IMC Chapter 1 Flashcards
What are the 4 main functions the financial services industry provides to an economy?
Financial Intermediation (FI); pooling and managing risk (PMR); payments and settlement services (PSS); portfolio management (PM)
What’s the role of a central bank?
Set the monetary framework; lender of last resort; sets short term IR
What are Deposit institutions?
Accepts deposits which then becomes liabilities, and lends it as a direct loan / investment
What’s the role of an investment institution?
Invest funds via equities / bonds. These can be insurance companies. Life ins - longer term assets held, general ins: shorter term assets held
What are the four functions of a government?
1- providing services that firms are unwilling to provide (law and order/market failure
2- regulation
3- distributing income generated by private market transactions (state benefits)
4 - stabilisation of the economy
What’s a real asset and a financial asset?
Real - physical (land, buildings, gold)
Financial - claims representing rights to ownership.
Debt claims - loans and are tradable (called securities),
equity securities: shares, tradable
Is Indirect investment through intermediaries a positive or negative?
Positive;
1- greater diversification
2- reduced costs
3- access to expertise
4- increase in investable assets
What’s a unit trust?
Pooled investment vehicle: OEICs
Fund issues new units in exchange for cash
Withdrawals - fund repurchases shares in the fund
Fund manager invests the cash
What are derivatives?
Used to manage risk
Fin. Contract derived from an underlying asset
Contracts can be used to:
1) speculate
2) underlying asset = expensive, derivative is cheaper to own
What are forex market transactions?
Currency markets
Smaller transactions = broker
Larger transactions = dealer (quotes bid/offer)
What are money markets? Difference with capital markets?
MM: Securities with maturity less than a year
CM: securities with maturities more than a year
What are the main functions markets perform?
1- raising capital (capital markets)
2- transferring risk (derivatives)
3- price discovery - B + S interact at comfortable levels
4- Creates liquidity
What are primary and secondary markets?
Primary - securities are initially sold (IPOs)
Secondary - any subsequent trading takes place;
— sell side: IBs, brokers, dealers - provides transactions and investment services/products
— buy side: investment managers - purchases those services / products
2 types of price dissemination:
Pre-trade transparency: publishes real time data about quotes and orders
Post-trade transparency: publishes data shortly after
Both are required under MIFID 2
Buy side - prefers pre-trade transparency
Sell-side - prefers opaque markets - it gives an informational advantage
Are the bid and ask spreads in opaque markets wide?
Yes, transparency reduces spreads.
Order driven markets liquidity?
Market depth?
Liquidity risk?
By-product of informational efficiency?
Order driven markets liquidity - order book
Market depth - measures size of orders to move markets; largest is U.S. treasury
Liquidity risk? Not being able to sell quickly, some AIM shares are illiquid - traders want a higher return because of this
By-product of informational efficiency? Informational efficiency as more trading reflects more information about the asset
Implicit costs?
Bid ask spread - set by the dealer to cover their own costs
Price impact of a trade
Opportunity cost
Explicit costs?
LSE - commission charged by brokers; SDRT must be paid by the purchaser of securities at 0.5%
CREST settled transactions - shares settled electronically - SDRT is rounded to the nearest 1p or £5
£1 charge on all purchases and sales over £10,000 -> PTM levy
> Market Makers are exempt from PTM and SDRT charges
Direct costs?
Platform fees, CCP, CSD: 28.6p whilst other exchanges: 7.3p
GILT Transaction costs?
Commission rates: 0.5-1% of the value of purchases under £5000
> above £1mn = no commission
Settlement: T+1
Gilts and the following are exempt from SDRT:
1. Loan stocks
2. Foreign securities registered outside the UK
3. Beater securities
4. Deals traded through ICE FE
