BUS614 Study Guide

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Study Guide Structure

In this study guide, the sections in each unit (1a., 1b., etc.) are the learning outcomes of that unit. 

Beneath each learning outcome are:

• questions for you to answer independently;
• a brief summary of the learning outcome topic; and
• and resources related to the learning outcome. 

At the end of each unit, there is also a list of suggested vocabulary words.

How to Use this Study Guide

1. Review the entire course by reading the learning outcome summaries and suggested resources.
2. Test your understanding of the course information by answering questions related to each unit learning outcome and defining and memorizing the vocabulary words at the end of each unit.

By clicking on the gear button on the top right of the screen, you can print the study guide. Then you can make notes, highlight, and underline as you work.

Through reviewing and completing the study guide, you should gain a deeper understanding of each learning outcome in the course and be better prepared for the final exam!

Unit 1: Introduction to Financial Markets

1a. Analyze the role of lenders and borrowers in financial markets

• What are the different financial markets?
• Who are lenders and borrowers in bond markets?

Financial Markets

Financial markets are ones where securities are traded. These securities include stocks and bonds. Financial markets generally include stock markets and bond markets, which are further divided into sub-markets known as the Primary Markets and Secondary Markets. Furthermore, Secondary Markets include Over-the-Counter Markets (OTC).

To review, see The Stock and Bond Markets.

Bond Markets

Investors can either invest in loan instruments or equity instruments. Those who invest in loan instruments typically buy bonds, whereas investors looking to become shareholders invest in shares. Generally, companies looking to raise capital through loans will issue bonds and are considered borrowers, whereas the investors who buy these bonds are considered lenders.

The same concept applies to governments that issue bonds. For example, when governments want to borrow money to finance some projects, they issue bonds that investors later purchase. This makes governments the borrowers in this transaction, and investors become the lenders.

To review, see Financial Markets and Assets and State and Local Governments.

1b. Compare methods of raising capital in the marketplace, such as IPOs, rights issue, and private placement

• What are the different non-debt methods of raising capital?
• What are the rights of shareholders?

Non-Debt Methods of Raising Capital

Companies looking to raise capital can generally opt for debt and equity. In terms of equity financing (non-debt financing), companies could issue shares either through private placement, initial public offering, or through rights offering (also called rights issue).

Private placement is when the issuing company selects a group of investors to offer them the option of investing in the company's stocks. An initial public offering is when a company decides to issue and sell their shares to the public for the first time. Finally, a rights issue is when a company offers existing shareholders the right to purchase additional stocks relevant to the proportion of ownership of each shareholder. Such investment is offered at a discounted price.

To review, see Owning Stocks.

The Rights of Shareholders

Shareholders are regarded as owners of the organization in which they hold their stocks. Their degree of ownership varies depending on their shareholding proportion. Furthermore, each shareholder has rights that depend on their class of shareholding.

Generally, common shareholders have the right to sell their shares, nominate directors, vote, receive dividends, purchase new shares issued by the company, and access the remaining assets after liquidation.

On the other hand, preferred shareholders have hybrid rights of common shares and bonds. Preferred shareholders, like common shareholders, are regarded as owners in the company and have the right to dividends (though, unlike common shareholders varying dividends, they earn fixed dividends). Additionally, though they both have access to the company's assets, their preference for such access differs. Preferred shareholders have priority access over common shareholders. Preferred shareholders also have the right to convert their preferred shares into common shares. However, preferred shareholders have no voting rights, unlike common shareholders.

To review, see Ownership Nature of Stock and Control and Preemption.

1c. Outline the main differences between debt and equity

• What is the difference between debt and equity instruments?
• What are the main features of bonds?

Debt vs. Equity

The main difference between the two is their nature. Equity instruments allow investors to become owners in the organization, whereas investors in debt instruments are considered lenders. Debt investments are generally less risky than equity investments. Furthermore, debt instruments issued by a company increase the debt obligation of the issuing organization, unlike equity instruments.

To review, see The Difference between Debt and Equity Markets.

Bonds

Bonds are regarded as a debt financing instrument. The issuer (a company or government), regarded as the borrower, provides investors, regarded as lenders, with interest against the money lent. This tax-free investment is considered a fixed-income instrument that is less risky than equity investments. In addition, unlike equity instruments, these debt instruments have an "expiry date" known as the maturity date, where the borrowed amount, known as the face value or principal amount, is returned to the investor in full.

To review, see Owning Bonds.

