LS13 - Role of Financial Banks

Question 1

Roles of financial markets

Answer 1

• facilitate saving
• lend to businesses & individuals
• to provide a means by which goods & services can be bought & sold easily
• to reduce risks and provide greater certainty by enabling commodities & currencies to be traded in future markets

Question 2

How do financial institutions act as intermediaries between lenders & borrowers in financial markets

Answer 2

• Collect deposits from lenders & lend to borrowers who need capital
• saves deposit in bank and gain interest on it

Question 3

How are commercial banks profitable

Answer 3

• have different interest rates
• lower for savings and higher for borrowing
• needs to cover costs and make profit

Question 4

why do financial markets allow for increased consumption/investment in an economy

Answer 4

• as then more money is borrowed so then banks can make more profit

Question 5

how do financial markets make it easier to trade goods and services?

Answer 5

by offering different ways of payment such as debit/credit cards as well as online payment methods/transfers

Question 5

Forward contracts

Answer 5

contract between 2 parties to buy/sell an asset at a specified future time at a price agreed upon today

Question 6

how do forward markets provide more certainty to firms that trade with other firms and/or consumers that use a different currency?

Answer 6

• allows businesses/investors to protect itself against exchange rate fluctuations and commodity price volatility
• sets price to purchase currency in future so may not have to pay higher prices