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Unformatted text preview: inary shares with issued listed on a stockunlisted companies
as well as listed public companies, so A and D are both incorrect. Shares have no maturity date so B is also
incorrect. See page 27. 21
Banks and other financial intermediaries typically use standardised documentation for their contracts,
including deposits and loans. Which of the following benefits of financial intermediation applies in this case?
A) asset transformation
B) economies of scale
C) liquidity transformation
Feedback: Standardisation lowers costs in financial intermediation because once a contract has been drawn up
the same contract D) credituseddiversification
can be risk for many transactions. Therefore, the fixed costs of preparing the contract are
s pread over many ‘units of output’, lowering the cost per unit which is the concept known as economies of
s cale. See page 22. 22
Users of the foreign exchange market may be concerned about foreign exchange risk. This risk is:
A) the risk that interest rates in overseas markets may change
B) the risk that the exchange rate between currencies may alter
C) the risk that an overseas borrower may default
D) the risk that particular foreign currency may not be available when it is required
Feedback: Currencies are tradedain the foreign exchange market and 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 correct 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 underl...
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This note was uploaded on 03/26/2012 for the course FIN 1612 at University of New South Wales.