Y2 - The financial sector

Question 1

Define financial market

Answer 1

Any market place where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives

Question 2

What are the types of financial markets

Answer 2

• Derivatives market
• FOREX market
• Money market
• Capital market

Question 3

What is the capital market?

Answer 3

• Enables individuals/institutions to trade financial services = allows LONG TERM gain of finance
• Stock market and bonds

Question 4

What is the money market?

Answer 4

• Market for SHORT TERM loans

- Treasury bills and certificates of deposit

Question 5

What is the derivatives market?

Answer 5

• Market for financial instruments

- Future contracts (cow selling video)

Question 6

What is the FOREX market?

Answer 6

Foreign exchange

- Market where currencies are traded

Question 7

What are the roles of financial markets? (5)

Answer 7

• Facilitate saving
• Lending (connects firms/households)
• Exchange goods/services (payments in shops/online, receive wages, settle debts)
• Provide forward markets in commodities and contracts (sets price and can be used for hedging/speculation)
• Market equities (stocks and shares issued/traded)

Question 8

What are examples of market failure in the financial sector?

Answer 8

• Asymmetric information ( stock market firm knows more, 2008 investors did not understand risks)
• Moral hazard (2008) = more risky behaviour
• Speculation/market bubbles = low interest until 2007 (expected to continue)
• Externalities (asset bubbles = housing)
• Market rigging = banks collude to set interest rates

Question 9

What is the role of the central bank?

Answer 9

• Implement monetary policy
• Banker to banks
• Regulates banking industry (FCA and PRA)