Lecture 1 - Introduction

Question 1

Financial claims/instruments

Answer 1

A claim to the payment of a sum of money at some future dates
- risk (uncertainty)
- liquidity (speed)
- real value certainty (suspectability to loss)
- term/time to maturity (time)
- expected return (probability of outcome)
- currency denomination (exchange rate risk)
- divisibility (standardised or not)

Question 2

Some very basic principles

Answer 2

1. Time has value
   - example: will you lend me £1000 if I tell you I will give it back in 10 years
2. Investment:
   - investment is everywhere
   - long term vs short term

Question 3

Some very basic principles more

Answer 3

1. Risk requires compensation: return
   - junk bonds vs gilts
2. Gambling vs investment
   - risk taker vs risk averse

Question 4

Some very basic principles more more

Answer 4

1. Information is the basis for decisions
   - good info can give you good returns
   - info can be costly
   - insider trading
   - info asymmetry

Question 5

Some very basic principles more more more

Answer 5

1. Markets determine prices and allocate resources
   - market based systems (market driven by supply and demand): UK AND US
   - the dominant role of financial markets
   - transition economies: BRICS countries

Question 6

What is money?

Answer 6

• money as “currency” - in international market
• money as “wealth” - in capital market
• money as “income” - in household/accounting

Question 7

Functions of money: medium of exchange

Answer 7

As a medium of exchange, money is what we used to buy goods and services (the transactions demand for money is assumed to be positively related to the level of national income)

Question 8

Functions of money: unit of account

Answer 8

As a unit of account, money provides the terms in which prices are quoted and debits are recorded

Question 9

Functions of money: store of value

Answer 9

As a store of value, money is a way to transfer purchasing power from the present to the future (demand for money is negatively related to the real rate of interest)

Question 10

What is a financial centre?

Answer 10

• a market (city) meets much of the demand for financial services of domestic/international market, and it is a key component of financial system

Question 11

Most of developed countries have a major financial centre

Answer 11

Europe: London, Paris, Frankfurt
Asia: Tokyo, Singapore, Hong Kong, Shanghai
US: New York

Question 12

Why are financial centres important

Answer 12

• retaining the domestic financial business
• competing for international business
• being a foreign exchange earner
• providing employment
• aiding the economy by channeling funds

Question 13

What role do they play?

Answer 13

• recycling funds from surplus agents to deficit ones as efficiently as possible
• facilitating the transfer of funds
• global concerns: foreign exchange, risk management, insurance and more

Question 14

Surplus agents

Answer 14

• households, public/private bodies and government
• risk averse, short term investment

Question 15

Deficit agents

Answer 15

• households, public/private bodies and government
• risk lover/less risk averse, medium/long term borrowing

Question 16

Financial intermediaries

Answer 16

• reconciling the needs between surplus and deficit agents

Question 17

The growth of financial industry

Answer 17

Technology: - computers, ATM, internet banking, etc
- security issues
Financial innovation: - why? Loophole of regulation, variety of needs
- financial derivative, securitization
Deregulation since 1980s