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Overview of Financial Economics Concepts

Financial economics studies resource allocation in uncertain markets, while the financial system encompasses institutions and markets facilitating fund exchanges. Financial instruments are contracts that create financial assets and liabilities, and financial markets are platforms where these instruments are traded, involving surplus units (investors) and deficit units (borrowers). Key participants in the financial system include firms, households, and government entities.

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7 views2 pages

Overview of Financial Economics Concepts

Financial economics studies resource allocation in uncertain markets, while the financial system encompasses institutions and markets facilitating fund exchanges. Financial instruments are contracts that create financial assets and liabilities, and financial markets are platforms where these instruments are traded, involving surplus units (investors) and deficit units (borrowers). Key participants in the financial system include firms, households, and government entities.

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n.taranco.izquie
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Activity 1

Financial economics (FE) is defined as a branch of economics that analyzes the use and
distribution of resources in markets in which decisions are made under uncertainty.

Financial system (FS) is a set of institutional units and markets, such as banks insurance
companies and stock exchanges that permit the exchange of funds others who define it as a
system of complex and closely linked institutions agents markets and others which enables the
transfer of money between investors and borrowers and this financial system is comprised of
the following money financial instruments financial markets financial institutions and financial
services.

Financial instrument (FI) is contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity a financial instrument is a monetary
contract between parties that can be created traded or modified a financial instrument is a
monetary contract between two parties which can be traded and settled. Financial instrument
then is something that generates a resource or an asset by issuing either debt securities
representing liability or equity securities that represent ownership but perhaps one of the most
exciting things about the definition given is the word trade or traded can you guess what trading
means in finance by itself in finance.

Financial market (FM) is where financial instruments are traded, it's a market in which securities
such as stocks and bonds can be purchased or sold it's a vibrant avenue where buyers and sellers
meet it's so alive and abuzz with energy that there are many different types of financial markets
and we shall get to know them in one of our future discussions there are at least two participants
in a financial market they are called surplus units or the investors and deficit units who are the
surplus units surplus units are those who have extra to give think of these as those people or
institutions who receive more than they spend and thus have extra funds to lend to others. They
are also called savers for investors the second participant is a deficit unit.

Deficit units are those people or institutions who have spent more than they have received in
other words deficit units go into a financial market looking for funds that's why they are called
users or borrowers. Financial markets provide the avenue for financial management decisions
of deficit units and investment management decisions of surplus units to complete our
overview.

Surplus units earn more than it spends on its basic needs and therefore has money left over to
invest into the economy through the form of purchasing goods, investing, or lending. A surplus
spending unit can be a household, business, or any other entity that makes more than it spends
for the purpose of sustaining itself.

Some basic economic units who take part in the FS are:

• Firms, Companies, Households, The government, Angel investors…, and others.

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