4.4 - The financial sector

Question 1

Define financial market

Answer 1

Any place or system that provides buyers & sellers the means to exchange goods/services & trade financial instruments.

Question 2

Explain the 3 main financial markets

Answer 2

MONEY = Provide short-term financing (borrowing & lending) for households and individuals.

CAPITAL = Provide medium to longer term financing for firms and governments. Bonds and shares are issued in primary capital markets and the existing assets are then traded on secondary markets.

FOREX = Where currencies are traded. Either now in spot markets or on an agreed future date at an agreed price in forward markets.

Question 3

Explain facilitating savings as a role of the financial market

Answer 3

Allows individuals to store their money for the future. It can be done through a range of assets, such as savings accounts and holding stocks and shares.

Question 4

Explain lending to firms and consumers as a role of the financial market

Answer 4

Access to credit a key requirement for economic growth & development as it allows investment and consumption. It also allows households or firms to purchase assets &
pay them over an extended period of time e.g. mortgages on home purchases.

Question 5

Explain facilitating the exchange of goods/services as a role of the financial market

Answer 5

• The purchase of goods/services requires the movement of money between at least two parties.
• So financial markets provide a payment system for this to happen For example, central banks print paper money, institutions process cheque transactions and
  companies offer credit card services.

Question 6

Explain providing forward markets in currencies & commodities as a role of the financial market

Answer 6

Forward markets are ones in which forward contracts are traded.

= a private and customisable agreement between two parties to trade assets at a specific price/exchange rate on a specified date in the future.