CAEC 4

Financial Markets

MODULE 1

Samantha Louise C. Eulogio

BSA-4
Peer Work (L1)

What would happen to a country’s standard of living if people lost faith in the safety of a
financial institutions?

Since large businesses generally enlist the service of a financial institution to raise
capital, it would be difficult for a business to raise its capital. Thus capital investments would
slow down, unemployment would rise, the output of goods and services would fall and in
general, our standard of living will decline.

Quiz (L1)

1. B
2. D
3. A
4. B
5. B

Activity (L1)

1. D
2. E
3. F
4. C
5. I
6. H
7. B
8. G
9. A
Samantha Louise C. Eulogio
BSA 4

WRITTEN TEST

1. Describe the different ways in which capital can be transferred from supplier of capital to those
who are demanding capital.

The first way is through direct transfer or the transfer of assets from one type of tax
deferred retirement plan or account to borrower. Another way is indirect transfer through
investment bankers. The investment banker assumes the risk of selling a new security issue at
a satisfactory price called the underwriting. The third way is an indirect transfer through
financial intermediary. Through this process, certain assets or liabilities are transformed into
other assets or liabilities. As such financial intermediaries’ channel funds from savers to those
borrowers.

2. In terms of the life of the securities offered, what is the difference between money and capital
markets?

Money markets are where funds are borrowed or loaned for short period or less than
one year while capital markets are for stocks and for intermediate or long-term debt, which is
one year or longer.

3. What is the difference between a primary and a secondary market?

Primary markets are markets in which corporations raise capital by issuing new
securities while secondary markets are markets in which securities and other financial assets
are traded among investors after they have been issued by corporations.

4. Assume you are looking at many companies with equal risk, which ones will have the highest
stock prices?

Those companies with expectations of high return will have higher common stock
prices relative to those companies with poor returns.
5. What changes takes place under restructuring? In recent times, what group of investors has often
forced restructuring to take place?

Restructuring is an action taken by a company to significantly modify the financial

and operational aspects of the company, usually when the business is facing financial
pressures. When a company is having difficulties with making the payments on its debt, it
will often consolidate and adjust the terms of the debt in a debt restructuring, creating a way
to pay off bondholders. A company can also restructure its operations or structure by cutting
costs, such as payroll or reducing its size through the sale of assets.
 CAEC 4
Financial Markets

MODULE 2

Samantha Louise C. Eulogio

BSA-4
Peer Work (L1)

What procedure(s) would you recommend for a multinational company in studying exposure
to political risk? What actual strategies can be used to guard against such risk?

The simplest solution is to research the riskiness of a country, either by paying for
reports from consultants that specializes in making these assessments or doing research
yourself using the many free sources available on the internet. Then you will have more
informed option to not set up operations in countries considered political risk hot spots. One
strategy that can be used is to purchase political risk insurance. Multinational companies
could go to one of the many organizations that specialize in selling political risk insurance
and purchase a policy that would compensate them if an adverse event occurred.

Quiz (L1)

1. D.
2. D.
3. C.
4. D.
5. A.

Learning Journal (L1)

1. What are the top three things you’ve learned from this lesson?
2. What were your difficulties in this lesson?

The top three things I have learned from this lesson are the importance of trade to almost
every business, the foreign exchange rates and the factors influencing it, and lastly the risks
of foreign exchange. As for the difficulties, I have none.
Samantha Louise C. Eulogio
BSA 4

WRITTEN TEST
1. List the factors that affect the value of a currency in foreign exchange markets.

a. Inflation
b. Interest rates
c. Balance payments
d. Government intervention
e. Other factors

2. Explain how exports and imports tend to influence the value of a currency.

If a country exports more than he imports, there is a high demand for its goods, and
thus, for its currency. The economics of supply and demand dictate that when demand is
high, the prices rise and the currency appreciates in value. In contrast, if a country imports
more than it exports, there is relatively less demand for its currency, so prices would decline.
In the case of currency, it depreciates or loses value.

3. What is meant by translation exposure in terms of foreign exchange risk?

Translation exposure is the risk that a company’s equities, assets, liabilities, or income
will change in value as a result of exchange rate changes. This occurs when a firm dominates
a portion of its equities, assets, liabilities, or income in a foreign currency.