week 1

Question 1

How does finance create value?

Answer 1

o Well-functioning financial markets facilitate
 Storage and exchange of value

 Inter-temporal matching of consumption and productivity

 Efficient risk sharing

 Separation of ownership and management

Question 2

o Finance Work involves intermediation

Answer 2

 Matching savers with spenders

Question 3

• Storage and exchange of value

Answer 3

o Need money for exchange, need a currency as a means of exchange and store wealth

o Financial assets; no financial market = not efficient way to store wealth
o E.g. poor country unfinished houses, no bank so you build a house and acts as the security
o Making wealth easier and more secure to store, transport and exchange facilities economic activity and growth

o Standardizing makes exchange easier, reducing the need for trust
 Facilitates trade -> ensures trade occurs quicker
 Creating a convenient, reliable store of wealth that can be used in exchange is a significant component to the value generated by Finance

Question 4

• Inter-temporal matching of consumption and productivity

Answer 4

o Finance is the bridge between your current wealth and future wealth
 Allows you to consume your future wealth in present time
• Ie. A loan
• Can immediately start living a lifestyle similar to that of much wealthier people
o Able to borrow against your future wealth
 Facilitates projects with negative consequences
• War
 Can borrow more than you can afford
• Ethics
• Finance intermediaries only wish to make a quick buck?

Question 5

• Efficient risk sharing

Answer 5

o A project requires a mix of skills and capital -> even if you have all the skills and sufficient capital -> unlikely to risk everything on one project
o An efficient financial system brings the skills and capital of different people together
 Creating a control and bearing the right amount of risk and reward
o Risk of loss is borne by the entities that best be able to bear that loss
 If designed properly
o If it is not designed properly -> losses borne by people not able to bear them
 Loss of wealth

Question 6

• Separation of ownership and management

Answer 6

o Many people generate wealth not only from their salary but from investments they make
 Require opportunities to invest
 E.g. China investing in one child’s education
o Sustainable standard of living people can afford depends on the rates of return that can be earned on that wealth

Question 7

• What kind of work is ‘finance work’?

Answer 7

 Matching savers with those who spend
 Analysis
• Pricing risk
• Designing, advising, selling products to protect against risk
• Monitoring and enforcing contractual obligations

Question 8

• Providing access across a barrier – Bridge

Answer 8

• Providing access across a barrier – Bridge

Question 9

• Guaranteeing Quality – A certifier

Answer 9

• Guaranteeing Quality – A certifier

Question 10

• Monitoring and enforcing contracts- Enforcers

Answer 10

• Monitoring and enforcing contracts- Enforcers

Question 11

• Matching savers with spenders

Answer 11

• Matching savers with spenders

Question 12

• Providing information – Conciege

Answer 12

• Providing information – Conciege

Question 13

• Take the heat – Insulator

Answer 13

• Take the heat – Insulator