Lecture 1: Introduction

Question 1

Risk Averse

Answer 1

Investors only take on increased risk if there is sufficient return to compensate, such as old people living with a pension

Question 2

Risk Neutral

Answer 2

Investors who are looking for a certain amount of return and will not be affected by the degree of risk for example lottery buyers

Question 3

Risk lover

Answer 3

Investors who would choose higher risk opportunities even if the expected returns are the same for example gamblers

Question 4

Financial instruments / claims definition

Answer 4

Financial claims/ instruments is a claim to a payment of a sum of money at some future dates.

Question 5

Characteristics of financial instruments/ claims

Answer 5

o	Risk (uncertaincy of return) 
o	Liquidity (ease and speed of converting assets into cash)
o	Real value certainty, (susceptible to loss due to increase in the general level of price, such as inflation)
o	Expected return (probability of outcome) 
o	Term to maturity (time of losing liquidity) 
o	Currency denomination (relating to exchange rate risk)
o	Divisibility reflects the degree which the financial instrument can be subdivided into smaller units for transaction purposes.

Question 6

Functions of money

Answer 6

Medium of exchange: Money used to buy goods/ services (the transactions demand for money is assumed to be positively related to the level of national income)
Unit of account: Money provides the terms in which prices are quoted and debits are recorded.
Store of value: Money is a way to transfer purchasing power from the present to the future (demand of money is negatively related to the real rate of interest.)

Question 7

What is a financial centre?

Answer 7

A market (city) meets much of the demand for financial services of domestic/international market, and it is a key component of financial system.

Question 8

Why is it important to have a financial centre?

Answer 8

o Retaining the domestic financial market
o Competing for international business
o Being a foreign exchange earner e.g. transaction fees, gross spread. (Financial centre e.g. London can act as a “middleman”. Gain some money for transaction fees etc.
o Providing employment
o Aiding the economy by channelling funds

Question 9

The roles of financial centres

Answer 9

o Recycling funds from surplus agents to deficit ones as efficiently as possible
o Facilitating the transfer of funds
o Global concerns: foreign exchange, risk management, insurance, primary and secondary markets for bonds and equities, international banking. Etc.

Question 10

How does a finance system work?

Answer 10

Surplus agents:
o Households, public/private bodies and government
o Risk averse, short term investment
Deficit agents
o Households, public/private bodies and government
o Risk lover/ less risk averse, medium/ long term borrowing
Financial intermediaries
o Reconciling the needs between surplus agents and deficit agents

Question 11

GDP meaning

Answer 11

Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.
o The financial services sector has expanded since the 1980s