Questions and Answers
What is a derivative and what determines its value?
A derivative is a security whose price is derived from underlying assets, and its value is determined by fluctuations in these underlying assets.
Name three common underlying assets in the derivative market.
Stocks, commodities, and currencies are three common underlying assets.
Who are the main participants in the global financial market?
Main participants include commercial banks, non-bank financial institutions, corporations, and individuals.
What are the three financial zones mentioned in the text?
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Identify the three main financial centers in the world.
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What is a financial market?
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List two features of a financial market.
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What is the primary purpose of capital markets?
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Define a money market.
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What types of investments are commonly traded in money markets?
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Explain the foreign exchange market.
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What role do central banks play in financial markets?
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Give an example of a transaction that would take place in the capital market.
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Study Notes
Financial Market Environment
- A financial market enables trading of financial securities and derivatives, including stocks, bonds, and precious metals, at low transaction costs.
- Key marketplaces include the stock market, bond market, foreign exchange market, and derivatives market.
Features of Financial Market
- Capital/Fixed Income Market
- Money Market
- Foreign Exchange
- Derivative Market
Capital Markets
- Capital markets involve buying and selling long-term debt or equity-backed securities.
- Composed of:
- Stock Market: Involves issuance of shares or common stock.
- Bond Market: Involves issuance of bonds.
Money Markets
- Concerned with high-quality short-term debt investments.
- Involves trading of loans for a duration of up to 365 days.
- Composed of:
- Deposits
- Banker’s acceptance
- Commercial paper
- Treasury bills
Foreign Exchange
- Platform for trading foreign currencies, allowing buyers and sellers to exchange one currency for another at an agreed rate on a specific date.
- Common currencies traded include the US Dollar, Euro, and Japanese Yen.
Derivative Market
- Derivatives are securities whose price is reliant on one or more underlying assets.
- These financial instruments are contracts between two or more parties influenced by the asset's value.
- Underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes.
- Common derivative instruments include financial futures and options.
Main Participants in Global Financial Market
- Participants include commercial banks, non-bank financial institutions, corporations, individual investors, central banks, and brokers.
- Three major financial zones in the world: Asia, Europe, and North America.
- London serves as the primary financial center, followed by New York and Tokyo.
- Trading occurs in dealing rooms of various financial institutions and government bodies.
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Description
This quiz covers the fundamentals of the financial market environment, including the definition of financial markets and the roles of central banks. Enhance your understanding of financial securities, derivatives, and transaction costs. Perfect for students studying finance.