Unit 1 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• Preferred Shares
  • Preferred shares enjoy the qualities of equity and debt instruments, allowing investors to become shareholders (partners) in the issuing organization and provide the holding investors with dividends and preference over the company's assets, but do not allow investors to vote.
• Common Shares
  • Common shares are an equity instrument that allows investors to become shareholders (partners) in the issuing organization and provide the holding investors with a set of rights, including voting rights and receiving dividends depending on the organization's performance.
• Equity Financing
  • Equity financing is a method of financing by which an organization (or government) issues equity instruments (shares) to finance projects or raise capital.
• Debt Financing
  • Debt financing is when an organization (or government) issues debt instruments (bonds) to finance projects or raise capital.
• Securities Markets
  • Securities markets are ones where bonds and shares are traded
• Over the Counter
  • Over-the-counter markets are decentralized markets where financial instruments are traded directly between market participants without brokers or central exchanges.
• Initial Public Offering
  • An initial public offering is when a company decides to issue and sell their shares to the public for the first time.
• Private Placement
  • Private placement is when the issuing company selects a group of investors to offer them the option of investing in the company's stocks.
• Rights Offering
  • Rights offering (or rights issue) is when a company offers existing shareholders the right to purchase additional stocks relevant to the proportion of ownership of each shareholder.
• Primary Markets
  • Primary markets are markets where securities are traded for the first time
• Secondary Markets
  • Secondary markets are those where already-issued securities are traded among investors.
• Bond Term
  • The bond term is the time the bond has until its maturity.
• Bond Maturity
  • Bond maturity is the due date when the issuer is expected to return the Principal in full.
• Bond Coupon Rate
  • The bond coupon rate is the interest rate the bond pays to the investor
• Bond Market Value
  • Bond market value is the current price of the bond
• Bond Yield to Maturity
  • The bond yield to maturity is the return on bond investment annually.

Unit 2: Banking

2a. Outline the history of banking from the 17th century to today

• How did banking evolve throughout history?

In the early 1600s, merchants began to use banknotes as a means to settle financial obligations. This new form of settling debt was used to support lending, and as a result, it helped create the first bank in the UK, not to mention the use of cheques, which started in the mid-1600s.

However, in the late 1600s, a new function was introduced to banking. Bank clerks regularly met to set off cash movements of each cheque against others, arranging for the balance to be paid between banks only. This is what is known as clearinghouses. In addition, during the late 1600s, a group of goldsmiths formed the Bank of England to raise funds for the war against France. At the same time, the Bank of Scotland was also created, which is credited for the "overdraft" service commercial banks offer today.

In the late 1700s, London started emerging as a financial center of the world. As a result of the strength of the British sterling, British banks offered trade financing and investment banking. After the dominance of British banks, US banks gained momentum after the First World War when European capital landed in New York, establishing the city as an international financial center.

To review, see The Origins and Evolution of Global Banking and Timeline of Financial Services.

2b. Describe the differences between commercial banking and investment banking 

• What are the services offered by Investment Banks?
• What are the services offered by Commercial Banks?

Investment Banks

Investment banks are financial institutions that assist corporations in accessing capital markets by raising funds. They additionally assist in corporate mergers. As such, they act as intermediaries in complex financial transactions.

Investment banks thus provide their services to corporations and high-net-worth individuals exclusively. These services include IPO underwriting, financial advisory, mergers and acquisitions (M&A) support, securities sales and trading, and asset management. Unlike commercial banks, investment banks do not accept deposits or provide loans.

Commercial Banks 

Commercial banks offer their services to depositors, including accepting deposits, offering loans, discounting bills of exchange, funds transfer, and foreign currency exchange, among other services. These for-profit financial institutions mainly use depositors' money to provide loans.

Commercial banks make a profit through the difference between the interest the banks earn on loans and the interest these banks pay on deposits, plus fees banks earn from other financial services they provide.

In the US, commercial banks can be either National or State banks. National Banks receive their bank charter from the US Treasury Department through the Comptroller of the Currency. On the other hand, State Banks receive their bank charter from the state where they operate.

To review, see Institutions and Markets and US Financial Institutions.

2c. Analyze the role of central banks and their effects on financial markets 

• What role do Central Banks play?
• How do Central Banks affect the functions of the financial markets?

The Role of Central Banks

Generally, Central Banks control the money supply, provide price stability, attain economic output and employment goals, regulate commercial banks, stabilize the macroeconomy, and provide a payment system. These institutions act as bankers for governments and are regarded as lenders of last resort.

