wk1

Question 1

what are they key functions of financial markets?

Answer 1

1. Facilitate the efficient allocation of resources-allow those with surplus funds
   to invest/buy/lend to those in need of funds (selling/borrowing)
2. Price discovery/valuing assets-the price of a financial asset (like all assets) is
   determined by the demand for and supply of this asset. For financial assets these
   could be newly issued assets or those traded on the secondary markets.
3. Access liquidity-investors can liquidate assets to raise cash, e.g. liquidate stock
   portfolio. Liquidity is how easy asset can be converted to cash
4. Risk transfer/sharing-potential for loss by uncertainty of price known as risky asset

Question 2

what are the three roles of finane?

Answer 2

-moving so movement of funds from people who have surplus funds to those who need it
- allocating → efficiently allocate resources
- pricing → financial markets allow us to price and value assets

Question 3

real asset

Answer 3

assets to produce goods and services including land, buildings, machines and knowledge

Question 4

financial asset

Answer 4

• claims on real assets → deriving value from contractual claim on underlying asset
  
  • example → bonds, stock, derivates

Question 5

nature of investment

Answer 5

commitment of current resources in expectation of future benefit

Question 6

allocation of risk

Answer 6

financial markets facilitate transferal risk

Question 7

information role

Answer 7

stock prices reflect market assessment of firm current and future performance and optimism on global environment

Question 8

who are market players

Answer 8

• individuals and organisations who buy and sell financial assets and engage in financial markets
  
  • example is governments, banks, firms, private investors

Question 9

purpose of finance

Answer 9

-allocate resources to
maximise products and services (firms), wealth (investor), social benefit (governments)
- manage risks → quantify risks and manage them
- can reduce risk cant get rid of it such as through diversification
- important to quantify risks so to measure it as then know the level of exposure to make it easy to manage
- security selection → what asset to invest in how to optimise
- analysing different assets and its characteristics whats best

Question 10

what two factors make finance challenging?

Answer 10

Time → need to consider differences and time period when decision making
Risk
→ to adress challenge use historical data and probability to calculate risks

Question 11

characteristics of competitive markets

Answer 11

• many similar economic agents
• no dominant seller nor buyer
• information widely available
• products similar or identical
• free entry and exit to market

Question 12

what are the six fundamental principles of finance?

Answer 12

-everything has value in finance everything has price and tradable
-decision making based on maximising own happiness
-financial markets adaptive and competitive
-financial market prices shift to make demand=supply
-risk sharing and frictions key to financial innovation

Question 13

what is efficient market hypothesis?

Answer 13

market prices reflect available information
market responds quickly to new information

Question 14

what are the two fundamental challenges of finance?

Answer 14

-valuation of assets → real/financial or tangible/intangible
-management of assets → acquiring/ selling

Question 15

what are the types of financial markets and assets?

Answer 15

stock/equity → part ownership of a company
- Fixed income or debt securities
- it pays regular income and will know how much we will get
- foreign exchange/ currencies → most traded financial assets key participants are large financial institutions
- commodities → physical goods not financial assets so production inputs including crude oil, natural gas, gold, wheat
- derivative securities → options and future contracts where payoffs determined by price of underlying asset
- underlying asset → stocks, interest, commodities