Extra More Detailed Questions Flashcards
What does the household sector consist of?
1) Individuals
2) Families
3) Private charitable and non-profit bodies
4) Unincorporated businesses (Farmers and professional partnerships)
What does the corporate sector consist of?
Non-financial firms or companies producing and distributing goods and services.
What does the government sector consist of?
Central and provincial governments as well as local authorities.
What does the foreign sector consist of?
All individuals and institutions situated in the rest of the world
Which sector is the net provider of funds?
The household sector since they are net savers
What role does the borrower play in the financial markets?
They are the issuers of securities
What role does the lender/investor play in the financial markets?
The buy or invest in the securities
What role does the financial intermediaries play in the financial markets?
They expedite the flow of funds from lenders to borrowers. Hence, they are both issuers and buyers of securities
What role does the broker/agent play in the financial markets?
They act as conduits between lenders and borrowers in return for a commission.
What is the alternative name for a broker?
A agent
What role does the financial advisor play in the financial markets?
They give investors recommendation, guidance and proposals for the purchase of instruments
What role does the dealer/jobber play in the financial markets?
They buy and sell securities for their own account (its their “job” hence jobbers)
What is a dealer also known as?
They are also known as jobbers
What role does the market maker play in the financial markets?
They stand ready to buy or sell securities at all time. They have a bid and quote price and make a profit from the spread.
What role does the hedger play in the financial markets?
They are exposed to risk of adverse market price movements and mitigate the risk using hedging instruments such as derivatives (They dont take on the risk, they simply hedge against existing risk)
What role does the speculator play in the financial markets?
They try to make a profit by taking a view on the market (they take on risk that others might not be willing to take aka they are professional gamblers)
What role does the arbitrageur play in the financial markets?
They attempt to make profits by exploiting inefficiencies in market prices
Which of the following markets is not in the cash market?
Bond Market, Options Market, Money Market, Property Market, Equity derivatives,
Option Market (part of the derivatives market), Equity derivatives
What is another name for the spot market?
The cash market
Is the derivatives or cash market more liquid?
The derivatives market is more liquid
What are the 3 different secondary market types?
Order-driven/auction market
quote-driven/dealer market
Combined market
Is OTC markets or exchanges more liquid?
Exchanges since they are standardised and OTC can be tailored to suit a specific need which may not be as attractive to other investors
What are the characteristics of a weak market?
All past market prices and data are fully reflected in asset prices. (no immediate information about market conditions)
What are the characteristics of a semi-strong market?
All publicly available information is fully reflected in asset prices (only public immediate information is used)
What are the characteristics of a strong market?
All public and private information is fully reflected in asset prices (all info is used. Cant use insider info to beat the market)
What are the challenges to EMH?
Anomalies: There are patterns that are quite reliable
Behavioural finance: Human psychology plays a role
What are the 3 types of economic systems and what is the structure of each?
1) Centrally planned(command): state makes key decisions on production
2) Free-market (capitalist): Firms and household make decisions through price system.
3) Mixed: Gov and corps share the production of goods and services. Depends on countries political philosophy
Under what objectives is the performance of an economy judged?
1) High rate of growth (not due to inflation)
2) Steady employment
3) Stable price level (no inflation)
4) Good balance of payments
5) Equitable (fair) distribution of income
What are the most important tools of the monetary policy?
Reserve requirements
Open-market operations
Bank/discount rate policy
When is the monetary policy said to be accommodative/expansionary vs restrictive/contractionary
Accommodative: Bank rate is reduced (cheaper lending of money)
Contractionary: Bank rate is increased (more expensive lending)
What makes up aggregate demand?
Household spending (Consumer)
Government spending (public expenditure)
Investment spending on capital goods
Exports of goods and services less expenditure on imports of goods and services
What are the different names for the different point is the business cycle?
1: Lower turning point, Trough, Recovery, Early Expansion
2: Expansion
3: Upper turning point, Early Contraction
4: Contraction
What are the different BOP accounts?
1) Financial (capital account) - international capital or financial flows. Has to do with the ownership of different things
2) Current account - sale and purchase of goods to the rest of the world. Has to do with the different production of things
3) Gold and other foreign reserves
What are the characteristics of a normal yield curve?
Yields rise as maturity increases.
What are the characteristics of a inverse yield curve?
Yields decrease as maturity increases
When does a flat or humped yield curve occur?
When there is a transition between inverse and normal yield curves
What does covariance indicate?
The direction of the relationship (does it move in the same direction or opposite)
What does correlation indicate?
How closely the securities move together
What is the difference between Unconditional (marginal) probability and Conditional probability?
Unconditional: Probability that a single event will occur
Conditional probability: The probability that an event will occur given that another even has occurred (Probability of a probability)
What are the 3 methods to estimate probabilities?
1) Empirical probability - relative frequency of occurrence based on historical data
2) Priori/classical probability - Logical reasoning and analysis
3) Subjective probability - Estimated based on personal judgement
What role does the commercial banks play in the FX market?
They buy and sell fx on behalf of their customers.
What role does the interdealer brokers play in the FX market?
They facilitate the currency needs of banks and relay the prices from banks to clients (usually other banks)
What role does non-bank financial institutions play in the FX market?
They invest in the FX market
Why are firms and corporations participants in the fx market?
Because they are involved in international trade
Who issues majority of the bonds in South Africa?
Government and corporates
What role does limited public companies play in the equity market?
They are the issuers of shares on regulated stock exchanges
What role does investment banks play in the equity market?
They underwrite new share issues. They buy the entire share issue from the company and resells them to investors
What role does Venture capitalists play in the equity market?
They invest in medium and long-term funds in new and young firms
What role does brokers play in the equity market?
They act as conduits between lenders and borrowers in return for a commission
What role does producers play in the commodity market?
They make, grow or supply commodities for sale
What role does consumers play in the commodity market?
They buy and use commodities
What role does spot market traders play in the commodity market?
They connect producers and consumers and will sometimes accumulate commodities to clear the market
What role does CTAs (Commodity trading advisors) play in the commodity market?
They are investment manager who focus on commodity futures and options trading
When is a long call option in the money?
When the market price is above the strike price
When is a short call option in the money?
When the market price is above the strike price
When is a long put option in the money?
When the market price is below the strike price
When is a short put option in the money?
When the market price is below the strike price
What is the role of hedgers in the derivatives market?
They are entities that are exposed to the risk of adverse cash-market price movements.
What role does speculators play in the derivative market?
They add liquidity to the market. They attempt to make a profit by taking a view on the market.
Is the OTC market self regulated?
Somewhat
If the central bank lowers the reserve requirement, is it contractionary monetary policy or expansionary?
Expansionary
In which phase of the business cycle does cash generally perform well?
Contraction
Which phase of the business cycle has the following characteristics:
Imports decrease, inflation decreases, production declines, weak credit demand?
Contraction
After a recession, is growth in private consumption expenditure a precursor to a general recovery
Yes
Does larger than expected increases in inflation cause bond prices to rise or fall?
They will usually fall
Does payments of a ordinary annuity occur at the start of each payment interval or at the end of each payment interval?
Payments are made at the end of each interval
What is the present value of an annuity?
It is the sum of the present value of individual payments
Does the effective rate increase or decrease as the number of compounding periods increase?
The effective rate increases as the number of compounding periods increases.
How is the internal rate of return of an investment calculated?
It is calculated by equating the net present value to zero
Which method for estimating probabilities is deduced by logical reasoning and analysis?
Priori probability
What is the direct exchange rate?
It is the price of 1 foreign currency in terms of the domestic currency