Central Banks and Financial Markets 

Central banks, through their role as regulatory authorities, use their actions to steer financial markets and economies. The central bank is responsible for the country's monetary policy and is entrusted with maintaining steady GDP growth and ensuring low inflation levels.

To review, see Central Bank Form and Foundation and Regulation.

Unit 2 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• Investment Bank
  • An investment bank is a financial institution that assists organizations in raising capital.
• Commercial Bank
  • A commercial bank is a financial institution that accepts deposits from depositors and offers loans.
• Clearing Houses
  • Clearinghouses are financial institutions that facilitate the exchange of securities, transactions, and payments.
• Thrift Institutions
  • Financial institutions that encourage personal savings and home-buying and obtain their funds from the public.
• Depository Institutions
  • Financial institutions that obtain funds through accepting deposits.
• Credit Unions
  • These not-for-profit, tax-exempt financial institutions are member-owned and pool assets, funds, and loans. They offer other services to their members, including favorable interest rates on deposits.
• Brokerage Firms
  • These financial institutions buy and sell securities for their clients and provide them with related advice.
• Non-depository Institutions
  • These organizations enter into contractual agreements and invest in securities that appeal to investors.
• Central Banks
  • A financial institution controls the production and distribution of money and credit in a particular country.
• The Federal Reserve
  • The Fed is the US Central Bank, comprising a central governmental agency and 12 regional Federal Reserve Banks. It is entrusted with regulating the monetary and financial systems of the US.

Unit 3: Money and Bond Markets

3a. Describe the dynamics that define interest rates in debt markets, such as central banks, commercial banks, and maturity rates 

• How are interest rates defined?
• How would you describe the Yield Curve?

Interest Rates 

Interest rates are generally connected to money supply and money demand. When the money supply falls, the equilibrium interest rates increase. Similarly, when price levels decrease, the equilibrium interest rates also fall. Finally, when real GDP falls, the equilibrium interest rates fall. Money supply and money demand will equalize only at one average interest rate. The equilibrium interest rate in the economy is the rate that equalizes money supply and money demand.

Normally, a reduction in the interest rate increases the quantity of money demanded, whereas an increase in the interest rate reduces the quantity of money demanded. Therefore, a shift in money demand or supply will lead to a change in the equilibrium interest rate and changes in the real GDP and the price level.

To review, see Interest Rate Determination and Demand, Supply, and Equilibrium in the Money Market.

Yield Curve 

The Yield Curve shows interest rates across different contract lengths for similar debt contracts. It shows the relationship between interest rate levels and the time to maturity. Generally, the Yield Curve could either be flat, humped, or inverted. A flat yield curve sends signals of uncertainty in the economy and happens when all maturities have similar yields. A humped curve happens when short-term and long-term yields are equal and medium-term yields are higher than those of the short-term and long-term. Finally, an inverted yield curve happens when long-term yields fall below short-term yields.

To review, see More on Interest Rates.

3b. Compare money markets and bond markets by examining the terms of the debts they contain 

• What is the difference between money markets and bond markets?

Generally, both money markets and bond markets are regarded as fixed-income securities, rendering them liquid, accessible, and safe investments. Money markets handle short-term debt securities that typically take less than a year to mature, rendering them cash investments. In contrast, bond markets have a longer maturity and are riskier than money markets. In terms of maturity, bonds can be short-term, long-term, or medium-term. Comparing both short-term bonds with money markets' maturity, it can be noted that short-term bonds are typically between 1-3 years, unlike money markets where their short-term means typically require less than a year to mature.

To review, see Bonds and Bond Markets.

3c. Differentiate between domestic bonds, Eurobonds, and foreign bonds

• What are the different types of bonds?

Generally, there are domestic bonds, foreign bonds, and what is referred to as Eurobonds. Domestic bonds are those issued in a particular country using that country's currency. Governments and corporations can issue domestic bonds in a particular country. On the other hand, foreign bonds are those issued by foreign issuers dominated by the currency of the national market where the bonds are issued. For example, a British company may decide to issue bonds in the United States dominated by US dollars and sell to US investors. Finally, Eurobonds are issued outside the issuer's country and sold to investors across the globe. For example, a US company may issue US dollar-denominated bonds and sell them to British investors.

To review, see Types of Bonds.

