Financial markets
, 1. What is the primary objective of the monetary policy of the ECB?
It’s primary objective is to maintain the price stability in the euro area and so preserve the
purchasing power of the single European currency.
2. In pursuing its primary objective and in controlling the monetary conditions, what are the
3 monetary policy instruments the ECB can make use of? Provide a brief description for
each instrument:
Interest rates = lower interest rates to borrow money with central bank will feed through
the banking system and result in lower lending rates
Open market operations = involves the central bank to buying and selling financial
instruments in order to influence of money circulating in the economy
Minimum reserve requirements = The central bank requires the credit institutions to hold
deposits on accounts with their national central bank.
3. What are the 5 keys functions of financial markets. Provide a brief description for each
function
Price setting & asset valuation = the value of an asset is worth no more or less than the
amount that someone is willing to spend on it (offer and demand). The markets bring
together buyers and sellers to provide price setting for individual assets
Capital Opportunities = Companies may require new funds to build factories, machinery and
so forth. Governments may wish to raise money to invest in public works or to manage
foreign exchange reserves.
Short-term financing = Companies and governments require working capital to pay
inventories or wages in short-term
Investment Opportunities = Companies and governments who don’t need money can invest
their surplus capital in order to generate a return.
Financial risk management = There is a trade-off between a return and the risk of an
investment. Financial market instruments will allow the companies to mitigate the risks by
hedging or diversification
4. What is the difference between a money market and a capital market?
A money market is associated with short term investments or borrowing of funds, where short term
is defined as one year or less
Capital market is associated with long term investments or borrowings.
, 1. What is the primary objective of the monetary policy of the ECB?
It’s primary objective is to maintain the price stability in the euro area and so preserve the
purchasing power of the single European currency.
2. In pursuing its primary objective and in controlling the monetary conditions, what are the
3 monetary policy instruments the ECB can make use of? Provide a brief description for
each instrument:
Interest rates = lower interest rates to borrow money with central bank will feed through
the banking system and result in lower lending rates
Open market operations = involves the central bank to buying and selling financial
instruments in order to influence of money circulating in the economy
Minimum reserve requirements = The central bank requires the credit institutions to hold
deposits on accounts with their national central bank.
3. What are the 5 keys functions of financial markets. Provide a brief description for each
function
Price setting & asset valuation = the value of an asset is worth no more or less than the
amount that someone is willing to spend on it (offer and demand). The markets bring
together buyers and sellers to provide price setting for individual assets
Capital Opportunities = Companies may require new funds to build factories, machinery and
so forth. Governments may wish to raise money to invest in public works or to manage
foreign exchange reserves.
Short-term financing = Companies and governments require working capital to pay
inventories or wages in short-term
Investment Opportunities = Companies and governments who don’t need money can invest
their surplus capital in order to generate a return.
Financial risk management = There is a trade-off between a return and the risk of an
investment. Financial market instruments will allow the companies to mitigate the risks by
hedging or diversification
4. What is the difference between a money market and a capital market?
A money market is associated with short term investments or borrowing of funds, where short term
is defined as one year or less
Capital market is associated with long term investments or borrowings.
