Almira

2-1 FINANCIAL MARKETS AND INSTITUTIONS Assume that you recently graduated with a degree in finance and

have just reported to work as an investment adviser at the brokerage firm of Smyth Barry & Co. Your first

assignment is to explain the nature of the U.S. financial markets to Michelle Varga, a professional tennis player

who recently came to the United States from Mexico. Varga is a highly ranked tennis player who expects to invest

substantial 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 U.S. financial system to Varga.

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

each one.

b. 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.

c. Why are financial markets essential for a healthy economy and economic growth?

d. What are derivatives? How can derivatives be used to reduce risk? Can derivatives be used to increase risk?

Explain.

e. Briefly describe each of the following financial institutions: commercial banks, investment banks, mutual

funds, hedge funds, and private equity companies.

f. What are the two leading stock markets? Describe the two basic types of stock markets.

g. If Apple Computer decided to issue additional common stock and Varga purchased 100 shares of this stock

from Smyth Barry, the underwriter, would this transaction be a primary or a secondary market transaction?

Would it make a difference if Varga purchased previously outstanding Apple stock in the dealer market?

Explain.

h. What is an initial public offering (IPO)?

i. What does it mean for...