Flashcards in MN-1502 Finance Deck (200)
What are the 4 forces behind the expansion of the financial system?
- Financial Innovation
Give 3 positives on financial markets of globalisation
- Borrowers are no longer limited to their national markets
- Agents have more opportunities to invest
- Financial institutions can have global presence
Give 4 negatives on financial markets of globalisation
- Problems with detecting wrongdoing
- Increased spillover between markets
- Stock and bond markets have increasing synchronisation
- Lack of local market knowledge
Why is stock and bond markets have increasing synchronisation an issue?
Investors can't diversify their portfolio
Give 3 advantages on financial markets of improved technology
- Increased speed of trades
- Reduced costs of financial firms
- Created a broader range of trades
Give 4 disadvantages on financial markets of improved technology
- Security and reliability weakened
- Large capital investment
- Backward compatibility
- Altered balance between fixed and variable costs
Give 4 UK policies introduced in the 1980s to encourage more agents into the financial system
- Tax breaks for savers
- Shifted tax on income to expenditure
- Kept financial products untaxed and increased indirect taxes
Give an advantage of financial innovation
More customers in the market because of increased investment opportunities
Give a negative of financial innovation
Often created in order to take advantage of tax loopholes
Give the 5 types of Financial Innovation
- Market-Broadening Innovation
- Risk Management Innovation
- Arbitraging Innovation
- Pricing Innovation
- Marketing Innovation
Explain risk management innovation as a type of financial innovation
People aim to shift the risk on them to others
Explain arbitraging innovation
People taking advantage of tax loopholes
Explain what is meant by marketing innovation
New methods and techniques to buy/sell new products
Define 'Financial System'
A channel of funds from entities with surplus funds to those with a shortage
Give the 3 main roles of the Financial System
- Transfer of funds from surplus units to deficit units
- Provide a mechanism for the transfer of financial risk
- Introduce a concept of money into the economy
Anything that is generally accepted as payment for goods and services or for the repayment of debt
Give the 3 roles of Money (same as from economics)
- Medium of Exchange
- Store of Value
- Unit of Account
Explain what is meant by money being a 'Store of Value'
It is a way of transferring purchasing power from present to the future
Explain what is meant by money being a 'Unit of Account'
It provides the terms in which prices are quoted and debt recorded
What are the 4 ordered elements of the finance cycle?
Savers -> (financial markets) -> Borrowers
Borrowers -> (financial intermediaries) -> Savers
Define 'Financial Intermediary'
Economics agents who specialise in buying/selling financial contracts
Define 'Financial Markets'
Markets where funds are moved from those with an excess to those with a deficit
Give the 2 basic principles of any financial transactions
- Time has value
- Information is the basis for decision making
Why are financial transactions often weighted one way?
Because of asymmetry of information
Which of the following is not a benefit of globalisation on
a) Borrowers can raise funds on both domestic and foreign
b) Loss of local knowledge.
c) Financial institutions seek to have global presence both as a
means of expansion and to retain their existing customers.
Investing in tax-exempt securities is an example of:
a) market-broadening innovation
b) risk-management innovation
c) arbitraging innovation
d) pricing innovation
e) marketing innovation
A deficit unit is one for whom ______ exceeds _______ .
a) saving; income
b) expenditure; saving
c) expenditure; income
d) income; expenditure
A surplus unit is one for whom income exceeds expenditure.
Which of the following are functions of a financial system?
1. The operation of a payments system.
2. Providing the mechanism for transfer of financial risk.
3. Helping to reduce unemployment.
4. Channeling funds between lenders and borrowers.
5. Helping speculators to bet on price movements.
1, 2, 4