Financial markets Flashcards
What is the role of financial markets?
Saving
Help businesses with investments
Help the exchange of goods and services
What is a money market?
Liquid markets
Trading assets that only last a year
What is a financial market?
Where buyers and sellers meet to trade assets
What is a currency market?
Buying and selling currency
What is debt capital?
Assets in which interest is made
Borrowing for the issuer
What is equity capital?
Paying back profits (shares)
Why do we need forward markets?
Buy currency while it is weak
Speculate it will increase in the future
Sell it and make money
Why is the demand curve for currency downwards sloping?
At lower interest rates consumers hold more money
At higher interest rates consumers save more money as the rate of return on savings is higher
How can central banks lower interest rates?
Lower reserve requirement
Increase the money supply
Lower interest rates
How can the central bank help businesses?
They can borrow money
Increase their liquidity
What is a bond?
A piece of paper
You pay for it
You are guaranteed the face value of the bond back
It is used to generate revenue for firms
What does it mean if a bond matures?
The time when the government have to pay the money back at nominal value
What is fractional reserve banking?
Saver saves £100 in the bank
They need to keep some of it still in the bank as a reserve £10
Borrower borrows £90
They are charged interest on this
Money that is extra is the profit that banks make
What is a bank run?
Liquidity crisis
They do not have enough money liquid assets in the short run to meet short term liabilities
What is insolvency?
Not enough capital to offset a fall in asset values
For example if loans get written off
They need to cover the losses with assets
If they cant cover this the bank will be in debt
What is the role of the central bank?
Monetary policy
Bankers to governments
Bankers to other banks
Regulate financial stability
When will central banks not intervene?
If a bank goes insolvent
They make bad decisions on loans
What is moral hazard?
When a risk is taken by a commercial bank
The costs are bared by the central bank
They may be more inclined to take risks in terms of loans
What is regulatory capture in financial markets?
Regulators that used to work for the central bank
They may lower interest rates if they are friends with insiders
What is the definition of financial market failure?
When free financial markets fail to allocate resources at the socially optimum level of output
What is speculation ?
Buying assets with the idea that they will increase in value so you can sell them
What is a leveraged deal?
Borrowing money
Buying an asset
Holding the asset
Selling it at a higher price
Paying off the debt
Keeping the profit
What is an example of a bubble?
Tanzanian cherries
People buy them hoping their price will rise
People start to sell them
Price falls
Demand falls
They are not worth anything
What is assymetric information in financial markets?
Consumers know they are unable to pay back loans but the bank do not know that
What are externalities?
Costs of bailouts
Loss of jobs
Loss of stability in the economy
What is market rigging?
Collusion to fix prices to make more money
LIBOR and FOREX
What are macroprudential regulators? (FPC)
They monitor the entire financial sector
Prevent and identify systemic risk
What is systemic risk?
Complete financial meltdown
What is micro prudential regulators? (PRA)
Maintain stability of commercial banks
Supervise risk
What is the role of the financial conduct authority?
Protect individual consumers and business confidence
What is the difference between the FCA and the FPC/PRA?
They report to the treasury
