Agosto, Shantelle Nicole C.

Financial Markets
3.3 BSA-CY3

Chapter 4 - Review Questions

1. Define financial instrument.

- Any contract that creates a financial asset for one entity and a
financial obligation or equity instrument for another entity is referred
to as a financial instrument. It includes primary instruments and
derivative instruments. Financial instruments includes financial asset
(petty cash, demand, savings and time deposits, undeposited
checks, foreign currencies, money orders, bank drafts, trade-
receivables promissory note, bond certificates, stock certificates,
publicly listed securities). Financial Assets are subsequently
measured at amortized cost, fair value through other
comprehensive income (FVTOCI) and fair value through profit or
loss (FVTPL). It also includes financial liability (contractual obligation,
and a contract that will or may be settled in the entity’s own equity
instruments) and equity instruments (ordinary shares, preferred
shares, warrants, or written call options). Also, derivative financial
instruments contains financial options, futures and forwards
contracts, interest swaps, and currency swaps. On the other hand
contracts are also a big part of financial instruments. Contract is
defined as an agreement between two or more parties with
obvious economic repercussions that the parties have little if any,
control over, generally, because the agreement is legally binding
relates to a contract between two or more parties in the definition.

2. Give examples of primary financial instrument.

- A primary financial instrument is a financial investment whose price
is directly based on its market value is known as a primary
instrument. It might be any sort of financial investment that is based
on the value of the asset itself. Its fair market value is based on
 assumptions regarding their individual characteristics. Examples of
this are stocks, bonds, and currency. Stocks are being sold (privately
or publicly), giving an opportunity to buyers to own a part of the
company It includes a stock certificate as a proof of stock
ownership. On the other hand, bonds are investment securities in
which an investor loans money to a firm or a government in return
for monthly interest payments over a predetermined length of time.
The bond issuer returns the money to the investor when the bond
matures. And lastly, the currency is defined as bills and coins which
have been printed or minted by the National Government.
Currencies has different denominations.

3. Explain the nature of derivatives.

- It is a financial instrument whose value is determined by
contractually obligated cash flows derived from different security or
index. Derivatives work through contracts by allowing a company
to purchase an asset on a designated future date, at the price or
market value the contract was specifically dated. Derivatives are
being used also to access different markets and trade different
assets. It can be used as a tool to avoid risk or speculation. Both
functions have one goal- to avoid profit loss in the said selling of the
asset. Using derivatives is risky because it might trigger a massive
liability for someone who holds the derivatives. The specific asset’s
value is derived from its price, volatility, and riskiness. The three
classifications of derivative traders are hedgers, arbitrageurs, and
speculators. All of these derivatives traders have their own divergent
interest, commercial risk, market views, and financial tolerance.
Derivatives have the power to reduce uncertainty and its effect.

4. Indicate whether the following instruments are examples of money market

or capital market securities?
● BSP Treasury bills.
- Money Market
 ● Long-term corporate bonds
- Capital market securities
● Ordinary shares (common stock)
- Capital Market Securities
● Preferred shares
- Capital market securities
● Dealer commercial papers.
- Money Market
5. Distinguish between financial assets and non-financial assets.
- A financial asset is an asset that is considered as cash (petty cash,
demand, savings and time deposits, undeposited checks, foreign
currencies, money orders, and bank drafts) Receivables (accounts,
notes, and loans receivable), and equity instrument (investment in
bonds and other debt instrument issued by other entities, stock
certificates, publicly listed securities) this are the assets that
represents cash and cash equivalents. On the other hand,
non-financial assets are mostly the assets that the company used to
make and brand a goods or service these non-financial assets are
property, plant, and equipment, intangible assets such as patents,
goodwill, intellectual property, etc., It also determines the value of
the company. Unlike financial assets, non-financial assets do not
have a market standard and don't have active buyers and sellers.
But its value is determined by its physical characteristics. Hence,
financial asset values are determined by the current financial
market. Non-financial assets can also be used as security for a loan
such as collateral.

