Coprorate Finance

Chapter 3 – Business and the financial markets Presentation by: James Williams

The roles of the financial markets

 The financial markets in Australia, and indeed in any country, fulfil many roles, not least of which are:

• Provision of platforms where the supply of funds by surplus units and the demand for funds by deficit units may be reconciled and priced through trading • Facilitation of business and trade • Facilitation of savings by individuals to allow for future consumption • Provision of financial services which allow participants to balance their risk tolerance with their requirements for both returns and cash.

The roles of the financial markets

 In Australia, savers are typically individuals and foreign entities.  The borrowers are usually businesses and governments.  Apart from the savers and borrowers, there are other entities in the markets that provide financial services and, additionally, who oversee the markets.  The first group is composed of the financial institutions and the second of the regulators.

Financing business operations

Direct finance

 Direct finance takes place when the saver who is the supplier of funds makes a deal directly with the business that needs the funds.  With direct funding, the supplier must know the entity that needs the funds. If the supplier does not know of an entity needing funds, then no supply can be made.  Transactions costs are the costs, in terms of both time and explicit cash costs, of effecting a transaction or deal.

Financing business operations

Direct finance

 Hoarding is savings held outside the financial system and thus not available for investment.

Financing business operations

Intermediated finance

 Intermediate finance takes place through an intermediary or a financial institution.  Intermediated finance is much more common than direct finance.  They provide services at costs which are less than the transactions costs savers and borrowers would have to bear if...