimed at giving the delegates insight into the nature fixed income markets with a strong focus on understanding the instruments, pricing, and market practice for dealing in fixed income.
The Futures Exchangeand the JSE have in recent years implemented fully automated electronictrading systems, which eliminate telephone calls between buyers and sellersor buying and selling agents to a large degree. Although transactionsare closed in numerous ways, the exchange of money and products such ascontracts, certificates, etc. Still takes place between the parties ofa transaction, and this is called the settlement of a transaction.Settlement of the transaction can take place at a later date than thedate of the transaction.Owning a financial instrument is calleda long position. A short position is the selling of a financialinstrument without being the owner thereof. Because the settlementdate could be after the transaction date, a seller could sell somethinghe doesn't own and buy it before the settlement date, to be able to deliverit to the buyer.Factors influencingthe financial marketsEach effective market has a supply of acertain commodity, and a demand for that commodity.
Savings (investments)represent the supply side in the money markets, and financing needs,as the demand side.
Abundant resources, an advanced industrial sector, robust financial systems, a progressive legal framework – and the gateway to other African markets. The country remains rich with promise.
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