6. Give examples of financial instruments represented by financial assets,

and explain each briefly.
● Cash
Petty cash - Paying for tiny out-of-pocket expenses like
postage and other modest out-of-pocket expenses using a
cash balance maintained on hand at several places
 Demand, savings, and time deposits - corresponds to the
amount in your checking, savings, or time deposit accounts,
respectively. The term "time deposits" refers to investments
made over a lengthy period of time.
Undeposited checks - a cheque made out to a company or
bearer that has not yet been delivered to the bank for
payment
Foreign Currencies - currencies from another country that is
authorized by the government of the said country.
Money Orders - are similar to bank drafts, except they are
usually drawn from a bank or other financial organization that
has been allowed to do so.
Bank drafts - are agreements by financial institutions to
advance monies on demand by the person to whom the
draft was addressed.
● Equity Instruments of another entity
- Such as ordinary shares, preference shares, warrants or written call.
● Receivables
- A goods or services that is sold on account.
- Accounts, notes, and loans receivable

7. Distinguish between financial liabilities and non financial liabilities.

- Any liability that delivers cash or other assets to another business and/or
exchanges financial assets or financial liabilities with another entity under
potentially unfavorable terms is referred to as a financial liability. It is also a
non-derivatives in which the company is or may be compelled to deliver
a variable number of its own equity instruments, and/or a derivative in
which a fixed quantity of cash or another financial asset is exchanged for
a fixed number of the entity's own equity instruments to be settled. Some
of the examples of financial liabilities are contractual obligations, and a
contract that will or might be paid in the entity's own equity instruments.
On the other hand, non-financial liabilities are the type of liabilities that
are not for financial transactions such as deferred revenue, and
 advances received. Financial liabilities are obtained because of the
normal operation cycle while non-financial liabilities are non-cash
obligations that needs to be settled for long-lived assets’s maintenance.

8. Give examples of financial equity instruments and explain each briefly.

● Ordinary Shares - known also as voting shares because those shareholders
who have significant influence have the power to vote for the company’s
major decisions. It forms corporate equity ownership. It is proof of
ownership in the company. And it is publicly listed and each share will not
guarantee a dividend.
● Preferred Shares - It guarantees a dividend and has a steady income.
Unlike common shares that have a volatile price, preferred shares might
also rise or fall but are not as volatile as common shares. Unlike ordinary
shares, it does not include voting rights.
● Holders of warrants or written call options -It is purchasing a common
stock in a certain period of time at a certain price also. It can subscribe or
buy ordinary shares in exchange for a specified quantity of each or
another financial asset. It also expires when you don’t purchase the said
stock in a specified time frame. It is usually sold by brokers or private
investors.

9. Give examples of derivatives and explain each briefly.

● Futures Contracts - A futures contract is a contract between a seller
and a buyer in which the seller agrees to supply a certain
commodity at a specified price at a specific future date. On
regulated futures markets, these arrangements are known as
financial futures contracts because they are actively traded.
Futures contracts can be bought as an investment or as a hedge
against price fluctuations in the future.
● Forward contracts - A forward contract requires delivery on a given
date, but a future contract allows the seller to choose which day of
the month will be the delivery date at a later date (if it gets as far as
actual delivery before it is closed out)
 ● Call Options - The right to purchase or sell an instrument, such as a
Treasury bill, at a certain price and within a certain time period is
granted to the holder of options. Options are routinely bought to
protect against the effects of interest rate changes.
● Foreign Currency Exchange - The lender's currency is commonly
used to denominate foreign loans. But it is prone to risk as peso
equivalent to foreign currency is volatile and changes.
● Interest Rate Swap - based on a notional amount and a fixed and
variable rate, they are contracts to exchange cash flows as a given
date or a series of specified dates.

