4.4 - Role of financial markets

Question 1

Role of financial
market

Answer 1

a) To facilitate saving

b) To lend to businesses and individuals

c) To facilitate the exchange of goods and services

d) To provide forward markets in currencies and
commodities

e) To provide a market for equities

Question 2

Role of financial market: to facilitate saving

Answer 2

• Financial institutions, such as banks and credit unions, provide a safe and convenient platform for individuals and businesses to save their money.
• They offer various types of savings accounts, including regular savings accounts, fixed deposits, and retirement accounts like IRAs (Individual Retirement Accounts).
• These institutions ensure the security of deposited funds and often pay interest to encourage saving. (protect against inflation)
• By pooling the savings of many individuals, financial institutions can allocate these funds to support loans and investments, thereby stimulating economic activity.

Question 3

Role of financial markets:
To lend to businesses and individuals

Answer 3

• One of the primary functions of financial institutions is to act as intermediaries between savers and borrowers.
• They collect deposits from individuals and then lend this money to businesses and individuals in need of capital.
• Financial institutions assess the creditworthiness of borrowers and determine the terms and conditions of loans.
• This intermediation process facilitates economic growth by directing funds to productive uses, such as funding business expansion or financing home purchases.

Question 4

Role of the financial market:
To facilitate the exchange of goods and services

Answer 4

• they facilitate the exchange of goods and services by creating a payment system.
• which provide a wide range of payment and transaction services that facilitate the exchange of goods and services in the economy.
  > Central banks print paper money
  > institutions process cheque transactions,
  > companies offer credit card services and banks
  > bureau de changes buy and sell foreign currencies
  > offer checking accounts, > allow electronic fund transfers
  > debit and credit card services
  > online payment systems. - By providing a secure and efficient means of transferring funds, financial institutions play a vital role in supporting everyday economic transactions.

Question 5

Role of financial markets:
To provide forward markets in currencies and commodities

Answer 5

• Financial institutions also participate in financial markets by offering forward contracts for currencies and commodities.
• These contracts allow businesses and investors to hedge against currency exchange rate fluctuations and commodity price volatility.
• Forward markets provide a mechanism for parties to lock in future prices, reducing uncertainty and risks associated with international trade and commodity markets.

Question 6

Role of financial markets: To Provide a Market for Equities

Answer 6

• Financial institutions often serve as intermediaries in the equity market, allowing individuals and institutions to buy and sell shares of publicly traded companies.
  > Issuing shares
  is an important way for companies to finance expansion but people would be unlikely
  to buy shares if they were unable to sell them on in the future. Financial markets provide the ability for shares to be sold on in the future, making the asset more
  appealing.
• Stock exchanges and brokerage firms facilitate these transactions, enabling investors to participate in the ownership of corporations and potentially benefit from capital gains and dividends.
• This function supports capital formation and efficient allocation of resources.

Question 7

examples of financial markets

Answer 7

• retail/commercial banks
• investment banks
• insurance companies, hedge funds, pension funds
• market for assets

Question 8

Financial assets examples

Answer 8

Shares, bonds (government&corporate), property, foreign exchange (FOREX), derivatives (mortgage-backed securities)