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Accordingly foreign exchange risk arises from changes

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Unformatted text preview: nd an exchange rate is the price of one currency in terms of another. Accordingly, foreign exchange risk arises from changes in exchange rates, so B is the answer. See page 29. 23 In the context of the capital market, the derivatives market is important because: A) derivatives allow borrowers to raise long-term funds B) derivatives allow the risks associated with capital market transactions to be managed C) securities with options attached to them are attractive to investors Feedback: Derivatives are financial instruments whose value is linked to (derived from) the value of some D) derivatives are very secure low-risk A change in underlying (‘physical’) asset such as a bond or share. investments the price of the underlying asset will result in a price change for any related derivatives so it follows that they can be used to manage risks as stated in B. See page 29. 24 Financial institutions whose liabilities are mainly contracts that specify that, in return for the periodic payment of fundsA) money market corporations will make payments if and when a specified event occurs are: to the institution, the institution B) unit trusts C) contractual savings institutions Feedback: Financial institutions that are obliged to make payment(s) if and when a specified event occurs D) financial general insurers and superannuation funds. The contracts between these include life insurance offices,intermediaries institutions and their policyholders require payment of regular premiums or contributions (the policyholder agrees to save) so they are classified as contractual savings institutions, making C the answer. See page 9. 25 Institutions that mainly provide off-balance-sheet advisory or fee-based services while also providing some loans are: finance companies A) B) investment banks and merchant banks Feedback: Depository financial institutions such as commercial banks accept deposits and make loans, earning C) commercial banks a return from the spread between the interest rates on loans and...
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