San Miguel, Clara Mae

CBET 401A

1.The crucial role that banks and other financial institution play.

A financial institution (FI) is a company engaged in the business of dealing with financial
and monetary transactions such as deposits, loans, investments, and currency exchange.
Banks play a crucial role in the market economies. The primary role of financial institutions
is to provide liquidity to the economy and permit a higher level of economic activity than
would otherwise be possible. They decide who can get finance and on what terms and
can make or break investment decision. Large financial institutions normally do business
with other corporations for services and supplies. When the large financial institution fails,
the companies that depend on the larger financial institution for a portion of its income might
fail as well. As a result, jobs will be loss and cause a domino effect. Most financial
institutions have an active investment desk for advising their members on the best ways
invest their cash. Investment is one of the best ways of ensuring the financial future for
both individuals and businesses but without the right information, people and businesses
may lose all their cash by picking un-bankable investment options. Financial institutions
are aware of the best investment options for businesses and individuals and they would
gladly share this information should you visit their investment desk.

To sum it all, Financial institutions play an important role to play in improving the lives of
individuals and business entities and above are some of the ways they go about doing
that.

2. The significance of money in the economy of a country.

Money is one of the fundamental inventions of mankind. It has become so important

that the modern economy is described as the money economy. The most important
function of money is that it acts as a medium of exchange. Money is accepted freely
in exchange for all other goods. Barter system is very inconvenient. So the
introduction of money has got over the difficulty of barter. Money acts as a common
measure of value. It is a unit of account and a standard of measurement. Whenever,
we buy a good in the market, we pay a price for it in money.
• Store of value: A man who wants to store his wealth in some convenient form will
find money admirably suitable for the purpose. It acts as a store of value. Suppose
the wealth of a man consists of a thousand cattle. He cannot preserve his wealth in
the form of cattle. But if there is money, he can sell his cattle, get money for that and
can store his wealth in the form of money.
 • Standard of deferred payments: Money is used as a standard for future (deferred)
payments. It forms the basis for credit transactions. Business in modern times is
based on credit to a large extent. This is facilitated by the existence of money. In
credit, since payment is made at a future date, there must be some medium which
will have as far as possible the same exchange power in the future as at present. If
credit transactions were to be carried on the basis of commodities, there would be a
lot of difficulties and it will affect trade.

3. Give two examples of derivatives and explain each.

Futures contract is a legal agreement to buy or sell a particular commodity asset, or

security at a predetermined price at a specified time in the future. The buyer of a futures
contract is taking on the obligation to buy and receive the underlying asset when the
futures contract expires. The seller of the futures contract is taking on the obligation to
provide and deliver the underlying asset at the expiration date. Futures are derivative
financial contracts that obligate the parties to transact an asset at a predetermined future
date and price. Here, the buyer must purchase or the seller must sell the underlying
asset at the set price, regardless of the current market price at the expiration date. For
example, you might hear somebody say they bought oil futures, which means the same
thing as an oil futures contract. When someone says "futures contract," they're typically
referring to a specific type of future, such as oil, gold, bonds or S&P 500 index futures.
Futures contracts are also one of the most direct ways to invest in oil. The term "futures"
is more general, and is often used to refer to the whole market, such as "They're a futures
trader."

Interest rate swap is a forward contract in which one stream of future interest payments
is exchanged for another based on a specified principal amount. Interest rate swaps
usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to
reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower
interest rate than would have been possible without the swap. Interest rate swaps are the
exchange of one set of cash flows for another. Because they trade over the counter
(OTC), the contracts are between two or more parties according to their desired
specifications and can be customized in many different ways. Swaps are often utilized if
a company can borrow money easily at one type of interest rate but prefers a different
type.