Unit 3 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• Money Supply
  • The money supply is the amount of currency currently in circulation and the total value of all checking accounts in banks.
• Money Demand
  • Money demand is the demand by households, businesses, and the government for highly liquid assets such as currency and checking account deposits.
• Money Market Model
  • The money market model is an economic model that describes the supply and demand for money in a particular country.
• Equilibrium Interest Rate
  • It refers to the rate at which the quantity of money demanded is equal to the quantity of money supplied.
• Heath-Jarrow-Morton Framework
  • This is an approach by which predicting future interest rates is possible.
• Liquidity
  • Liquidity is a term used to describe the distinction between bonds and currency.
• Yield Curve
  • A yield curve shows the relationship between interest rate levels (or cost of borrowing) and the time to maturity.
• Real GDP
  • Real GDP is the total value of all final goods and services produced during a particular year or period, adjusted to eliminate the effects of price changes.
• Financial Stress Index
  • It is the rate of difference between a 10-year treasury bond rate and a 3-month Treasury bond rate.
• Eurobonds
  • US dollar-denominated bond issued by a non-U.S. (European) entity.
• Foreign Bonds
  • It is issued by foreign issuers dominated by the currency of the national market where the bonds are issued.
• Domestic Bonds
  • It is issued in a particular country using the currency of that country.
• Yankee Bonds
  • A US dollar-denominated bond issued by a non-U.S. entity in the US market.
• Bulldog Bonds
  • A pound-sterling-denominated bond issued in England by a foreign institution or government.
• Samurai Bonds
  • A Japanese yen-denominated bond issued by a non-Japanese entity in the Japanese market.
• Kangaroo Bonds
  • An Australian dollar-denominated bond issued by a non-Australian entity in the Australian market.
• Kimchi Bonds
  • A Korean won-denominated bond issued by a non-Korean entity in the Korean market.

Unit 4: Equity Markets

4a. Describe the role of stock exchanges in capital markets

• Is there any difference between stock markets and stock exchanges?
• What are the types of stock market transactions?

Stock exchanges allow investors to trade with securities. The trade (buying and selling) of securities is thus facilitated through stock exchanges. It is where real-time information about securities is available to traders. Stock exchanges form part of the stock markets, which are a collection of markets and exchanges that allow buyers and sellers to meet and trade with securities. For example, the NYSE and NASDAQ are collectively regarded as stock markets and other exchanges in the United States. Stock markets are thus where companies are listed, and stock exchanges are where these listed companies’ shares are traded.

Stock market transactions include Initial Public Offering (IPO), Secondary Offering, Stock Buybacks, and Private Placement. When a company wishes to issue stocks for the first time to raise capital, they do an Initial Public Offering (IPO). On the other hand, a secondary market offering happens when the stocks of a particular company are held by investors who then sell this block of stock to other investors for profit maximization. In such a transaction, the proceeds of sale do not go to the issuing company but to the investor who sold the block of shares. Here, no new shares were created. Unlike IPOs, which take place in primary markets, such transactions occur in secondary markets.

Alternatively, companies may opt for private placement, which typically takes place in primary markets where companies raise funds from pre-selected investors. Finally, a company may buy back the shares it has already issued from investors. This is referred to as stock buyback or stock repurchase.

To review, see Stocks and Stock Markets.

4b. Analyze the efficient market hypothesis and its importance in equity markets 

• Why is the Efficient Market Hypothesis (EMH) important in Equity Markets?

EMH relates to information about the stock being traded. Based on the information about a particular stock, EMH could be either strong, weak, or semi-strong. Strong market efficiency means share prices reflect all information, public and private, and no one can earn excess returns. Weak market efficiency takes place when prices on traded stocks and other assets already reflect all past publicly available information. Semi-strong efficiency claims that prices reflect all publicly available information and that prices instantly change to reflect new public information. The importance of EMH lies in the fact that it allows investors to make informed decisions on the investments they wish to undertake.

To review, see Market Efficiency.

4c. Compare primary and secondary markets by examining how stocks are issued in each 

• How are stocks issued in primary and secondary markets?

Generally, primary markets deal with stocks a company issues for the first time. These come in the form of IPOs, private placement, rights issue, and preferred allotment. Also, bonds can be issued for the first time in primary markets.

On the other hand, secondary markets trade with already-issued bonds and shares. In secondary markets, owners of shares and interested buyers meet and trade with these shares. Here, the shares are not owned by the issuing organization anymore but rather by private investors. Some known examples of secondary markets include the New York Stock Exchange, the London Stock Exchange, the Frankfurt Stock Exchange, and NASDAQ, among others.

