5 Basic Elements of Financial System - Essay Sample

Question One

A financial system is an array of organizations, for example, banks, insurance agencies, and stock trades, that license the trading of assets. They exist on local, regional, and global levels where they affect and influence the lives of borrowers, lenders, financial analysts, and venture capitalists. These systems also affect how the financial resources in their jurisdictions are circulated and managed.

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Five Basic Elements of a Financial System:

1) Financial Institutions

Financial institutions serve the vast majority somehow or another, as financial tasks are an essential piece of any economy, with people and groups depending on financial institutions for exchanges and subsidizing. Governments think of it as necessary to manage and direct banks and financial institutions since they do have such a fundamental influence on the economy. Truly, liquidations of financial institutions can make alarm.

In the United States, the Federal Deposit Insurance Corporation (FDIC) guarantees official store records to console people and organizations in regards to the security of their funds with financial institutions. The wellbeing of a country's financial system is a vital part of monetary dependability. Loss of trust in a financial institution can, without much of a stretch, lead to a bank run (Roberts, 2019).

2) Financial Markets

Financial markets include avenues where financial assets, be it physical or business, are traded and moved. Generally, financial markets are grouped into capital markets and money markets. While money markets revolve around transient budgetary assets, capital markets, on the other hand, is involved with long term assets that have usually mature over periods more extended than one year (Chen, 2003). It is, however, worth noting that an assortment of the two can be possible, thus essential and auxiliary markets. Moreover, capital markets also cover emerging issues and assurance claims, while ancillary markets concern securities available on the stock trade.

3) Financial Instruments

This is a massive piece of money related system. In this day and age of Globalization, we are without seeing exchange understandings between various nations, universal trades are increasing, and business hindrances are falling. Thus rivalry is estimated on a worldwide scale. In this influx of Globalization, financial instruments have been developing at an unimaginable pace. We are right now seeing a fast development wonder of the utilization of the business tools in the universal financial market. These vary from conventional instruments like interests or securities to the different types of subsidiary instruments, for example, fates contracts, forward agreements, alternatives, loan fee trade, and so forth.

4) Financial Services

Financial administrations contain organizations given by Liability Management and Asset Management Companies. They help to get the significant resources and guarantee that they are capably passed on. They help to choose the financing blend and widen their master organizations up to the period of overhauling of moneylenders. They help with acquiring, selling, and purchasing protections, crediting and contributing, making and allowing portions and repayments, and managing chance exposures in money related markets. These range from the leasing associations, vendor financiers, typical reserve houses, portfolio heads, charges are limiting, and affirmation houses (Murphy, 2003).

The money related organizations part offers different master organizations like FICO assessment, venture financing, natural resources, broker banking, book building, vault administrations, etc. Budgetary associations and financial markets aid the working of the money related structure by techniques for financial instruments. To have the choice to finish the assignments given, they require a couple of administrations of cash compared to nature. This way, commercial organizations are considered as the fourth noteworthy section of the money related structure.

5) Money

Cash is appreciated to be whatever is recognized for the portion of things and administrations or the repayment of obligations. It is a vehicle of exchange and goes about as a store of enormous worth. The pertinence of the announcement 'A profoundly created and effective financial system is basic to continuous monetary development and thriving' is that the financial systems bolster the monetary exchanges. They energize reserve funds that help with assets for venture. It additionally helps with a broad scope of acquiring options and speculation openings. At the point when the financial system is all around created, it aids productive appropriation of economic development resources while administrative systems invigorate security and to an economic system.

Question 2

The global financial crisis of 2007 is the single most significant economic issue that has affected the world during the entry into the 21st Century. The dilemma with its genesis in the United States real estate bubble caused a lot of ripples that were felt across the world. It led to recession and disaster to which some countries, for example, Greece, are yet to recover from. In the same way, it had impactful adverse effects, the crisis also changed the global finance scene, and the way investment was carried out in the years to come.

Due to technology and the ease of movement, the world was just getting acclimatized to a global financial system. Nevertheless, a country's choice to operate in an open and global economy risks significant fiscal ramifications. But owing to the overdependence on technology, a lot of countries have been forced to abandon the traditional state-led financial systems and adopt a more global approach to financial matters.

