Extra More Detailed Questions

Question 1

What does the household sector consist of?

Answer 1

1) Individuals
2) Families
3) Private charitable and non-profit bodies
4) Unincorporated businesses (Farmers and professional partnerships)

Question 2

What does the corporate sector consist of?

Answer 2

Non-financial firms or companies producing and distributing goods and services.

Question 3

What does the government sector consist of?

Answer 3

Central and provincial governments as well as local authorities.

Question 4

What does the foreign sector consist of?

Answer 4

All individuals and institutions situated in the rest of the world

Question 5

Which sector is the net provider of funds?

Answer 5

The household sector since they are net savers

Question 6

What role does the borrower play in the financial markets?

Answer 6

They are the issuers of securities

Question 7

What role does the lender/investor play in the financial markets?

Answer 7

The buy or invest in the securities

Question 8

What role does the financial intermediaries play in the financial markets?

Answer 8

They expedite the flow of funds from lenders to borrowers. Hence, they are both issuers and buyers of securities

Question 9

What role does the broker/agent play in the financial markets?

Answer 9

They act as conduits between lenders and borrowers in return for a commission.

Question 10

What is the alternative name for a broker?

Answer 10

A agent

Question 11

What role does the financial advisor play in the financial markets?

Answer 11

They give investors recommendation, guidance and proposals for the purchase of instruments

Question 12

What role does the dealer/jobber play in the financial markets?

Answer 12

They buy and sell securities for their own account (its their “job” hence jobbers)

Question 13

What is a dealer also known as?

Answer 13

They are also known as jobbers

Question 14

What role does the market maker play in the financial markets?

Answer 14

They stand ready to buy or sell securities at all time. They have a bid and quote price and make a profit from the spread.

Question 15

What role does the hedger play in the financial markets?

Answer 15

They are exposed to risk of adverse market price movements and mitigate the risk using hedging instruments such as derivatives (They dont take on the risk, they simply hedge against existing risk)

Question 16

What role does the speculator play in the financial markets?

Answer 16

They try to make a profit by taking a view on the market (they take on risk that others might not be willing to take aka they are professional gamblers)

Question 17

What role does the arbitrageur play in the financial markets?

Answer 17

They attempt to make profits by exploiting inefficiencies in market prices

Question 18

Which of the following markets is not in the cash market?

Bond Market, Options Market, Money Market, Property Market, Equity derivatives,

Answer 18

Option Market (part of the derivatives market), Equity derivatives

Question 19

What is another name for the spot market?

Answer 19

The cash market

Question 20

Is the derivatives or cash market more liquid?

Answer 20

The derivatives market is more liquid

Question 21

What are the 3 different secondary market types?

Answer 21

Order-driven/auction market
quote-driven/dealer market
Combined market

Question 22

Is OTC markets or exchanges more liquid?

Answer 22

Exchanges since they are standardised and OTC can be tailored to suit a specific need which may not be as attractive to other investors

Question 23

What are the characteristics of a weak market?

Answer 23

All past market prices and data are fully reflected in asset prices. (no immediate information about market conditions)

Question 24

What are the characteristics of a semi-strong market?

Answer 24

All publicly available information is fully reflected in asset prices (only public immediate information is used)

Question 25

What are the characteristics of a strong market?

Answer 25

All public and private information is fully reflected in asset prices (all info is used. Cant use insider info to beat the market)

Question 26

What are the challenges to EMH?

Answer 26

Anomalies: There are patterns that are quite reliable Behavioural finance: Human psychology plays a role

Question 27

What are the 3 types of economic systems and what is the structure of each?

Answer 27

1) Centrally planned(command): state makes key decisions on production 2) Free-market (capitalist): Firms and household make decisions through price system. 3) Mixed: Gov and corps share the production of goods and services. Depends on countries political philosophy

Question 28

Under what objectives is the performance of an economy judged?

Answer 28

1) High rate of growth (not due to inflation) 2) Steady employment 3) Stable price level (no inflation) 4) Good balance of payments 5) Equitable (fair) distribution of income

Question 29

What are the most important tools of the monetary policy?

Answer 29

Reserve requirements Open-market operations Bank/discount rate policy

Question 30

When is the monetary policy said to be accommodative/expansionary vs restrictive/contractionary

Answer 30

Accommodative: Bank rate is reduced (cheaper lending of money) Contractionary: Bank rate is increased (more expensive lending)

Question 31

What makes up aggregate demand?

Answer 31

Household spending (Consumer) Government spending (public expenditure) Investment spending on capital goods Exports of goods and services less expenditure on imports of goods and services

Question 32

What are the different names for the different point is the business cycle?

Answer 32

1: Lower turning point, Trough, Recovery, Early Expansion 2: Expansion 3: Upper turning point, Early Contraction 4: Contraction

Question 33

What are the different BOP accounts?