Chapter 5 - Review Questions

1. Why is there a need for an efficient system for a country to have a strong
economy?
- Efficient in its definition is a skill that allows you to do anything
without wasting resources, time, or energy. A system in its definition
is a set of things working together as parts of a mechanism or an
interconnecting network. Combining these two definitions, an
efficient system without wasting resources, time, or energy, a group
of items operating together as part of a mechanism or an
interconnecting network. Having an efficient system for a country to
have a strong economy is important because it benefits the people
who are living in that country. Proper promotion of local products,
well-strategized plan for a country, as well as well-managed
infrastructures and net worth that will not just benefit the private
companies but will benefit the majority. Also, I believe that an
efficient system will add more opportunities to grow and create
more of local products and talents that results to a need of
manpower that will lessen the unemployment rate.
2. What comprises the financial system?
- Everything about a company's finances, including accounting,
revenue and cost schedules, payroll and balance sheet
verification, is covered by the financial system. It is a mechanism
that allows lenders and borrowers to exchange money is known as
the financial system. It has the basic function of transferring money
from those who have a surplus. Here in the Philippines, financial
system has a structure that starts with Bangko Sentral ng Pilipinas,
second is baking institutions, third in the rank is non-bank financial
institutions and lastly government non-bank financial institution. All
of it covers the function and what does it mean when we say
financial system. Everything that systematic function of money is
involved is what comprises a financial system. It also contributes to
the analyzation of the economy of a country by helping money to
flow in a systematical way. Basically, financial system plays a big
role in our daily lives.

3. Explain the nature and main objective of the financial system.

- Its objective is to have a well-functioning in place that directs funds
to their most productive uses. It is a crucial prerequisite for
economic development. The financial system also teaches us
where and why to invest, lend, or borrow funds from the designated
institutions. The financial system is promoting a But the financial
system is not just composed of how funds and money circulates. It is
also composed of strategic ways to productively use the funds that
will contribute to economic development. It is also a financial
system that collects financial entities that work together to trade
and transport money from one location to another, such as
insurance firms, stock exchanges, and investment banks. Investors
obtain funds to develop initiatives and receive a return on their
investments through the financial system.
4. Explain the basic flow of funds through the financial system.
 - A financial system is composed of funds that came from lenders
and savers such as households, business firms, governments,
foreigners. The said funds will go to financial intermediaries that will
be used also to borrow and spend the said savings and lend funds
also called Indirect Finance. Household is the main lender and saver
or the majority of indirect finance. Borrowers and spenders are
composed of business firms, government, households, on the other
hand, funds that come from lenders and savers can also go through
financial markets that will be used also by the borrowers and
spenders. This is what they called direct finance. Business firms and
government are the top borrowers and spenders or the majority
who used direct funds. But household and foreigners also borrow
funds for the purchase of assets such as a house, cars, furniture,
etc., Example of direct finance in the financial market are the
selling of securities.
5. What are the key components of the financial system?
- The major component of the financial system is financial instruments
which means any contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument of another entity.
Also, financial market which means are a gathering place for
people, businesses, and organizations who need money or want to
lend or invest money. People and financial institutions who may be
lenders, borrowers, or owners of public firms throughout the world
make up this large global network. Those who are included in
financial markets are national, state, and local governments, that
are primarily borrowers of funds for highways, education, welfare,
and other public activities. The financial institutions is a corporation
that deals with financial and monetary activities such as deposits,
loans, investments, and currency exchanges, among others. Banks,
trust companies, insurance companies, brokerage firms, and
investment dealers are just a few of the businesses that fall within
the financial services umbrella. And lastly, the Central Bank and
Other Financial Regulators.
6. Describe the three important functions of the financial system, namely:
a. Risk sharing
- Is the possibility that the value of one's financial assets may
fluctuate in relation to one's expectations. The ability to share
risk is one of the benefits of utilizing the financial system to
connect individual savers and borrowers. Between high and
low wages, there is the most savings. Diversification is the
process of dividing a person's money into many assets in
order to lessen risk.
b. Liquidity
- The ease with which an item may be traded for money,
which savers see as a positive, is known as liquidity. Physical
assets, such as automobiles, machinery, or real estate, are
often more liquid than assets produced by the financial
system, such as stocks, bonds, or checking accounts.
c. Information gathering and sharing
- It is a process of gathering and disseminating data or facts
regarding borrowers and their expectations for financial asset
returns. Borrowers' information is gathered by banks in order to
predict how likely they are to repay their debts. The bank's
expenses for acquiring information are cheaper than if you
sought to get information on a pool of borrowers since it
specialized in collecting and processing it. A critical function
of the financial system is the gathering and dissemination of
information or data regarding borrowers, as well as the
anticipation of financial asset returns. Stock, bond, and other
assets are priced by financial markets, which provide
information to both savers and borrowers.

