Theme 4: Financial Markets Flashcards
What finance is provided by financial markets?
- Short term finance
- Long term finance
Types of financial markets
- Money markets- short term finance eg debt with sub year maturity rate
- Capital markets- long term finance eg bonds and shares
- Foreign exchange markets- where different currencies are traded
What are the different purposes of financial markets?
0. Bring together lenders and borrowers
1. Facilitate saving
2. Lend to businesses and individuals
3. Facilitate the exchange of goods and services- create payment systems for the exchange of goods and services
4. Provide forward markets in currencies and commodities- pre ordering goods and services
5. Provide a market for equities- equities are the shares of companies
6. Forward markets- transaction that will happen at an agreed time in the future
Give 5 examples of market failure
- Asymmetric information
- Moral hazard
- Externalities
- Market rigging
- Speculation and market bubbles
What is market failure?
When free markets fail to deliver an efficient or socially optimum allocation of resources.
Asymmetric information
When one party in a transaction has more information than the other. So they are able to exploit the information gap.
Define Externalities
Externalities paid for by other individuals, firms or governments but not the financial markets creating the costs.
Moral hazard
when someone is more willing to take risks because they understand that someone else will pay any costs if anything goes wrong.
Defne speculation
Buying assets when the price is low and selling them at a later higher price, with the aim of making a profit.
Define market bubbles
when prices are forced excessively high due to the speculation and excessive optimism about future prices, this can attract invenstors further driving up prices
Market rigging
When individuals or a group collude to fix prices or exchange information to help them gain for themselves at the expense of others.
What was the LIBOR scandal?
From 2007 and involved a group of banks working together to fix the London interbank offered rate. Rate at which banks are willing to lend to each other in the interbank market, use globally to fix base rates
4 functions of a central bank
- Implementation of monetary policy
- Banker to the government
- Banker to the banks- lender of the last resort
- Role of regulation of the banking industry
What can the central bank do using monetary policy?
- Manage availability of credit
- Influence the amount of lending banks
- Affect the exchange rates
What does an increase in the availability of credit do?
- Increases aggregate demand
- Increases inflation