Secondary markets are divided into two broad categories: Broker Markets and Dealer Markets. Both markets are further divided into different markets. For example, Broker Markets can either be National Exchanges or Regional Exchanges, whereas Dealer Markets (which are typically decentralized) include Over-the-Counter Markets and NASDAQ.

To review, see Buying and Selling at Securities Exchanges.

Unit 4 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• Stock Markets
  • The stock market is the collection of markets and exchanges where trading (buying and selling) of stocks, bonds, and other securities occur.
• Stock Exchanges
  • Stock exchanges are trading floors where buyers and sellers of securities meet to trade.
• Initial Public Offering
  • An initial public offering is a public offering where shares of stock in a company are sold to the general public on a securities exchange for the first time.
• Secondary Offering
  • A secondary market offering is a registered offering of a large block of a security that has been previously issued to the public.
• Stock Repurchase
  • Stock repurchase, also known as stock buyback, is the reacquisition by a company of its stock.
• Private Placement
  • Private placement is the funding of securities sold to a small number of pre-selected investors, not through a private offering.
• Dealer Market
  • Dealer markets are markets that do not operate on centralized trading floors but instead use sophisticated telecommunications networks that link dealers on a national level.
• Broker Market
  • The broker market consists of national and regional securities exchanges that bring buyers and sellers together through brokers on a centralized trading floor.
• Efficient Market Hypothesis
  • EMH is information about the security being traded that helps form an opinion on the price of the traded security.
• Strong Market Hypothesis
  • Strong market efficiency means share prices reflect all information, public and private, and no one can earn excess returns.
• Weak Market Hypothesis
  • Weak market efficiency takes place when prices on traded stocks and other assets already reflect all past publicly available information.
• Semi-Strong Market Hypothesis
  • Semi-strong efficiency claims that prices reflect all publicly available information and that prices instantly change to reflect new public information.

Unit 5: Hedge Funds and Private Equity

5a. Evaluate the role that hedge funds play in international financial markets

• What is the significance of Hedge Funds?

Hedge Funds are a type of private equity fund where assets are pooled from a group of investors and managed by professionals for risk minimization and profit maximization.

These funds use a variety of strategies to reach the goals of risk reduction and profit maximization, and they charge their investors omissions in managing the fund and the profit generated.

To review, see How Hedge Funds Work.

5b. Differentiate between hedge funds, private equity, and venture capital

• How would you differentiate between hedge funds, private equity, and venture capital?

Though, in theory, hedge funds are a form of private equity fund, they are different. Their similarities start in their investor portfolio, where they both appeal to high-net-worth investors. They are also similarly structured, and they could invest in private companies directly, and both use leveraged buyouts (LBOs). Private Equity Funds invest in companies directly, providing these companies the opportunity to remain private. Private Equity Funds could also buy stock of publicly traded companies to delist them. Unlike Hedge Funds, Private Equity Funds are more interested in long-term investments.
 
Venture capital is a form of private equity fund where investors are interested in investing in new companies (start-ups) and small businesses that are perceived as solid investments having the potential for long-term growth. Notably, VCs could provide monetary support to the companies they invested in and technical and managerial support and advice.
 
To review, see Private Equity and Venture Capital.

5c. Differentiate between different types of investment strategies, such as value investing, income investing, growth investing, small-cap investing, and socially responsible investing

• What are the different investment strategies?

Value Investing

Generally, one of the main investment strategies is Value Investing. This strategy entails choosing stocks that appear to be trading for less than their intrinsic value. Investors would buy what appears to be underpriced stocks in the hope that the value of these stocks will appreciate.
 
To review, see Value Investing and Growth Investing.

Momentum Investing 

Through this strategy, investors typically buy shares and securities that experienced high returns over a particular period and sell those that experienced poor returns over the same period.
 
To review, see Momentum Investment, Strategic Investment Funds, and Value Investing and Growth Investing.

Growth Investing

A growth investing strategy focuses on increasing investors’ capital through investing in small companies with expected earnings higher than the average rate. In that sense, it focuses on companies that are experiencing or might experience a high degree of growth.
 
To review, see Value Investing and Growth Investing.

Other Investment Strategies 

In addition to the mentioned strategies, there are other strategies that investors may use. For example, investors may opt for what is known as income investing, where investors aim to build a portfolio that generates regular income. They may decide to invest in stocks with a small market capitalization in what is referred to as small-cap investment, or they may opt for a socially responsible investment strategy that aims to generate financial returns and influence social changes.
 
