4.4 Flashcards
Bond Market
Bond markets allow governments, and businesses to borrow to finance activities.
In this market, borrowers issue a security, called a bond, that promises the timely payment of interest and principal over a set time
Stock Market
Market where shares in companies are traded
Companies initially sell stock (in the primary market) to raise money. But after that, the stock is traded among investors (secondary market).
Foreign Exchange
Markets where foreign exchange is traded
Exchange rates are set by the forces of supply and demand for currencies
Some currency rates are fixed by government policy
The Role of Financial Markets
-To provide savers with a return on their investment
-To provide short, medium and long term sources of finance for business and governments
-To use market forces to set interest rates and exchange rates
-To allow governments to implement monetary policy
-To allow the development of more complex financial products (Derivatives-futures, options, swaps) that manages risk and allows speculation
Forward Markets
A market in which participants agree to trade some commodity, security, or foreign exchange at a fixed price for future delivery.
-A currency forward contract sets the exchange rate for a contract at an agreed price
-A commodity forward contract sets the price of some good to be delivered in the future. For example a farmer may agree to deliver a wheat to a bread manufacturer in 6 months at a price agreed now
Ad Forward Markets
-Guarantees a future price and allows the company to control supply and risk.
-Can be used to hedge currency and raw material costs .
-Contracts are flexible and can be defined for a specific situation.
-Can help in predicting cash flow
Dis Forward Markets
-The price or exchange rate could move against you, and you end up paying more than the standard price in the future.
-A forward contract is more complicated than a standard contract.
-With a longer timeframe, it carries an increased risk of non-payment or default.
main forms of market failure
Moral Hazard
Externalities
Asymmetric Information
Principal-Agent Problem
Market Rigging
Speculation
Market Bubbles
Incomplete Markets
Asymmetric Information
When one individual or party has much more information than another individual or party, and uses that advantage to exploit the
other party.
Market Bubbles
When the price of something is driven well above what it should be, usually due to the behaviour of consumers.
moral hazard
Occurs when someone increases their exposure to risk when insured, especially when a person takes more risks because someone else bears the cost of those risks
Market Rigging
When there is a small number of firms in a market, they may choose to work together to increase their joint profits and exploit consumers.
Principal Agent
When one person is able to make decisions on behalf of another person , but may not be in their best interests
Externalities
When a market transaction has a negative consequence for a 3rd party.
Speculation
A risky action in which a person or organisation tries to predict what will happen to the price of an asset and buys / sells accordingly in order to try and make a profit.
