Discussion — Lectures 17 & 18

This session covers Lecture 17: Direct and Indirect Finance and Lecture 18: Forwards and Futures.

• Lecture 17 Notes
• Lecture 18 Notes

Lecture 17—starting with a simple description of "traditional" commercial banks—describes the evolution and emergence of shadow banking as the money market and capital market became intertwined through an iterative process of intermediation and disintermediation. Money-market funding allows security dealers to provide "shiftability" to capital assets, and liquidity to capital markets.

Lecture 18 picks up on Lecture 8's discussion of matching up time patterns of cashflows with cash commitments. People can use forward and futures contracts to lock in cashflows ahead of time. Our exploration of forwards and futures also serves as an entry point for making sense of other types of derivatives.

The finance perspective says that “the future determines the present.” Not just today’s asset prices, but also today’s cash flows are determined partly by people’s expectations of the future. Nowhere is this more evident than in the mark-to-market cash flows of futures contracts.

Using our knowledge of futures contracts, we investigate the puzzle of what makes cash-and-carry arbitrage profitable.

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