4.5 Risk in the Financial Sector Flashcards
Unexpected or unpredictable events that have a major effect on the economy
An unpredictable change where there is no way to calculate its likelihood
When changes are expected so the probability of their occurrence can be calculated using past data
Define supply-side shock
An impact upon the provision of a good or service that will impact price
Define demand-side shock
An impact on the consumption of a good or service that will effect price
What is a forward market?
An agreement to buy a foreign currency at a fixed exchange rate on a future date
Give 3 advantages of using forward markets for a business
- Don’t lose money on imports with a depreciation of the domestic currency
- Allows for better future planning and reduced uncertainty
- Protects them in the case of a shock
Give a possible disadvantage of a business using forward markets
Appreciation of the domestic currency will see them paying more than necessary for imports
A contract between 2 parties who look to provide financial protection against any losses incurred by a business
What is meant by an insurance premium?
The cost of the insurance to the firm
What is meant by an insurance payout?
They money the firm would receive in the case of having to honour the contract
Give 2 advantages of business insurance to a firm
- Reduces risk
- Provides business confidence to encourage investors
Give 3 potential disadvantages of having business insurance for a firm
- Opportunity cost
- Premiums can change and cause uncertainty
- Individuals can claim against a business
How does the financial sector mobilise savings for lending to firms?
They use savings and channel them to the firms as they are financial intermediaries
What is the role of an investment bank?
To serve big businesses and big projects
What is the role of a building society?
To offer mortgages
Why are building societies the safest banks to save with?
They only lend what they have depositied
What is the role of retail banks?
To loan to individuals and small businesses
How does the financial sector create jobs in working capital (people who don’t get paid until a job is done)
They provide overdrafts to help them pay their costs before they get paid
How have advancements in technology helped the financial sector with ease of trade? (3)
- Credit & Debit cards make trade easier
- Payment systems are faster
- The cost of exchanges are lowered
Define creditor risk
The risk of providing a loan to a bank
How is creditor risk assessed by banks? (2)
- Credit ratings
- Banks sharing information between each other