Answer 33

1) Financial (capital account) - international capital or financial flows. Has to do with the ownership of different things 2) Current account - sale and purchase of goods to the rest of the world. Has to do with the different production of things 3) Gold and other foreign reserves

Question 34

What are the characteristics of a normal yield curve?

Answer 34

Yields rise as maturity increases.

Question 35

What are the characteristics of a inverse yield curve?

Answer 35

Yields decrease as maturity increases

Question 36

When does a flat or humped yield curve occur?

Answer 36

When there is a transition between inverse and normal yield curves

Question 37

What does covariance indicate?

Answer 37

The direction of the relationship (does it move in the same direction or opposite)

Question 38

What does correlation indicate?

Answer 38

How closely the securities move together

Question 39

What is the difference between Unconditional (marginal) probability and Conditional probability?

Answer 39

Unconditional: Probability that a single event will occur Conditional probability: The probability that an event will occur given that another even has occurred (Probability of a probability)

Question 40

What are the 3 methods to estimate probabilities?

Answer 40

1) Empirical probability - relative frequency of occurrence based on historical data 2) Priori/classical probability - Logical reasoning and analysis 3) Subjective probability - Estimated based on personal judgement

Question 41

What role does the commercial banks play in the FX market?

Answer 41

They buy and sell fx on behalf of their customers.

Question 42

What role does the interdealer brokers play in the FX market?

Answer 42

They facilitate the currency needs of banks and relay the prices from banks to clients (usually other banks)

Question 43

What role does non-bank financial institutions play in the FX market?

Answer 43

They invest in the FX market

Question 44

Why are firms and corporations participants in the fx market?

Answer 44

Because they are involved in international trade

Question 45

Who issues majority of the bonds in South Africa?

Answer 45

Government and corporates

Question 46

What role does limited public companies play in the equity market?

Answer 46

They are the issuers of shares on regulated stock exchanges

Question 47

What role does investment banks play in the equity market?

Answer 47

They underwrite new share issues. They buy the entire share issue from the company and resells them to investors

Question 48

What role does Venture capitalists play in the equity market?

Answer 48

They invest in medium and long-term funds in new and young firms

Question 49

What role does brokers play in the equity market?

Answer 49

They act as conduits between lenders and borrowers in return for a commission

Question 50

What role does producers play in the commodity market?

Answer 50

They make, grow or supply commodities for sale

Question 51

What role does consumers play in the commodity market?

Answer 51

They buy and use commodities

Question 52

What role does spot market traders play in the commodity market?

Answer 52

They connect producers and consumers and will sometimes accumulate commodities to clear the market

Question 53

What role does CTAs (Commodity trading advisors) play in the commodity market?

Answer 53

They are investment manager who focus on commodity futures and options trading

Question 54

When is a long call option in the money?

Answer 54

When the market price is above the strike price

Question 55

When is a short call option in the money?

Answer 55

When the market price is above the strike price

Question 56

When is a long put option in the money?

Answer 56

When the market price is below the strike price

Question 57

When is a short put option in the money?

Answer 57

When the market price is below the strike price

Question 58

What is the role of hedgers in the derivatives market?

Answer 58

They are entities that are exposed to the risk of adverse cash-market price movements.

Question 59

What role does speculators play in the derivative market?

Answer 59

They add liquidity to the market. They attempt to make a profit by taking a view on the market.

Question 60

Is the OTC market self regulated?

Answer 60

Somewhat

Question 61

If the central bank lowers the reserve requirement, is it contractionary monetary policy or expansionary?

Answer 61

Expansionary

Question 62

In which phase of the business cycle does cash generally perform well?

Answer 62

Contraction

Question 63

Which phase of the business cycle has the following characteristics: Imports decrease, inflation decreases, production declines, weak credit demand?

Answer 63

Contraction

Question 64

After a recession, is growth in private consumption expenditure a precursor to a general recovery

Answer 64

Yes

Question 65

Does larger than expected increases in inflation cause bond prices to rise or fall?

Answer 65

They will usually fall

Question 66

Does payments of a ordinary annuity occur at the start of each payment interval or at the end of each payment interval?

Answer 66

Payments are made at the end of each interval

Question 67

What is the present value of an annuity?

Answer 67

It is the sum of the present value of individual payments

Question 68

Does the effective rate increase or decrease as the number of compounding periods increase?

Answer 68

The effective rate increases as the number of compounding periods increases.

Question 69

How is the internal rate of return of an investment calculated?

Answer 69

It is calculated by equating the net present value to zero

Question 70

Which method for estimating probabilities is deduced by logical reasoning and analysis?

Answer 70

Priori probability

Question 71

What is the direct exchange rate?

Answer 71

It is the price of 1 foreign currency in terms of the domestic currency