Unit 4 Topic 6 Flashcards
What is uncertainty in financial planning?
Uncertainty refers to the unpredictability of future events, such as inflation rates, interest rates, and economic conditions, making financial planning challenging.
How does volatility contribute to financial uncertainty?
Volatility refers to large swings between highs and lows in financial markets, exchange rates, or interest rates, making predictions more difficult and increasing uncertainty.
What is the difference between pure risk and speculative risk?
Pure risk involves only the possibility of loss (e.g., property damage from flooding), while speculative risk includes the potential for both gain and loss (e.g., investing in stocks).
What are the three categories of financial loss?
Expected loss, unexpected loss, and catastrophic loss.
How does inflation impact real income?
If wages increase at a slower rate than inflation, real income decreases, reducing purchasing power.
How do rising inflation rates affect savers and borrowers?
Savers lose purchasing power if interest rates on savings are lower than inflation, while borrowers may benefit if loan interest rates do not increase with inflation.
Why is stock market volatility a concern for small investors?
Small investors may lack experience in managing market fluctuations, increasing the risk of financial losses.
How do financial services providers help investors manage stock market volatility?
They offer investment products designed to minimize fluctuations in asset values.
How does economic uncertainty affect consumer borrowing?
People may borrow less, focus on repaying existing debts, or save more due to fears of job loss or rising interest rates.
What is a fixed-rate mortgage, and why might it be beneficial during inflation?
A fixed-rate mortgage locks in the interest rate for a set period, protecting borrowers from rising rates.
What is retail ring-fencing in banking?
It is the separation of a bank’s retail operations from its investment banking activities to protect consumer deposits from high-risk financial activities.
What was the purpose of ‘Project Verde’ and ‘Project Rainbow’?
These were plans by Lloyds Banking Group and RBS, respectively, to sell off bank branches to improve competition in the UK banking sector.
How do changing weather patterns affect financial services?
Increased climate-related risks, such as flooding, raise insurance costs and lead to new financial products designed for disaster recovery.
What is self-insurance in the context of flood risk?
When individuals save money instead of purchasing insurance to cover potential flood damage.
What is ‘green finance’?
Investment in sustainable projects and businesses that promote economic growth while reducing environmental harm.
How has consumer demand influenced ethical banking?
Many people prefer banks that invest in environmentally sustainable and socially responsible projects.
How does Islamic finance differ from conventional finance?
Islamic finance prohibits interest (Riba) and promotes profit-sharing and ethical investment practices.
What is Murabaha in Islamic finance?
A method where a bank purchases a property and resells it to a customer at a profit, avoiding interest charges.
Why do insurance policies often exclude coverage for terrorism?
The unpredictability and potentially large financial impact of terrorist attacks make it difficult for insurers to assess risk and set premiums.
What is cyberterrorism, and how does it affect financial institutions?
Cyberterrorism involves hacking financial systems to disrupt operations, requiring banks to invest in cybersecurity measures.
