LS13- Role of Financial Markets Flashcards
1
Q
What are the role of financial markets?
A
- to facilitate saving
- to lend to businesses and individuals
- to provide a means by which goods and services can be bought and sold easily
- to reduce risks and provide greater certainty by enabling commodities and currencies to be traded in futures markets
- to provide a market in which shares and bonds can be traded
2
Q
Financial markets
A
- Any place where buyers and sellers meet to trade financial assets
3
Q
Forward/futures markets
A
- When a buyer and seller can trade a financial asset at a future date, at a specified price
usually for trading currencies
4
Q
How forward markets provide greater certainty to firms (that trade with other firms) and/or consumers that use a different currency
A
- price of a foreign currency is agreed upon so firms can budget and make decisions
- prices are more likely to be stable for consumers
- enables firms to reduce risk/uncertainty since firms can be certain about the cost of their imports in pounds
5
Q
Why the rate of interest on saving and borrowing has to differ for commercial banking
A
- need the return paid to savers to be lower than the interest paid by borrowers in order to be profitable
6
Q
How financial markets allow for increased consumption in an economy
A
- they provide credit and transaction services
7
Q
Why companies rely on stock markets and bond markets to finance investment
A
- issuing bonds allows companies to raise large amounts of capital quickly, which is useful for expansion, R&D
8
Q
Why governments rely on bond markets to finance investment
A
- when there’s a shortfall in tax revenue, bonds can be used to fuel economic growth and development
