(Topic 1) Financial Markets & Institutions

Question 1

What can a financial centre do?

Answer 1

1. Be foreign exchange earners
2. Provide employment
3. Channel funds into best performing investments/business

Question 2

Where are the major financial centres?

Answer 2

• NY
• London
• Hong Kong
• Tokyo

Question 3

How do these groups respond to risk? (Averse/Neutral/Taking)

1. Surplus Agents
2. Deficit Agents

What horizons do they work towards?

Answer 3

1. Risk-averse -> short-term horizons

2. Risk-taking -> medium-to-long-term horizons

Question 4

Where does the transfer of funds majorly take place? (3 key areas)

Answer 4

1. Money market (

Question 5

What are the roles of a Global Financial Centre? (3)

Answer 5

• Channel funds (domestically/internationally)
• Have a range of products (to meet surplus/deficit agents demand at competitive prices)
• Provide a range of financial services

Question 6

What are some of the financial services that a Global Financial Centre provides?

Answer 6

• Foreign exchange
• Risk management
• Insurance
• Swaps
• Banking lending
• Derivatives
• Research and advisory

Question 7

What are the features of a Key International Financial Centre? (7)

Answer 7

• Large number of domestic/foreign banks
• Sufficient foreign exchange business
• Significant off-shore markets
• Well capitalised and highly liquid stock market
• Major market for corporate bonds
• Range of financial institutions and services
• Significant presence in the derivative market

Question 8

What are these financial centres best known for?

1. London
2. NY
3. Tokyo

Answer 8

1. Biggest for foreign exchange trading and over-the-counter derivative contracts
2. Dominant player in institutional funds
3. Banking and insurance

Question 9

Define the globalisation of finance.

Answer 9

“The tendency of financial institutions and their customers to move beyond their domestic markets to other markets around the globe”

Question 10

What impacts have we had from globalisation? (4)

Answer 10

• High speed/low cost communication
• Growth of trading stimulating demand for traded-finance products
• Global businesses and international portfolio diversification
• Borrowers, lenders and investors not limited to their national markets

Question 11

What are some of the benefits of globalisation (of finance)?

Answer 11

• Borrowers are no longer limited to their national markets
• Agents with surplus funds can take advantage of investment opportunities in other countries
• Financial institutions seek to have global presences both as a means of expansion and to retain their existing customers

Question 12

What are some of the risks of globalisation (of finance)?

Answer 12

• Loss of local knowledge
• Problems in detecting wrongdoing
• Increased interactions and spillovers between markets
• Stock market/bond markets move increasingly in synch

Question 13

What are some of the benefits of enhanced financial technology?

Answer 13

• Improved efficiency
• Increased speeds
• Reduced costs
• Broader range of services
• Allowed for more complex products to be made (e.g. Quantitative trading)

Question 14

What are some of the issues regarding technology?

Answer 14

• Security
• Reliability
• Backward compatibility (needs to work with older tech to service existing customers)
• Large capital investments, but returns are uncertain

Question 15

Regulation aims to protect investors from misfortune, and misuse of their funds.

What are some of the problems associated with regulation?

Answer 15

• Increases costs
• Can prevent innovation
• Redirects business to less regulated markets
• Moral hazard (can insurance be seen as too much of a safety net?)

Question 16

Financial innovation is seen through the creation of new instruments and new ways to deliver services.

There are 2 views as to why innovation occurs - what are they? (+ve vs -ve)

Answer 16

• To overcome the effects of regulation and exploit tax loopholes (cynical view)
• Meet different investors’ needs and improve efficiency (positive view)