7. Explain what asymmetric information is.

- In a financial market, asymmetric information means that one side
may not have enough knowledge about the other to make
 informed judgments. It can also lead to the emergence of a slew of
financial intermediaries. The borrower has more information than
does the lender. In my understanding, assymetric infromation helps
us to decide within a transparent firms that will lessen the risk and
increase the trust of the investors. That is why national government is
the safest way to invest. In general, there are practical solutions to
asymetric information challenges, such as lowering the cost of
information needed to make investment decisions through financial
markets or financial intermediaries. As investing world is crucial,
transparency and information is really important. That is why
choosing a reliable firm and stock market is important so that
investment will not go to waste. Good thing that a financial system
aids in the reduction of the knowledge gap between borrowers
and lenders.
-

8. Describe the two problems arising from asymmetric information, namely:

a. Adverse selection
- This is the difficulty that investors have when deciding whether
or not to invest in borrowers who are low-risk or high-risk.
Borrowers often know more about their investment projects
than lenders, which leads to knowledge asymmetry before
the contract is signed. Borrowers who are most eager to
participate in a transaction are the ones who are most likely
to cause the lender to lose money. Individual savers may not
have the time, or the means, to accumulate and utilize
economies of scale and scope.

b. Moral hazard
- Even when a lender has determined whether a borrower is a
good borrower or a bad borrower, the lender's difficulties with
information haven't gone away. Moral hazard, which is still a
problem, is more likely to arise when a borrower has a
 motivation to hide information or act in a way that is contrary
to the lender's interests. Asymmetric knowledge causes moral
hazard since the borrower knows more about how the
borrowed funds will be utilized than the lender does.
9. What are transaction and information cost
- Transaction cost is the brokerage commission charged for
purchasing or selling a financial asset, for example, is the cost of a
trade or financial transaction. On the other hand, information cost is
to determine the cost and creditworthiness of borrowers, as well as
to track how they spend the cash they have obtained. Savers earn
a poorer return on their savings due to transaction and information
costs, whereas borrowers must pay more for the cash they borrow
as a result of transaction and information costs. As we've seen,
these costs might sometimes imply that money is never given or
borrowed in the first place. Despite the fact that transaction and
information costs impair the financial system's efficiency, they also
provide a profit opportunity for those who can find ways to lower
them. Knowledge about this costs is important as a borrower and
lender. Because borrowers will be more wise in terms of
decision-making about when and where to borrow.

10. Explain how financial intermediaries

a. Reduce “Adverse Selection”
- First is by requiring borrowers to reveal important information
about their financial and performance status. SEC requires to
show financial statements, such as the balance sheet, which
indicates the value of the company's assets, liabilities, and
stockholder's equity, are used by publicly listed companies to
disclose their financial performance. Then there are income
statements, which reflect a company's revenue, expenses,
and profits. Standard accounting processes must be used to
create these financial statements. Second is obtaining
company information and distributing it to investors. And
 lastly, Getting lenders to demand borrowers to pledge some
of their assets as collateral so that if the borrower defaults, the
lenders would be able to sue them.
b. Moral “Hazard Problem”
- It is dedicated to keeping track of borrowers and devising
effective methods to verify that the cash they lend are really
spent for what they were intended for. As well as putting
restrictive covenants in place.

c. Reduce “Transaction and Information Cost”

- First is, economies of scale refers to the reduction in the
average cost of a commodity or service produced as a result
of an increase in the number of goods or services provided.
Also, Technology is also used by financial intermediaries to
deliver financial services. And lastly, financial intermediaries
increased its dependence on sophisticated technologies to
assess a loan applicant's creditworthiness.

