Chapter 1: The Financial Services Industry ~ 3 Qs

Question 1

List of things that professional sector/wholesale firms would provide (investment banks and custodian banks in particular)

Answer 1

1. Markets: Equity, Bond (Exchange traded), Foreign Exchange (OTC)
2. Insurance (general and life. More corporate level than personal)
3. Fund Management
4. Investment Banks
   -Trading as principal or agent (broking)
   -Banking (savings and loans, mainly for corporates)
   -Market making
   -Research (companies improving capital structures, investment management)
5. Custodian Banks
   -Safekeeping of assets (protect from harm and ensuring they are properly protected)
   - Administration (manage cash transactions and perform foreign exchange transactions on behalf of clients)

Question 2

List of things that a retail sector firm (high street bank and building societies) would provide.

Answer 2

1. Retail banking (Savings/deposits, loans/mortgages, ISAs)
2. Pensions
3. Insurance (more personal level than corporate)
4. Investment services (agents/brokers)
5. Custodians (looking after assets, customer may not have physical copy of shares eg)
6. Financial planning (holistic view) and wealth management (for high net worth individuals) and advise (personal recommendation for an asset or group of assets).

Question 3

Central Banks have control over which of the following?
A Setting short-term interest rates
B Issuance of commercial paper
C Regulating credit card providers
D Issuing debentures to public authorities

Answer 3

A
Central banks typically have responsibility for setting a country’s or a region’s short-term interest rate, controlling the money supply, acting as banker and lender of last resort to the banking system and managing the national debt.

Question 4

Which of the following statements are TRUE of the wholesale/professional market?
I Involves large trades
II Investors are considered knowledgeable
III Investors are private
IV Includes retail banking
A I and III
B I and II
C II and III
D I and IV

Answer 4

B
The wholesale market involves institutional clients who are considered knowledgeable and place large orders.

Question 5

What type of service is one where a firm simply processes the orders given directly by the client?
A Execution only
B Discretionary
C Dealing with Advice
D Robo advice

Answer 5

A
Where a firm simply processes the orders given by the client and no advice is offered is called execution only.

Question 6

Which one of the following institutions would most likely manage cash transactions and perform foreign exchange transactions on behalf of clients, whilst also looking after securities which belong to those clients and ensuring they are properly protected.
A Investment Bank
B Custodian Bank
C Insurance Company
D Private Bank

Answer 6

B
Custodians are banks that specialise in safe custody services, looking after portfolios of shares and bonds on behalf of others. This would include cash transactions, for example paying for shares bought by clients and FX deals if the stock was in a foreign currency.