Theme 4.4.1 Flashcards
(16 cards)
Define the term ‘financial market’
Any place where buyers and sellers can trade financial assets
Describe the primary role of financial markets
To bring together lenders (those sitting on excess money) and borrowers (those who need money right now but do not have it)
Name the 5 roles of financial markets
To facilitate spending
To lend to businesses & individuals
To facilitate the exchange of goods and services
To provide forward markets in current and commodities
To provide a market for equities
Which group of people are considered under ‘lenders’
Savers
Investors
Lenders can go the debt management office and buy gov bonds or to companies to buy shares
Which group of people are considered under ‘borrowers’
Individuals- e.g those wanting to finance car
Firms - don’t have retained profit for investment
Gov- don’t have tax rev to finance important expenditure
What is the primary roles of intermediaries
To offer a lower rates of return to lenders and they charge an interest rate to borrowers and make profit between
Example of intermediaries
Pension funds - they take huge sums of money from individuals saving for their retirement, they’ll invest it in stock markets and will pay an annuity to pensioners for when they meet their pension age.
Commercial banks, investment banks, hedge funds
Name examples of financial markets
Bond markets
Stock markets
To facilitate spending
Financial institutions provide a safe platform for individuals and businesses to save their money. They ensure the security of deposited funds and pay interest to encourage saving. By pooling the savings of many individuals, financial institutions can allocate these funds to support loans and investments, thereby stimulating economic activity.
To Lend to Businesses and Individuals
One of the primary functions of financial institutions is to act as intermediaries between savers and borrowers. They collect deposits from individuals and then lend this money to businesses and individuals in need of capital. Financial institutions assess the creditworthiness of borrowers and determine the terms and conditions of loans. This intermediation process facilitates economic growth by directing funds to productive uses, such as funding business expansion or financing home purchases.
To Facilitate the Exchange of Goods and Services
Financial institutions provide a wide range of payment and transaction services that facilitate the exchange of goods and services in the economy. This includes offering checking accounts, electronic fund transfers, debit and credit card services, and online payment systems. By providing a secure and efficient means of transferring funds, financial institutions play a vital role in supporting everyday economic transactions.
To Provide Forward Markets in Currencies and Commodities
Financial institutions also participate in financial markets by offering forward contracts for currencies and commodities. These contracts allow businesses and investors to hedge against currency exchange rate fluctuations and commodity price volatility. Forward markets provide a mechanism for parties to lock in future prices, reducing uncertainty and risks associated with international trade and commodity markets.
To Provide a Market for Equities
Financial institutions often serve as intermediaries in the equity market, allowing individuals and institutions to buy and sell shares of publicly traded companies. Stock exchanges and brokerage firms facilitate these transactions, enabling investors to participate in the ownership of corporations and potentially benefit from capital gains and dividends. This function supports capital formation and efficient allocation of resources.
AO2 - Financial market failure- LIBOR
In 2012, Barclays were fined $450m for the manipulation of LIBOR- they weren’t leaving interest rates to supply and demand (market rigging) which distorted the price mechanism
AO2-level of private sector debts
In 2008 the level of private sector debts were 191% of GDP
AO2- Basell III
Basell III - e.g stress tests for banks to perform to see how they’d react in a crisis
