Learning Objectives:

  • Describe the structure of the financial system.

  • Distinguish between money markets and capital markets.

  • Identify the main financial instruments traded in financial markets.

  • Explain the role of financial intermediaries.

2.1 The Structure of the Financial System

The financial system comprises financial markets, financial intermediaries, and financial instruments . The HSE University course requires students to “analyse the key concepts of modern theory of finance” and “discuss functions of financial systems and types of financial systems with real-life examples” . The LSE external programme applies “a transactions cost and asymmetric information approach to financial structure” to explain why financial systems are organised the way they are .

Financial Markets: Platforms where financial assets are created and traded.
Financial Intermediaries: Institutions that channel funds from savers to borrowers.
Financial Instruments: The contracts and securities traded in financial markets.

The ESX Academy module defines the financial system as “the intricate network of institutions, markets, and mechanisms that facilitate the flow of funds and resources within an economy” .

2.2 Financial Markets

The HSE University syllabus covers “Financial Markets and Instruments” as a core topic, including “Functions of the financial system. Types of financial intermediaries. Financial instruments (debt, equity, derivatives). Market structures (OTC vs centralized exchanges, primary vs secondary markets, etc.). Money and Capital Markets” .

Money Markets: Short-term debt instruments (maturity less than one year). The NPUST Money and Banking course covers “financial system” and “financial markets” as foundational topics .

Capital Markets: Long-term debt and equity securities. The ESX Academy module covers “financial markets and instruments, elaborating on their structures, classifications, and functions, including primary vs. secondary markets, as well as cash and futures markets” .

Primary Markets: Where new securities are issued. The issuer receives the proceeds from the sale.
Secondary Markets: Where existing securities are traded between investors. The issuer does not receive proceeds from secondary market transactions.

Market Structures:

  • Organised Exchanges (Centralised): Such as stock exchanges where trading is conducted through a centralised platform.

  • Over-the-Counter (OTC) Markets: Decentralised markets where trades are negotiated directly between parties.

2.3 Financial Instruments

The HSE University syllabus covers “debt and equity instruments” and “derivatives: forwards, futures, options, swaps” as core topics . The ESX Academy module requires students to “identify and differentiate between financial instruments, such as money market instruments, capital market instruments, and Sharia-compliant instruments” .

Equities: Common and preferred stock representing ownership in a company.

Fixed Income: Coupon and discount bonds representing debt obligations. The HSE syllabus covers “Coupon and Discount Bonds. Annuities and Perpetuities. Valuation by absence of arbitrage” .

Derivatives: Forwards, futures, options, and swaps—financial contracts whose value is derived from an underlying asset.

The course also covers “Types of financial intermediaries. Financial instruments (debt, equity, derivatives)” as part of its foundational curriculum .

2.4 Financial Intermediaries

The ESX Academy module covers “key players, such as financial institutions and regulatory bodies, alongside the technological frameworks that support financial infrastructure” . The LSE external programme identifies financial intermediaries as a core component of the financial system, noting that “international capital flows, channeled by banks and other financial intermediaries” determine the development of economic systems .

Commercial Banks: Deposit-taking institutions that make loans to individuals and businesses.
Investment Banks: Institutions that underwrite securities and provide advisory services.
Insurance Companies: Institutions that provide protection against financial loss.
Pension Funds: Institutions that manage retirement savings.
Mutual Funds: Pooled investment vehicles that invest in diversified portfolios.

 

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