QUESTION 1

i) The function of a financial system is only to channel funds from the surplus to the deficit units

ii) Analyse the financial claims of a deposit, a bill, an ordinary share and a bond in terms of the following characteristics: risk, liquidity, real value certainty and term to maturity. Discuss the relationship between these characteristics

QUESTION 2

i) Distinguish between order driven and quote driven financial markets, giving examples of each

ii) Why is electronic order-matching becoming the main system for trading in financial markets?

QUESTION 3

i) Discuss the main theories which explain the term structure of interest rates

i) ‘Assets' returns should always be assessed in terms of their real values'. Critically comment on this statement

QUESTION 4

Explain the nature of hedging, speculation and arbitrage. Provide an example of each strategy in the context of the foreign exchange and stock markets

QUESTION 5

i) What are the main risks facing a bank in its traditional business?

ii) Why are banks singled out for special regulation?

QUESTION 6

Write briefly on any three of the following. (Each part carries equal marks)

i) Semi-strong and Strong form efficiency in the context of Efficient Market Hypothesis

ii) Systemic risk

iii) Monetary Policy

iv) Eurocurrency and Eurobonds

v) Primary and secondary markets

vi) Purchasing Power Parity