Chapter 12: Supply and demand

Question 1

What factors influence the demand for assets

Answer 1

• External factors (although investors’ perception of the asset remains unchanged)
• Investor’s income
• Investor’s circumstances (liabilities, tax regime, regulatory regime, political climate, marketing, education, fashion)
• Price of alternative assets

Investors’ perception of the asset has changed (risk and return)

Question 2

What factors influence the supply of assets

Answer 2

Bonds

• Government bonds: supply of gov bonds is determined by the government fiscal deficit and its strategy for financing the deficit
• Corporate bonds: supply depends on the need or desire of a company to raise finance and the relative attractiveness of debt to equity financing

Equities
- Supply depends on the number of rights issued, the number of new companies and the number of privatisation of previously state-owned companies

Property
- Supply is relatively inelastic - there may be delays and restrictions on construction

Derivatives
- Supply depends on technological innovation and a greater understanding of reserving and pricing of complex products

Question 3

What is the relationship between price and demand and price and supply

Answer 3

D -> P

S -> 1/P