EFB201

During 2017, Michael and Jenny Jones expect total income of $215,000 and are budgeting
total expenditure of $195,000. For this budget period, the Jones family is most specifically
a:

• deficit spending unit

• a recipient of funds from the financial system

• surplus spending unit

• financial intermediary

Answer explanation

215,000 -195,000 = 20,000 (positive) => Surplus

The ASX in 2023 is an example of:

• an over-the-counter market exchange.

• an electronic organised exchange.

• a physical exchange.

• all of the above

Answer explanation

Classification by organisation of trade:

organized exchange -> Provide platform to buy and sell financial claims and assets. e.g: NYSE

Over the counter: Financial claims that are not listed on exchange e.g: In this market, brokers and dealers help clients trade in securities, commodities, stocks, currencies, derivatives, structured products, and bonds.

/ currency bank loan

The financial market where new securities are sold for the first time is:

• an indirect market.

• a secondary market.

• a primary market.

• option market.

Answer explanation

Classification by time of entry

Primary: New products (physical product, financial claims)

Secondary: Used Products (Transactions of claims that have been sold before)

Highly liquid financial instruments with a maturity of 90 days would be traded in

• the bond market

• the share market

• the money market

• none of the above.

Answer explanation

Classification by maturity

< 1 year (356 days): Money market

>1 year: capital market

If Queensland government needs to externally finance new infrastructures for 2036
Summer Olympics, then it would most likely seek the funds in the:

• money market.

• capital market.

• futures market.

• foreign exchange market.

  
  

Answer explanation

Capital market -> long-term borrowings

Futures market -> exchange -> more for investment purposes

Foreign exchange market -> more for investment purposes

An oil and gas exploration and production company announces that it is offering 30 million
shares to the public at $45.50 each. This transaction is most likely a sale in the:

• money market.

• primary market

• futures market.

• commodity market.

Answer explanation

Issuing new shares -> primary market

Sam is young and has substantial wealth. A significant proportion of his stock portfolio
consists of emerging market stocks that offer relatively high expected returns at the cost of
relatively high risk. Sam believes that investment in emerging market stocks is appropriate
for him given his ability and willingness to take risks. Which of the following labels most
appropriately describes Sam:

• information-motivated trader

• risk hedger

• investor
  

• deficit spending unit

Answer explanation

1. 1.Save/Raise money: savers and Investors

2. 2. Manage risk: hedge

3. 3. Exchange assets: exchange US dollar for Euro

4. 4. Make a profit by trading on (private) information: -> information-motivated trader

5. 5. Facilitate -> financial intermediaries

Michelle owns a manufacturing company in Australia. Her company has bought goods
from a supplier in Brazil and will pay in Brazilian real (BRL) in three months. Michelle is
concerned about the possibility of the BRL appreciating more than expected against the
Australian dollar (AUS). Therefore, she is planning to buy three-month futures contracts
on the BRL. The buy of such contracts generally gains when the BRL appreciate against
the AUS. If Michelle were to buy these future contracts, she would most appropriately be
described as a(n)

• information-motivated trader

• risk hedger

• Investor.

• deficit spending unit

Answer explanation

Let's say $BRL appreciates Increase

Current Contract: pay more -> negative returns

Futures Contract: gains -> positive returns

-> Hedge -> To manage the risk and maintain a stable price

John has designed a sophisticated model to valuate stock share prices. He has been
monitoring the price of Gamestop and all relevant news. A famous hedge fund just
announced their pessimistic view on Gamestop’s future and its stock price started to fall.
John holds an opposite view based on his own collection and interpretation of information.
He predicts the stock price will bounce back soon and decides to buy Gamestop shares with
the intent to sell them again when price is indeed reversed. John is most appropriately be
described as a(n):

• information-motivated trader

• 
  risk hedger

• investor
  

• deficit spending unit

Answer explanation

Sophisticated model to evaluate stock prices

Make decisions on his own (private) information -> prediction

Private info is knowledge or data that B not publicity avilable and is held by certain individuals or entities

=> given them advantage in investment

In an efficient capital market, ____

• prices of securities adjust as new information becomes available to the market.

• security prices fully reflect the knowledge and expectations of all investors at a particular
  point in time

• nvestors and financial managers have no reason to believe the securities are not priced at
  or near their true value

• All of the above are true

Answer explanation

Efficiency in a financial market: the market price (market value) of a security reflects all available information about its fundamental value (intrinsic value)

Inefficiency: Market value ≠ fundamental value

=> mispricing -> 1 MV < FV -> underpricing

-> 2 MV > FV -> overpricing