Chapter 6 - Review Questions

1. Compare the function of a commercial bank with the function of a

universal bank
- With regards to what commercial banking authority’s functions, a
universal bank is also called an expanded commercial bank, is any
commercial bank that performs the investment house function. It
can invest in allied and non-allied enterprises. On the other hand
commercial banks are responsible for accepting drafts, issuing
letters of credit discounting and negotiating promissory notes,
drafts, and bills of exchange, and other evidence debt, accepting
or creating demand deposits, receiving other types of deposits and
deposits substitutes, buying and selling foreign exchange, gold or
silver bullions, acquiring marketable bonds and other debt
securities, and extending credit subject to such rules that the
 Monetary Board may promulgate. A commercial bank is under the
universal bank. At some point, they have the same function but
differ in the investment part. Universal banks uses their customers'
savings by how much the customer can take risk. While commercial
banks are concerned with accepting deposits from the public. Both
of them are private banking institutions.

2. Enumerate 3 government banks.

- Development Bank of the Philippines
- Land Bank of the Philippines
- Philippine Al-Amanah Islamic Investment Bank
3. Which of the following is not a thrift bank.
a. Private Development Bank
b. Stock savings and loan associations.
c. Stock savings and mortgage banks.
d. Cooperative banks.
4. A bank which caters to farmers businessmen and cottage industries in the
rural areas.
a. Rural bank
b. Cooperative bank.
c. Savings and loans association
d. Universal banks
5. Which of the following is not a government bank?
a. Land Bank of the Philippines
b. Al-Amanah Islamic Investment Banks
c. Philippine National Bank
d. Development Bank of the Philippines
6. Which of the following is not a government agency that regulates
financial institutions?
a. Insurance Commission
b. Bangko Sentral ng Pilipinas
c. Securities and Exchange Commission
 d. Bureau of Internal Revenue
7. Explain briefly how the following regulatory agencies intend to align their
policies, roles, and practices with global standards.
a. BSP
- Bangko Sentral ng Pilipinas (BSP) is aligning with global
standards by modernizing requirements of issuance of bonds
and commercial papers by banks and quasi-banks. They also
liberate the foreign exchange regulatory framework. They
also align the revised rules of liquid risk management that is in
line with Liquidity Risk Management and Supervision under
Basel III reform agenda.
b. SEC
- Supporting the proposals on regulating Collective Investment
Schemes, as well as amendments to the Security Regulation
Code (SRC) and the Corporation Code that enhances the
local regulations with an intention of confirming to
international best practices. They are also adopting to this
new changes such as cryptocurrency. With that being said,
they are studying how to protect investors as there is a
regulatory treatment of Virtual Currencies (VCs) to lessen
internet-based scams by coordinating with the Philippine
National Police and National Bureau of Investigation to lessen
the cybercrime that is being committed online.
c. Insurance Commission
- Insurance Commission is preparing to adopt Philippine
Financial Reporting Standards by the Financial Reporting
Standard Council that will be applied to insurance company,
The IC has established guidelines for the orderly acquisition,
merger, consolidation, sale of insurance portfolio, and exit
from the domestic insurance business for subsidiaries and
branches of Global Systematically Important Insurers
operating in the Philippines.
8. Discuss briefly the following current risks in the Philippine Financial system
a. Repricing, refinancing, and repayment risks
- Other countries' warnings emphasize the reality that global
trends have a significant impact on home economy. For a
tiny and open economy like the Philippines, which is a price
taker rather than a price setter, the impact is considerably
greater.

b. Developments in the credit market

- In the currency and interest rate markets, the incentives
would have been to borrow in the Phillipine peso and invest it
in a US dollar instrument based on the spot and future rates.

c. Increasing demand for the credit by corporate business and

households
- The continued demand for loans is encouraged since it
signifies the economy's "financial deepening." However, the
increasing debt levels must be balanced against the danger
of rising interest rates and a devaluation of the peso. This is
the debt service burden issue.

