Financial Markets

Question 1

Define financial markets

Answer 1

A market for financial assets are traded it also connects lenders and borrowers using intermediaries

Question 2

What are the 3 types of financial markets

Answer 2

• Money Market
• Capital Market
• Currency Market

Question 3

What is a money market

Answer 3

trade of assets and IOU (I owe you’s/debts) that are more liquid/have a payback of less than a year

Question 4

What is the Capital market

Answer 4

trade of assets and IOU’s that are less liquid/have a payback period of over a year

Question 5

What are the two types of Assets/IOU’s

Answer 5

Debts like bonds
Equity like shares

Question 6

What is the currency market

Answer 6

marketplace for currencies

Question 7

what are the two types of products in the currency market

Answer 7

• Spot (buy now get now)
• Futures (buy now get later)/(form of prediction)

Question 8

Who are the main buyers of currency markets

Answer 8

Importers (to protect them from currency risk)
Speculators/FX traders (to make a profit)

Question 9

What are the forms of market failure we see in the financial markets + explain them

Answer 9

• Moral hazard (take more risk as they are insured against their risk so act irrationally)
• Asymmetric information (don’t know everything so inefficient allocation)
• Principal agent problem (junior banker making risker investments on behalf of owner)
• Market rigging (manipulation of the financial markets for personal gain)
• Market bubbles (rising price ->herding behaviour from investors leading to an inflated price)
• Speculation (trading purely to make a short term profit which can have negative externalities)