Chapter 5 - other markets and investments

Question 1

+What are cash depositors and the main characteristics? advantages and disadvantages

Answer 1

Cash depositors are accounts held with banks and other saving institutions.
Main characteristics: return is interest, full amount can be withdrawn
Advantages - fast liquidity, relatively safe, saving vehicle for interest
Disadvantages - Risk if the bank defaults, inflation could reduce return, currency risk

Question 2

After 2016, how much do tax payers now pay

Answer 2

Basic tax payers - up to £1000
High tax payers - up to £500

Question 3

What is the compensation scheme

Answer 3

The financial service compensation scheme protects individuals up to £85,000

Question 4

what is cryptocurrency and the three main kinds of cyrtoassets?

Answer 4

Digital currency/asset that can be traded, stored or transferred electronically
Three main kinds:
- Exchange token - bitcoin
- Security token
- Utility token

Question 5

what is a fiat currency

Answer 5

Government-issued money and has value because the government maintains it

Question 6

the differences of fiat currency and cryptocurrency?

Answer 6

Fiat = physical forms crypto = digital
Fiat= issued by central authority crypto = decentralised
fiat = transaction takes longer crypto = faster

Question 7

the three main functions of money

Answer 7

• store of value
• medium of exchange to make a payment
• unit of account to measure value of item on sale

Question 8

what is a money market? and advantages and disadvantages

Answer 8

it is used for short-term borrowing and lending. Has a maturity up to one year.
Advantages - low-risk, keeps nominal value of investment, no market risk
disadvantages - only suitable for short-term, subject to risk of banks

Question 9

what are the instruments within a money market

Answer 9

Treasury bills - issued weekly by DMO for the government’s short-term borrowing. There is 0 interest and is issued at discounted rate.
Certificate of deposit - issued by banks in return for deposited money
Commercial paper - issued by large companies to meet their short-term borrowing needs

Question 10

what are the two money market sectors stated by the investment association?

Answer 10

money market funds - has a mix of short-term and long-term
short-term money market funds - focuses specifically on short-term investments

Question 11

What are the features of investing in property?

Answer 11

• unique in terms of location
• valuation is subjective
• complex legal considerations
• relatively illiquid
• no diversification

Question 12

what is residential property and commercial property and the differences?

Answer 12

residential - where people live
commercial - used for business purposes
differences:
R = short-term leasing C= long-term contracts, up to 10 years
R = Landlord responsible c= tenant responsible

Question 13

advantages and disadvantages of investing in property

Answer 13

advantages:
- provides reliable income
- long term returns with low volatility
- property appreciates
disadvantages
- illiquid
- no diversification
- high maintenance costs
- transaction costs

Question 14

what is a mutual fund?

Answer 14

way for investors to invest in property without directly buying the property. Invest in a real estate investment trust or real-estate companies.

Question 15

how are currency pairs traded?

Answer 15

The first currency is the base currency, always equal to 1, the second is the quote currency/counter

Question 16

what does it mean if the exchange rate goes up?

Answer 16

The base currency is rising to the other currency

Question 17

what are the types of transactions/instruments used in fx markets

Answer 17

Spot - buying/selling a currency which is settled immediately, usually within 2 days
Forward - agreement to buy/sell the currency at set price on specific date in future
Future - contract to buy/sell at a fixed price at a set price or later date
Swap - when two people agree to trade currencies at set time, then trade back after

Question 18

how are settlements made in fx?

Answer 18

Settlements are made by the CLS or the worldwide international banking system. it settles through a system called “Payment vs payment”

Question 19

what is a foreign exchange contract?

Answer 19

agreement between two parties to either buy or sell foreign currency at a fixed exchange rate for future dates

Question 20

how to calculate forward rate?

Answer 20

spot rate x (1 + quote currency short-term rate/ 1 + base currency short-term rate)

remember - the currency needs to be divided by 4 to work out quarterly.