Unit 5: Financial Markets

Question 1

What is the fundamental role of financial markets?

Answer 1

To bring buyers and sellers of financial products together in order to trade.

Question 2

What are the 4 different types of financial markets (e.g., primary…)?

Answer 2

1. Primary market
2. Secondary market
3. Exchange traded markets
4. Over the Counter (OTC) markets

Question 3

What is the primary market?

Answer 3

Where new issues of shares or other forms of security are offered to the market for the first time.

Example: Government wants to build a new road, so they issue government bonds to the market, so that they can borrow money from the market.

Question 4

What is the secondary market?

Answer 4

Where securities are traded after their initial issue, like a ‘second-hand’ market.

Question 5

What are exchange traded markets?

Answer 5

These are either physical or digital markets, typically with business rules that define relationships, products, and conventions. For example, the Australian Stock Exchange (ASX).

Question 6

What are over the counter (OTC) markets?

Answer 6

Non-standardized markets negotiated between the parties involved in the transaction.

Question 7

What are the 5 major Financial Markets in Australia?

Answer 7

1. Foreign exchange market
2. Equities market
3. Commodities market
4. Derivatives market
5. Interest rate or debt market

Question 8

How does the foreign exchange market work?

Answer 8

Exchanging one currency for another

Question 9

What is the largest financial market in the world?

Answer 9

Foreign exchange market. Due to time zone differences, it trades 24 hours per day

Question 10

How does the ‘interest rate or debt market’ market work?

Answer 10

Buying/selling includes short-term and long-term securities such as government and corporate bonds

Question 11

How does the equities market work?

Answer 11

Trading shares in listed companies

Question 12

How does the derivatives market work?

Answer 12

A contract whose value is derived from one or more underlying assets or instruments, for example, forward rate agreements on the underlying exchange rate

Question 13

How does the commodities market work?

Answer 13

Trading in raw or primary products such as wheat, grain, cattle, electricity

Question 14

Who participates in financial markets?

Answer 14

1. Banks
2. Non-bank financial institutions (NBFIs) e.g. building societies
3. Government
4. Individuals

Question 15

Who normally acts as intermediaries and ‘price makers’ in financial markets?

Answer 15

Banks, NBFIs, Brokers

Question 16

Who normally acts as end users or ‘price takers’ in financial markets?

Answer 16

Governments, corporations, and individuals

Question 17

What is building society and how are they run?

Answer 17

A mutual institutions, meaning that most people who have a savings account or mortgage are members.

Each building society has a board of directors. Each member has voting rights on how the organisation is run.

Question 18

What is a credit union and how are they run?

Answer 18

Like building societies, credit unions are mutually owned institutions. They provide basic, low-cost deposit, personal/housing loans and payment services to members.

Members finance their personal borrowing from their own combined resources.

Members must share some common bond, such as living in the same locality or working for the same employer or industry.

Question 19

Differences between banks, credit unions, building societies.

Answer 19

1. Banks are companies that are usually listed on the stock market and owned by shareholders; building societies and credit unions are owned by and for the members.
2. Australian banks access large and specialised foreign funding markets to supplement their domestic funding; building societies and credit unions face a limit on the proportion of funds that they can raise from the wholesale money market.
3. Banks look to return a proportion of profit to shareholders via dividends; building societies and credit unions reinvest surplus into the business to provide new products and services or build up reserves.

Question 20

There are other non-ADI Financial Intermediaries, such as the following: Explain a money market corporation (excluding those with assets < $50m)?

Answer 20

Primarily borrow and lend to government and large corporations in wholesale markets.

Other services may include advisory, corporate finance, capital markets.

Question 21

There are other non-ADI Financial Intermediaries, such as the following: Explain finance companies (excluding those with assets < $50m)

Answer 21

Finance companies that provide loans to households and small to medium size businesses.
They raise funds form both wholesale and retail markets.

Question 22

There are other non-ADI Financial Intermediaries, such as the following: Explain securitisation vehicles?

Answer 22

Special purpose financial solutions that issue securities backed by pools of assets, such as mortgage-backed housing loans. The securities are usually credit enhanced e.g., through use of guarantees from third parties.

Question 23

What products and services do life insurance companies offer?

Answer 23

1. Life insurance
2. Accident and disability insurance
3. Annuities
4. Investment
5. Superannuation

Question 24

What products and services might general insurance companies offer?

Answer 24

1. Property insurance
2. Motor vehicle insurance
3. Income insurance

Question 25

What do Superannuation and Approved Deposit Funds (ADFs) do?

Answer 25

Accept and manage contributions from employers (including self-employed) and/or employees to help Australians save for retirement

Question 26

What do unit trusts and managed funds do?

Answer 26

Pool investors funds, usually into specific types of assets (e.g., equities, property).

Most are managed by subsidiaries of banks, insurance companies, or money market corporations.

Question 27

What do cash management trusts do?

Answer 27

They are a type of unit trust governed by a trust deed and open to the public. They generally confine their investments as authorised by the trust deed to financial securities available through the short-term money market

Question 28

What do trustee companies (common funds) do?

Answer 28

Pool money received from the general public or held on behalf of estates or under powers of attorney. Usually invest into specific types of assets.

Question 29

What do Friendly societies do?

Answer 29

They are mutually owned co-operative financial institutions offering benefits to memebers through a trust-like structure.
Benefits include investment products through insurance or education bonds, funeral, accident, sickness, or other benefit.s

Question 30

Does the financial services industry deal primarily with information, or manufactured products?

Answer 30

Information. That’s why most major developments in the industry are in the area of information technology and networked communication systems.

Question 31

How does blockchain work?

Answer 31

Instead of using a central third party or an offline reconciliation process, Blockchain is a distributed ledger using peer-to-peer technology, providing real-time records that are replicated among the participants.

Question 32

What real and imminent threat does Blockchain pose to the payments industry?

Answer 32

The threat of disintermediation - eliminating intermediaries in the payments industry.

Question 33

What is Bitcoin?

Answer 33

A decentralised digital currency that enables instant payments to anyone, anywhere in the world, using peer-to-peer technology with no central authority.

Question 34

What are some ways banks are already using AI and robotics?

Answer 34

1. Trading without traders
2. Flagging unusual transactions
3. Customer analytics

Question 35

In 1990, the Australian federal government introduced the four pillars policy, which is still active today. What is the four pillars policy?

Answer 35

The government will maintain the separation of the four largest banks in Australia by rejecting any merger or acquisition between the four major banks.