9. Describe briefly the impact of the COVID-19 pandemic

- When we think of COVID-19 impacts and effects we can
enumerate tons and tons of experience because of how
unpredictable the pandemic is. And one of its impacts is the arising
case of mental health illness. Study says that a sudden change
(whether good or bad) can cause us stress. And stress has a
physical manifestation in our body that might cause us physical
illness. We can't also deny that this pandemic has caused us fear
and anxiety for what will happen in the future. And mostly, the
saddest impact of Covid-19 is that many lives were lost because of
severe symptoms and effects of Covid-19. It is sad to hear that a
family member of a friend or someone you know passed away
 because of Covid-19. More than the economic effect of it, we can't
refute the truth that the mental and emotional effect of this virus
was also severe and needs to be tackled and discussed too.

10. What positive developments are occurring that could possibly reverse
some unfavorable impact of the COVID-19 pandemic?
- An effective contract tracing and disseminating information about
vaccines to encourage people to get vaccinated can greatly
reverse the unfavorable impact of Covid-19. This simple yet
systematic step, little by little, helps us get back to normal and
minimize the severe effect of Covid-19 physically and economically.
Well-planned imposing of quarantine restrictions can also help. With
the rapid decrease of our economy, we cannot just impose strict
quarantine restrictions out of nowhere. Because it hinders businesses
(SMEs and Companies) to grow and strategize on how to gain more
profit that might give more opportunities and lessen the
unemployment rate. Prioritizing opening schools can significantly
reverse the effect of COVID-19 such as teenage pregnancy,
anxiety, and depression, incompetent graduates, and
unemployment also for non-teaching staff. And lastly, as everyone is
maximizing the use of social media, online businesses are a great
idea also to unleash creativity that could lessen mental health crisis
during pandemic.

11. Write a short essay on how COVID-19 Pandemic affected you, as an

individual, your family, and your local community.

My family and I own an overrun and skincare business. We greatly rely on

physical stores, bazaars, and malls. When a pandemic happens, we are forced
to shut down our physical storez and cancel incoming bazaars that will greatly
impact our business’ sales. Since pandemic is an unpredictable event, we
thought of ways to still gain profit with the assets and stocks we have. Online
selling is popular at that time, My Dad took a risk to do online selling, maximizing
the usage of social media. By that, we get to connect with different subdivisions
near our home, advertising and promoting our product. We can say that we are
still blessed and grateful because in the early months of quarantine people still
buy clothes and skincare products from us taht sustains us in our day-to-day
needs.
As an individual, I was greatly affected by the pandemic also mostly with
the sudden change of the education system. I am bless to have my own laptop,
wifi, and cellphone to use, but the mental and emotional damage it cost mostly
when I am pressured at school greatly affects my day-to-day life. I am not used
to studying online without a professor in front of me, so the online class was a big
challenge and adjustment for me.
And lastly, my community was also affected by having a financial
crisis. Just like what my Dad did, the people in our community maximize their skills
and talents to gain profit from it. By that, little by little, we are being sustained
from our daily needs.
There is this saying that in this time of the pandemic, we are all on the
same sea. Everyone is forced to stay at home, forced to do home school,
forced to work from home, and lastly, to be with our family (or alone) for a long
period of time. But as for me, I do not agree with the said statement. We might
all experience the same restrictions, but we can agree that all of us did not
respond the same way. Some have the means to buy and to own a laptop for
their studies, while others don’t even have a house to live in and protect
themselves from the virus, Some complained working from home, while others
who don’t have a regular job and overthinks about where to find food, and
many more scenarios we can name. We can all agree that pandemic has
greatly affects us in different ways.