To review, see Value Investing and Growth Investing.

Unit 5 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• Hedge Funds
  • Hedge Funds are a type of private equity fund where assets are pooled from a group of investors and managed by professionals for risk minimization and profit maximization.
• Private Equity Funds
  • Private Equity Funds are a form of pooled investment whereby these funds invest in companies directly, providing these companies the opportunity to remain private.
• Venture Capitals
  • VCs are a form of private equity fund whereby investors are interested in investing in new companies (start-ups) and small businesses that are perceived as solid investments with the potential for long-term growth.
• Fixed Income Arbitrage
  • Fixed Income Arbitrage is an investment strategy that aims to generate positive returns by identifying price anomalies in fixed income securities.
• Convertible Arbitrage
  • This investment strategy aims to generate profit on price discrepancies of convertible securities, such as callable bonds.
• Income Investing
  • Investors here aim to build a portfolio that generates regular income.
• Growth Investing
  • This strategy focuses on increasing investors’ capital through investing in small companies, with earnings expected to be higher than the average rate.
• Small Cap Investing
  • Using this strategy, investors invest in stocks that enjoy small market capitalization.
• Momentum Investing
  • Investors opting for this strategy typically buy shares and securities that experience high returns through a particular period and sell those that experience poor returns over the same period.
• Socially Responsible Investing
  • Investors use this strategy to generate financial returns and influence social changes.
• Value Investing
  • Investors buy what appears to be underpriced stocks in the hope that the value of these stocks will appreciate.

Unit 6: Financial Crises

6a. Compare a financial crisis to an economic recession

• What is the relationship between a financial crisis and an economic crisis?

A financial crisis is when one or more financial assets suddenly decrease in value, leading organizations to encounter significant losses and difficulties meeting their obligations. An economic crisis generally follows such a crisis.

Financial crises generally start with a sudden fall in a financial asset value after having experienced a period of growth that was facilitated by increased access to borrowing. With that, the decline in the value of collateral will cause households to reduce their debt and borrowing so that there is a feedback effect on the asset price.

On the other hand, an economic crisis comes from a financial crisis. It is characterized by a lack of liquidity, lower production levels and increased unemployment, high inflation levels or low precision levels, and lower GDP. These can result from asset mismatch, mismanagement, and sudden asset value decline.

One of the notable forms of recession is what is referred to as a double-dip recession, which is a recession followed by a short-lived recovery, followed by another recession similar to what the EU is currently experiencing due to the COVID-19 Pandemic.

To review, see Global Recession, The Global Financial Crisis, and The Effects of Coronavirus on the Economy.

6b. Identify trends that might lead to a financial crisis, such as systematic and regulatory failures 

• What are the causes of a financial crisis?

Generally, a financial crisis could be an inflation crisis, a currency crisis, a banking crisis, or a sovereign debt crisis. Generally, a banking crisis occurs as a result of a mass withdrawal of deposits from banks at the same time. This is what is referred to as a bank run.

A bank run is one of the forms of a banking crisis and, along with regulatory failures, indicates a lack of trust in the banks, reducing the number of future deposits.

At times, regulators may opt for a soft approach while regulating the financial sector, leading to a lack of proper regulations and, thus, the lack of government oversight. This is particularly dangerous as the lack of proper regulation and government oversight would lead banks to leverage themselves to capture gains even in extremely high-risk instances.

A currency crisis happens when there is a severe depreciation in the value of a particular currency. This would lead to a loss of trust in the currency, where investors would disregard the use of this currency. In many instances, a currency crisis comes from unsustainable fiscal policies where most governments cannot maintain the exchange rate peg. As a result of the government's ability to maintain the peg, the government would likely allow the currency to float, leading to rapidly increasing inflation rates.

To review, see Financial Crises, Fundamentals of Banking Crises, and Regulating Financial Markets after the Meltdown.

6c. Analyze the notions of "too big to fail" and "moral hazard"

• How is "too big to fail" connected to moral hazard?

A moral hazard happens when institutions (or individuals) take risks they normally wouldn't, knowing they are protected from the consequences of such risk. It happens due to a contractual relationship between two parties where one party assumes more risk that would negatively affect the other party. Therefore, Moral Hazard is post-contractual asymmetric information.

