DPF30033 Chapter 1 Financial Market Environment

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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?

The three financial zones are Asian, European, and North American. Signup and view all the answers

Identify the three main financial centers in the world.

London, New York, and Tokyo are the three main financial centers. Signup and view all the answers

What is a financial market?

A financial market is a marketplace where people trade financial securities and derivatives at low transaction costs. Signup and view all the answers

List two features of a financial market.

Capital market and money market are two features of a financial market. Signup and view all the answers

What is the primary purpose of capital markets?

The primary purpose of capital markets is to enable the buying and selling of long-term debt or equity-backed securities. Signup and view all the answers

Define a money market.

A money market is a financial market for trading in short-term debt investments, typically less than or equal to 365 days. Signup and view all the answers

What types of investments are commonly traded in money markets?

Commonly traded investments in money markets include treasury bills, commercial paper, banker's acceptance, and deposits. Signup and view all the answers

Explain the foreign exchange market.

The foreign exchange market is where buyers and sellers transact foreign currencies, exchanging one currency for another at an agreed rate. Signup and view all the answers

What role do central banks play in financial markets?

Central banks regulate the financial system, conduct monetary policy, and ensure liquidity in the markets. Signup and view all the answers

Give an example of a transaction that would take place in the capital market.

An example of a transaction in the capital market is the issuance of shares of common stock. Signup and view all the answers

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.