Introduction

Question 1

Advantages

Answer 1

Liquidity –> easier to find another party ready to make desired trade (narrowed spread)
Transparency & Reliability & Legal Procedures
Suitable investors protection & Regulations
Low transaction cost

Question 2

Risk of FM

Answer 2

every country has official Market exchanges
formal FM have expanded very fast since even semi-ilegal markets have sought to organise institutions
a) motivation part is self-interest (formal generate tex revenues which are recognised)
b) more efficient by formal means if business are thriving to raise capital (shares on stock market)

Question 3

Definition

Answer 3

place where B&S gather to enter into diff. types of financial transactions
Network of counterparties that enter into f. transaction of diff. nature and via diff. means

Question 4

Basis Function

Answer 4

Price Setting - good way of determine relative value of diff. items (S/D - price discovery)
Asset Valuation (market price to determine value of firm or property)
Arbitrage (price divergence)
Raising Capital (require funds for growth)
Commercial Transactions
Investing (stock, bond, MM) - earn returns or accumulate assets which generate future CF
Risk Management - protection against risk (reduce exposure) or attach price to risk

Question 5

Reasons to Trade

Answer 5

Speculate; hedge; arbitrage