On the other hand, Too Big To Fail (TBTF) is a notion by which the government saves big institutions through bailouts. This means that some institutions (financial or otherwise) are large enough that their failure may cause distress to the economic system nationwide, making the expensive option of saving these institutions through government bailouts a necessary expense.

Due to their size relative to the economy, some financial institutions take on more risk than they normally would, knowing they have government support should they need it.

To review, see Are Banks Too Big to Fail or Too Big to Save?, Moral Hazard, and Regulating Financial Markets after the Meltdown.

Unit 6 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• Financial Crisis
  • A financial crisis is when one or more financial assets suddenly decrease in value, leading organizations to encounter significant losses and difficulties meeting their obligations.
• Economic Crisis
  • An economic crisis is one characterized by a lack of liquidity, lower production levels and increased unemployment, high inflation levels or low recession levels, and lower GDP
• Bank Run
  • A bank run is the sudden withdrawal of deposits from banks simultaneously.
• Systematic Risk
  • Systematic risk is considered an inherent risk of a particular sector.
• Regulatory Failure
  • Regulatory failure is the lack of proper government oversight and the lack of proper regulation.
• Currency Peg
  • A currency peg is an exchange rate policy by which governments fix the exchange rate of their national currency to another foreign-denominated currency.
• Moral Hazard
  • A moral hazard is post-contractual asymmetric information
• Too Big To Fail
  • TBTF is the notion by which big institutions are saved through government bailouts

Unit 7: The Foreign Exchange Market

Unit 8: Economic and Monetary Union in Europe

8a. Explain the membership criteria of the EU and its common currency, the Euro 

• What are the membership criteria for joining the European Union and adopting the Euro currency?

For a prospective country to join the European Union or use the Euro as its currency, it is expected to meet a set of conditions. These differ depending on the membership.

To join the EU area, a country is expected to have an inflation rate no higher than 1.5 percentage points above the rate of the three best-performing member states. It should not be under the excessive deficit procedure. It should participate in the Exchange Rate Mechanism (ERM II) for at least two years. It should finally have an interest rate that is not higher than two percentage points above the rate of the three best-performing member states in terms of price stability.

To join the union, a prospective country should comply with all the EU's standards and rules and obtain the consent of the EU institutions and EU member states and their citizens. In addition, the perspective country should have stable institutions guaranteeing democracy, the rule of law, human rights, and respect for and protection of minorities, have a functioning market economy and the capacity to cope with competition and market forces in the EU, and finally be able to take on and implement effectively the obligations of membership, including adherence to the aims of political, economic and monetary union.

To review, see The European Union, Conditions for Joining the Euro Area, and Conditions for Membership in the EU.

8b. Explain the major benefits of EU membership from a financial and economic perspective 

• How would you outline the benefits of joining the EU from a financial and economic point of view?

When a country decides to join the EU and adopt the Euro as its currency, there are multiple benefits to such a choice. For example, countries that choose to join the European Union can enjoy access to a single market with increased economic integration, leading to higher competition, increased efficiency, and intra-EU trade volumes. Member states not only enjoy access to the single market but can also benefit from preferential agreements regarding import and export with more than 70 countries across the globe. This means increased stimulation of the national economy of the new member state through encouraging exports and attracting FDI by creating new jobs.

On the other hand, opting for a single currency also comes with its range of benefits, including ease of price comparison between member states of goods and services, allowing for more competition between member states, facilitating trade internally and externally cheaply, easily, and conveniently. It has improved economic stability, growth, and price stability. Better integration and more efficient financial markets lead to greater influence in the global economy.

To review, see The Benefits of the Euro and Benefits of EU Membership.

8c. Predict the effect of Brexit on the UK's and EU's financial market

• How will Brexit affect the EU's Financial Markets and Financial Services Sector?

After the UK departs from the European Union, many of the benefits the UK enjoyed previously will cease to exist. The UK's Banking and Financial industry majorly benefited from passporting rights whereby any financial institution authorized by an EU or EEA member state can trade freely in any other with minimal additional authorization. This gave the UK a competitive edge, and the UK's departure is expected to make trading with securities between London and the EU harder, leading to a possible decline in business.

Additionally, trade difficulties between the EU and the UK are foreseen. Moreover, the UK's economic growth will likely be reduced in the medium and long term.

The UK is expected to encounter many challenges, including the departure of the financial services companies that were once based in London to other EU neighboring countries and the downsizing of the current workforce in the UK's sector.

To review, see What's Next After Brexit? and Brexit and UK-Based Financial Services.

