Chapter 8: Other Areas of Financials Services

Question 1

What is fund management?

Answer 1

Fund management is where a firm creates an investment fund for its clients, which will enable those clients to invest together, sharing in any gains made or losses suffered.

The investment decisions are made by the fund management firm.

Question 2

What is foreign exchange?

Answer 2

Foreign exchange is the result of international trade or international travel - the money held by one party needs to be exchanged into another currency before a transaction can be completed.

Question 3

What is financial planning?

Answer 3

Financial planning involves providing assistance to individuals, families and businesses in organising their financial affairs to achieve their desired financial and lifestyle objectives.
Retirement planning is particularly important.

Question 4

Give two examples of financial technology and their uses.

Answer 4

1) Robo Advisers - Investing
2) Banking Services - e.g. mobile payments

Question 5

Explain the difference between direct and indirect investment.

Answer 5

Direct Investment = Cash => Shares
Indirect Investment = Cash => Fund => Shares

Question 6

What are the advantages of investing in a fund? (4)

Answer 6

Advantages of investing in a fund:
1) Money from a variety of investors is pooled
2) The fund can benefit from diversification beyond what is available to direct investors
3) Fund investors can buy portions of shares
4) The fund is run by a professional fund manager

i.e. Pooling, Diversification, Fractions, Expertise

Question 7

Explain in words the meaning of the following Forex Quote
£s per $ 0.74-0.80

Answer 7

A US dollar will buy £0.74 and £0.80 is required to buy a single US dollar

Question 8

Look at the textbook/notes to understand the relationship between the rates for $s per £ and £s per $

Answer 8

p.107 in the textbook

Question 9

What are cryptocurrencies?

Which was the first cryptocurrency and when was it created?

How many crypto currencies are there?

Answer 9

Cryptocurrencies are virtual or electronic currencies which use encryption technology to control the amount of currency issued as well as to record ownership and payments.

Bitcoin was the first established cryptocurrency and was created in 2009.

There are now 3,000 cryptocurrencies available.

Question 10

What is a digital wallet?

How can cryptocurrency tokens be acquired? (3)

What is the main drawback of cryptocurrencies?

Answer 10

A digital wallet is required to securely store coins and token s which can be acquired in one of the following ways:

1) Purchasing them in exchange for more traditional currencies like dollars or pounds.
2) Earning them; for example, by publishing blog posts on platforms that pay users in cryptocurrency.
3) Through mining (cryptomining) by solving mathematical problems to generate new cryptographic keys.

Cryptocurrencies can be very volatile and therefore they are high risk and speculative.

Question 11

What is syndication?

Answer 11

Syndication is a grouping of insurers to enable them to underwrite substantial risks.

Syndication spreads risk across the insurance companies which enables the insurance industry to take on insurance for even the largest, most expensive risks.

Question 12

What services does Financial Planning include? (5)

Answer 12

Financial Planning can include:
1) Tax planning - both during life and after death
2) Asset management
3) Debt management
4) Retirement planning
5) Personal risk management - protecting income and capital in the event of illness and providing for dependents on death

Question 13

Name three pension sources:

Answer 13

1) Personal Pension - provided by the individual
2) State Pension - Provided by the state
3) Provided by the individual’s employer - employer-sponsored pension

Question 14

What is an investment platform?

Name three types of investment platforms.

Answer 14

An investment platform is a website or smartphone app on which investments can be purchased or sold.

1) Low cost ‘no-frills’ investment platforms
2) Premium platforms
3) Robo advisers

Question 15

What are the features of a low cost ‘no-frills’ investment platform? (2)

Answer 15

1) These platforms do not provide the client with the advice about which fund is most suitable.
2) They allow the clients to invest at significantly lower comparable fees.

Question 16

What are the features of a premium investment platform? (2)

Answer 16

1) These investment platforms provide clients with analytical screening tools.
2) The assist investors in selecting the ‘best’ fund.

Question 17

What are the features of a Robo adviser? (2)

Answer 17

1) They provide automated advice to clients based on a series of questions.
2) Answers to the questions should clarify the investors aims and objectives and risk attitude so that the most appropriate fund is selected/recommended.

Question 18

What is crowdfunding?

Answer 18

Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people.

Question 19

Detail the three forms that crowd funding can take.

Answer 19

1) Seeking donations from people that believe in the cause or innovation - This offer no possibility of investment return for the donors.
2) Debt crowdfunding - where investors receive their money back plus interest.
3) Equity crowdfunding - where people invest in return for equity or shares in the venture.

Question 20

What is peer-to-peer lending?

How do peer-to-peer firms make a profit?

Why is this potentially more risky for investors?

Answer 20

Peer-to-peer lending cuts out the banks so that borrowers can borrow at lower interest rates while savers also get much improved interest rates.

Peer-to-peer firms profit by charging a fee for arranging the transaction.

Peer-to-peer firms can set up, access and connect investors and borrowers cheaply using the internet infrastructure.

This can be more risky for investors as they make the final decision as to whether the investment and the associated risks are appropriate.

Question 21

What is high frequency trading?

Answer 21

High frequency trading is where some participants automate the transactions that they want to be executed by writing algorithms that will act on pre-set indicators signals and trends.

Question 22

What is Distributed Ledger Technology?

Give three features of Distributed Ledger Technology.

Give an example of Distributed Ledger Technology.

Answer 22

Distributed Ledger Technology is the replacement of one centralised ledger of transactions with a decentralised network of computers all holding copies of the same ledger.

1) The computers are often referred to as node and any changes to the ledger must be done by consensus.
2) Consensus is typically achieved using a consensus algorithm - a process used to achieve agreement.
3) The distributed ledger can be public or private.

Blockchain is an example of DLT.

Question 23

What are the advantages of DLT? (4)

Answer 23

1) Trustworthy and reliable record, since consensus is required for any changes.
2) Failure in one of the nodes does not create a wider issue as all the nodes hold copies of the ledger.
3) Difficult to hack because of the use of multiple nodes.
4) Remove the costs and delays caused by the need to maintain and update a single, central database.

Question 24

How could Distributed Ledger Technologies be used in financial services? (2)

Answer 24

1) It is being investigated by the Australian Securities Exchange (ASX) to update and replace its current settlement system.
2) Some countries are exploring the creation of digital versions of their national currency with an associated underlying distributed ledger technology, which will facilitate use in international trade.