For example, the increased use of electronic money has grown exponentially over the years, with a lot of corporations and multinationals preferring wire transfer options in their dealings. Such provisions have made it easier for people to invest or conduct business remotely without the limitations associated with geography. In the same way, people hold international accounts that allow wire transfers from country to country in real-time further cementing the essence of Globalization as a concept. Conclusively, technology is arguable one of the significant factors that has contributed to the integration of global financial systems.

Another factor that has contributed to the shift towards Globalization in the finance industry is the evolution of financial institutions (James & Gills, 2007). Currently, banks and other financial institutions have adopted a multinational approach towards their business with different branches operating across all the continents. In this context, this has facilitated the ease of commercial operations for investors across the world since money can be easily accessed without the costs associated with moving money from one account to the other.

Question Three

Significant Attributes of Financial Assets

According to Investopedia, a financial asset is a liquid asset possessing the contractual right or ownership claim (Chen, 2003). In this context, therefore, financial assets include cash, stocks, bonds, or bank deposits. Unlike property and land, financial assets do not have inherent physical worth or, in some cases, physical form, for example, bonds or stocks. Instead, the value of financial assets is reflected in their influence on the workings of markets. In essence, financial assets affect the supply and demand in the markets they are utilized.

Term Deposits are financial assets that are similar to bank deposits since both involve the deposit of money in a bank account in a financial institution like a bank. The only difference between the two is the fixed time that is assigned bank deposits hence the change of name to term-deposits. Therefore, term deposits are fixed-term investments, which include the deposit of money in a bank account awaiting maturation upon the end of the stated time. Typically, term-deposits carry short maturity periods ranging from a single month to a few years (Barone, 2012). It is also common to have such investments to have minimum deposit amounts.

When an account holder opens an account with a financial institution, the bank or cooperative holds the right to use the money deposited in the report for the benefit of the bank and the customer. Usually, this money is lent to other clients who then repay the money with interest upon expiry of the timelines of their loans. In return to use the money, the bank pays a specific and significant amount of interest to the account holder as well as earning them profit. It is worth noting, however, that with such types of deposit accounts, the client has the right to withdraw their funds at any time of their choosing, thus making it familiar for most account holders to earn meager profits on their deposits. With term-deposits, however, the client deposits the money for a fixed period, thus affording them a higher percentage interest compared to standard deposit accounts.

Equity is another financial asset that is common in the finance field-typically referred to as shareholders' equity or owners' equity is the representation of the monetary value of the assets if they get liquidated. In a company of the financial organization, this refers to the amount of money that each shareholder receives upon the liquidation of the company's assets. Equity is a result of the deduction of liabilities from the profits obtained by such liquidation of assets (Adegbie, & Dada, 2018).

In accounting, equity is a common component of financial balance sheets and are commonly utilized to gauge the health of a company. Moreover, shareholder equity can also represent the book value of an organization. There are several types of investment, but the standard definition of the term holds to the description provided in the paragraph above. Nonetheless, one can consider equity as a degree of ownership in any asset. Consequently, equity may lack physical form, unlike assets.

According to accounting and corporate finance, a derivative is a contract existing between two or more parties whose value is dependent on an agreed-upon underlying financial asset, for example, securities or indices (Du et al., 2018). The typical examples of derivatives include bonds, commodities, currencies, and interest rates. Considered a part of advanced investing, derivatives are usually secondary securities valued upon the primary security attached. Subsequently, a derivative is in itself of no monetary value. Futures contracts, options, swaps, and warrants are among the most widely used derivatives.

Risk Profile

A risk profile is any quantitative analysis of the possible threats imminent to an organization or enterprise. Therefore, risk profiles are designed to help an individual calculate the risks and potential monetary and non-monetary losses they can expect, thus helping in the planning and strategizing of a business endeavor (Adegbie, & Dada, 2018). Risk profiles help investors determine the acceptable level of risk before investing.

For corporates organizations, many factors influence the creation of a risk profile. On the other hand, an individual's risk profile determines the person's willingness and ability to take a risk (Adegbie, & Dada, 2018). In this context, it refers to portfolio risk. Considering that the source of the investment is a high profile lottery win, it suffices to say that the willingness of such an individual to take risks is...