8d. Identify the benefits and challenges of Europe as an economic center 

• What are the benefits and challenges of the EU as an economic center?

One of the many benefits of joining a single monetary union is having a single banking union. This also means that monetary stability will benefit from legal protection. On the other hand, it is argued that the policy and regulatory environment of the Euro Zone will likely trigger large inflows of capital from the core into non-core countries that financed rising consumption, partly encouraged by rising wages, as well as a real estate boom.

To review, see European Capital Markets, The Banking Union, and The Crisis in the Eurozone.

Unit 8 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• European Union
  • The European Union (EU) is an economic and political union or confederation of 27 European member states.
• Eurozone
  • The Eurozone is the monetary union of 19 states who use the Euro as their currency.
• European Economic Area
  • EEA is an international agreement that extends the EU's single market to member states of the European Free Trade Association (EFTA).
• European Free Trade Association
  • EFTA is an intergovernmental association of 4 European states facilitating free trade between its member states.
• EU Passporting
  • EU Passporting is a system for financial institutions that enables those authorized in an EU or EEA member state to trade freely in any of the other member states with minimal additional authorization.
• Euro Interbank Offer Rate
  • EURIBOR is a benchmark daily rate of average interest rates from large European banks used for lending to one another in euros.

Unit 9: Derivative Products

Unit 10: The Future in Global Markets

10a. Analyze the political, economic, and financial challenges facing the EU as a common market 

• What are the EU's common market's various economic, political, and financial challenges?

There are several challenges that the EU may encounter. These could be economic, financial, or political. One of the main challenges the EU could experience is the withdrawal or expulsion of a member state. This political challenge could negatively impact the economic and financial environment of the bloc. For example, the recent departure of the UK has resulted in a few challenges on the economic and financial fronts. If another member state, such as Italy, were to leave the EU, this would challenge other member states as Italy's membership in the bloc also includes its membership in the Eurozone and the use of the common currency.

The current COVID-19 crisis is also projected to impact the EU negatively, with the EU experiencing a double-dip recession. The health crisis is also likely to shed a cloud of doubt over the long-term sustainability of the EU project.

To review, see Leaving the Euro and Five Challenges for the European Union.

10b. Assess how regulations governing KYC and AML have affected banking services and how they could affect the banking sector

• How have KYC and AML regulations affected the banking services sector?

With the introduction of new measures to combat money laundering and terrorist financing, the banking and financial sectors are expected to encounter more costs to comply with these laws and regulations. Some AML/KYC measures (such as customer due diligence rules) could also restrict formal financial services from reaching lower-income people. This is particularly true for financial services providers who serve low-income customers.

To review, see AML/CFT Regulation.

10c. Identify new trends, such as Islamic finance and cryptocurrencies, in global financial markets

• How is the financial services sector evolving?

With technology always evolving and adapting within different sectors, the financial sector adopted new technologies to provide customers with enhanced services. The use of tech in the financial sector was not only to provide customers with more content access to financial services but rather came in the form of innovation in the sector with new financial products emerging. Products like cryptocurrencies have evolved into a speculative asset class. This drove central banks to consider issuing their own cryptocurrency backed by the Central Bank, unlike traditional cryptocurrencies like bitcoin.

Additionally, in the wake of the financial crisis of 2008, the search for alternative finance led to the emergence of Islamic Finance on an international level. Pre-2008 crisis, Islamic finance was most prominent in Islamic countries. However, after the 2008 crisis, the search for more sustainable financing helped Islamic finance emerge internationally, especially since it emphasizes risk-sharing and appears to have been able to hedge the most severe consequences of the 2008 crisis.

To review, see Blockchain Technology and Cryptocurrencies and The Potential of Islamic Finance.

Unit 10 Vocabulary 

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• Cryptocurrencies
  • These are digital currencies where transactions are verified, and records are maintained by a decentralized system rather than a centralized authority.
• Blockchain
  • Blockchain refers to a system in which a record of transactions made in a cryptocurrency is maintained across several computers linked in a peer-to-peer network.
• Islamic Finance
  • Islamic Finance is a type of finance that is based on Islamic Law (Sharia Law).
• KYC
  • Know Your Customer/Client is a set of guidelines professionals in the financial services sector must follow to verify the identity, suitability, and risks involved in maintaining a business relationship with a particular customer/client.
• AML
  • Anti-money laundering laws and regulations aim to prevent disguising illegally obtained funds as legitimate ones.