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.
