Finance and Financial Markets

Third Edition

by Keith Pilbeam

Chapter 1 - The World of Finance

Find an overview and useful learning resources below to accompany Finance and Financial Markets chapter one.

Chapter Introduction

The world of finance has changed beyond all recognition over the last few decades, and among the most important changes have been:

  1. The so-called globalization of the world of finance with literally trillions of dollars swirling around the global financial markets;
  2. The unprecedented increase in the volume of funds and the size of the financial services industry;
  3. The growing institutionalization of markets with funds increasingly managed on behalf of individual investors by pension funds, unit trusts/mutual funds, insurance companies, hedge funds and the like;
  4. The range of new instruments traded such as junk bonds, collateralized debt obligations (CDOs), credit default swaps (CDS) and derivative instruments such as futures, options and swaps;
  5. The use of new technology;
  6. The development of the internet, enabling retail customers to access online dealing, extensive information and banking services;
  7. Increased pressures on banks as they have seen corporate lending fall dramatically due to the development of new forms of corporate finance such as Eurobonds;
  8. The trend towards deregulation of the financial sector;
  9. The use of the Euro in financial markets following the creation of a European Monetary Union in January 1999 and its introduction at street level in January 2002;
  10. The increased importance of so-called emerging markets and their economies;
  11. The impact of the so-called ‘credit crunch’, which started on 9 August 2007 and was ongoing in 2010, and its effect on the financial sector which will take many years to become fully known.

These changes have not taken place in isolation, rather they have fed off each other, and interacted in a dynamic self-reinforcing manner. The credit crunch mentioned in point 11 was the culmination of many years of debt build-up, deregulation, financial innovation and other forces that were not fully understood by market participants.

In this opening chapter we attempt to give an overview of the world of finance. We look at some of the factors that have influenced the development of the financial services industry from the 1980s up to the present. In particular we focus upon four factors: the globalization of financial markets; the impact of technology; the deregulation of the financial services industry and the importance of product innovation. We then proceed to a brief look at the so-called emerging markets which are becoming more important to the global financial system, and some of the issues and obstacles that these markets will have to tackle as they develop. The chapter concludes with a rather speculative gaze into the financial crystal ball.

Learning Objectives

In this chapter you will learn about:
  • The various statistics on international financial markets
  • The various forces for change in international financial markets
  • The role of financial centres such as London, New York and Tokyo
  • The globalization of financial markets
  • The various types of financial innovation
  • The growing importance of emerging markets

Further Reading

Bain, K. and Howells, P. (2007) Financial Markets and Institutions, 5th edn, Financial Times/Prentice-Hall.

Bodie, Z., Kane, A. and Marcus, A. (2008) Investments, 6th edn, McGraw-Hill.

Buckle, M. and Thompson, J. (2004) The UK Financial System: Theory and Practice, 3rd edn, Manchester University Press.

Valdez, S. (2010) Introduction to Global Financial Markets, 6th edn, Palgrave Macmillan

Revision Questions

  1. What are the key roles of a financial centre and to what extent is London a different financial centre than New York?
  2. Discuss the pros and cons of the use of new technology in financial institutions.
  3. What is meant by securitization?
  4. Discuss what is meant by financial innovation. What are the five types of financial innovation that can occur?
  5. What is meant by ‘globalization of financial markets’? Discuss the pros and cons of the globalization process in the world of finance.
  6. Briefly describe five reasons why emerging markets may not prove popular with international investors.

Multiple Choice Questions

Click here to launch multiple choice questions for chapter 1.