1. Introduction: the financial system 1.1 Financial Institutions 1.1.1 Financial institutions as firms 1.1.2 Financial institutions as ''intermediaries'' 1.1.

3 The creation of assets and liabilities 1.1.4 Portfolio equilibrium 1.2 Financial markets 1.2.1 Types of product 1.2.2 The supply of financial instruments 1.

2.3 The demand for financial instruments 1.2.4 Stocks and flows in financial markets 1.3 Lenders and borrowers 1.3.1 Saving and lending 1.3.

2 Borrowing 1.3.3 Lending, borrowing and wealth 1.4 Summary Questions for discussion Further reading 2. The financial system and the real economy 2.1 Lending, borrowing and national income 2.2 Financial activity and the level of aggregate demand 2.2.

1 Money and spending 2.2.2 Liquid assets and spending 2.2.3 Financial wealth and spending 2.3 The composition of aggregate demand 2.4 The financial system and resource allocation 2.5 Summary Questions for discussion Further reading Answers to exercises 3.

Deposit-taking institutions 3.1 The Bank of England 3.1.1 The conduct of monetary policy 3.1.2 Banker to the commercial banking system 3.1.3 Banker to the government 3.

1.4 Supervisor of the banking system 3.1.5 Management of the national debt 3.1.6 Manager of the foreign exchange reserves 3.1.7 Currency Issue 3.

2 Banks 3.3 Banks and the creation of money 3.3.1 Why banks create money 3.3.2 How banks create money 3.4 Constraints on bank lending 3.4.

1 The demand for bank lending 3.4.2 The demand for money 3.4.3 The monetary base 3.5 Building societies 3.6 Liability management Questions for discussion Further reading Answers to exercises Appendix: A history of UKmonetary aggregates 4. Non-deposit-taking institutions 4.

1 Insurance companies 4.2 Pension funds 4.3 Unit trusts 4.4 Investment trusts 4.5 NDTIs and the flow of funds 4.6 Summary Questions for discussion Further reading 5. The money markets 5.1 The discount market 5.

2 The ''parallel'' markets 5.2.1 The interbank market 5.2.2 The market for certificates of deposit 5.2.3 The commercial paper market 5.2.

4 The local authority market 5.2.5 Repurchase agreements 5.2.6 The euromarkets 5.2.7 The significance of the parallel markets 5.3 Monetary policy and the money markets 5.

4 Summary Questions for discussion Further reading Answers to exercises 6. The capital markets 6.1 The importance of capital markets 6.2 Characteristics of bonds and equities 6.2.1 Bonds 6.2.2 Equities 6.

2.3 The trading of bonds and equities 6.3 Bonds: supply, demand and price 6.4 Equities: supply, demand and price 6.5 The behaviour of security prices 6.6 Reading the financial press 6.7 Summary Questions for discussion Further reading Answers to exercises 7. Interest rates 7.

1 The rate of interest 7.2 The loanable funds theory of real interest rates 7.2.1 Loanable funds theory and nominal interest rates bsp; Problems with the loanable funds theory 7.3 Loanable funds in an uncertain economy 7.4 The liquidity preference theory of interest rates 7.5 Loanable funds and liquidity preference 7.6 The monetary authorities and the rate of interest 7.

7 The structure of interest rates 7.7.1 The term structure theory of interest rates 7.7.2 The pure expectations theory of interest rate structure 7.7.3 Term premiums 7.7.

4 Market segmentation 7.7.5 Preferred habitat 7.7.6 A summary of views on maturity substitutability 7.8 The significance of term structure theory 7.9 Summary Questions for discussion Further reading Answers to exercises 8. Foreign exchange markets 8.

1 The nature of forex markets 8.2 Interest rate parity 8.3 Other foreign exchange market rules 8.3.1 Differences in interest rates among countries - the Fisher effect 8.3.2 The determinants of spot exchange rates - purchasing power parity 8.3.

3 Equilibrium and the forex markets 8.4 Alternative views of foreign exchange markets 8.5 The fixed exchange rate system 8.6 Monetary union in Europe 8.6.1 The single currency in practice 1999-2006 8.6.2 The UKand the euro 8.

7 Summary Questions for discussion Further reading Answers to exercises 9. Exchange rate risk, derivatives markets and speculation 9.1 Forms of exposure to exchange rate risk 9.2 Exchange rate risk management techniques 9.3 Derivatives markets 9.3.1 Financial futures 9.3.

2 Options 9.3.3 Exotic options 9.3.4 Other related products 9.4 Comparing different types of derivatives 9.4.1 Exchange-traded versus OTC products 9.

4.2 Foward versus future contracts 9.4.3 Forward and future contracts versus options 9.5 The use and abuse of derivatives 9.6 Summary Questions for discussion Further reading Answers to exercises 10. International capital markets 10.1 The world capital market 10.

2 Eurocurrencies 10.2.1 The growth of the eurocurrency market 10.2.2 The nature of the market 10.2.3 Issues relating to eurocurrency markets 10.3 Techniques and instruments in international capital markets 10.

4 Summary Questions for discussion Further reading Answers to exercises 11. Government borrowing and financial markets 11.1 The measurement of public deficits and debt 11.2 Financing the PSNCR 11.2.1 The PSNCR and interest rates 11.2.2 The sale of bonds to banks 11.

2.3 The sale of bonds overseas 11.2.4 PSNCR, interest rates and the money supply 11.3 Attitudes to public debt in the European Union 11.4 The public debt and open market operations 11.5 Debt management and interest rate structure 11.6 Summary Questions for discussion Further reading 12.

Financial Market Failure and Financial Crises 12.1 Borrowing and lending problems in financial intermediation 12.1.1 Financing needs of firms and attempted remedies 12.1.2 Financial market exclusion 12.1.3 The financial system and long-term saving 12.

1.4 The financial system and household indebtedness 12.2 Financial instability: bubbles and crises 12.3 Fraudulent behaviour and scandals in financial markets 12.4 The damaging effects of international markets? 12.5 Summary Questions for discussion Further reading Answers to exercises 13. The regulation of financial markets 13.1 The theory of regulation 13.

2 Financial regulation in the UK 13.2.1 Regulatory changes in the 1980s 13.2.2 Supervision of the banking system 13.2.3 The 1998 reforms 13.2.

4 The Financial Services Authority 13.3 The European Union and financial regulation 13.3.1 The regulation of the banking industEU 13.3.2 The regulation of the securities market in the EU 13.3.3 The regulation of the insurance services in the EU 13.

4 Globalisation and the growing complexity of derivatives markets 13.5 Summary Questions for discussion Further reading Appendix I : Portfolio Theory Appenidix II-V: Present and future value tables.