Risk and the Financial Sector | Edexcel A-Level Economics B (9EB0)
Risk and the Financial Sector
- 128 questions
- 9 subtopics
- Theme 4: making markets work
- Paper 1 and Paper 3
Risk and the Financial Sector is examined in Paper 1, Markets and how they work, and in Paper 3, The economic environment and business.
It covers risk and uncertainty in business decisions, economic shocks and their impact on firms, exchange rate risk and forward markets, insurance and the management of business risk, mobilising savings and lending for business investment, assessing creditor risk and lending to individuals, payments, equity markets and the exchange of goods and services, the central bank: the MPC, monetary policy and financial regulation and the Global Financial Crisis and banking regulation.
Sample questions from Risk and the Financial Sector
Answer each one closed book first, then open the answer.
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Risk and uncertainty in business decisions
Define a risk premium.
Show the answer
A risk premium is the additional return an investor or lender requires in order to accept a riskier project or a less creditworthy borrower. -
Economic shocks and their impact on firms
Why is a firm with a long international supply chain more exposed to shocks?
Show the answer
There are more separate points at which the chain can break, lead times are long so a disruption cannot be corrected quickly, and stock held between stages is rarely enough to absorb it. -
Exchange rate risk and forward markets
Distinguish between hedging and speculation.
Show the answer
Hedging removes an exposure the firm already has in order to reduce risk, whereas speculation deliberately takes on an exposure in the hope of profiting from a price movement. -
Insurance and the management of business risk
Name four types of insurance a manufacturer would typically hold.
Show the answer
Employers' liability cover, public and product liability cover, buildings and contents cover, and business interruption cover. -
Mobilising savings and lending for business investment
Why can a bank lend more cheaply than an individual saver could?
Show the answer
It has specialist expertise in assessing borrowers, spreads the fixed cost of screening and monitoring over a large loan book, and diversifies default risk, all of which lower the cost and risk per pound lent. -
Assessing creditor risk and lending to individuals
How does a downgrade in its credit rating affect a company?
Show the answer
Investors demand a higher yield on its debt so its borrowing costs rise, some funds are barred from holding the debt at all, and refinancing existing borrowing becomes harder and dearer. -
Payments, equity markets and the exchange of goods and services
What is a letter of credit, and why does an exporter want one?
Show the answer
A letter of credit is a bank's undertaking to pay the exporter once the agreed shipping documents are presented, so the exporter is relying on the creditworthiness of a bank rather than on an unknown foreign buyer. -
The central bank: the MPC, monetary policy and financial regulation
Why does the Monetary Policy Committee aim at inflation two years ahead rather than the current rate?
Show the answer
A change in Bank Rate takes around two years to have its full effect, so setting policy by today's inflation figure would deliver the response long after the conditions that caused it had passed.
The 9 subtopics
One subtopic is one session. Work down the list.
| Subtopic | What it covers | Questions |
|---|---|---|
| Risk and uncertainty in business decisions | Risk against uncertainty and why only risk can be insured, examples of each, risk-averse decision-makers and risk premiums, expected value and calculating it, the entrepreneur as bearer of uncertainty, uncertainty and investment, reducing risk and diversification, higher borrowing costs for small firms, and uncertainty in overseas markets. | 13 |
| Economic shocks and their impact on firms | Economic shocks, demand-side and supply-side shocks and examples, the effect of an adverse supply shock on prices and output, long international supply chains, symmetric and asymmetric shocks, building resilience, just in time against resilience, energy price rises, uneven effects on firms, recessions in trading partners, permanent loss of capacity, and opportunities from shocks. | 13 |
| Exchange rate risk and forward markets | Exchange rate risk for exporters invoicing in dollars, forward exchange contracts, hedging against speculation, spot and forward rates, currency options, natural hedges, calculating hedged receipts and the difference a hedge makes, commodity forward markets, the role of speculators, and the drawbacks of hedging. | 14 |
| Insurance and the management of business risk | How insurance manages risk, premiums and how insurers set them, the law of large numbers, the insurance a manufacturer holds, business interruption insurance, compulsory employers' liability insurance, moral hazard and how insurers limit it, adverse selection and how insurers reduce it, uninsurable risks, and insurance as an encouragement to enterprise. | 13 |
| Mobilising savings and lending for business investment | Financial intermediation, maturity transformation and the vulnerability it creates, risk transformation, cheaper bank lending, working capital and growing firms, bank finance for working capital and invoice factoring, debt against equity finance, collateral, gearing, bank lending and productive capacity, and credit crunches. | 14 |
| Assessing creditor risk and lending to individuals | Assessing creditor risk and what banks examine before lending, higher rates for riskier borrowers, credit ratings and downgrades, asymmetric information, adverse selection and moral hazard in lending, reducing information problems, forms of lending to individuals, mortgages against unsecured loans, the loan-to-value ratio and calculating it, and lending and aggregate demand. | 14 |
| Payments, equity markets and the exchange of goods and services | How the financial sector enables exchange, payments and clearing systems, trade credit, letters of credit for exporters, equities, primary and secondary share markets, initial public offerings, reasons to float and the drawbacks of a listing, why share prices matter to listed companies, and equity market bubbles. | 13 |
| The central bank: the MPC, monetary policy and financial regulation | The Monetary Policy Committee, its membership and meetings, Bank Rate, what the committee considers and why it targets inflation two years ahead, responding to high inflation, independence and credibility, forward guidance, the Financial Policy Committee, macroprudential and microprudential regulation and their tools, stress tests, the lender of last resort and moral hazard, and banker to the banks. | 16 |
| The Global Financial Crisis and banking regulation | Sub-prime mortgages and their rapid growth, securitisation and weaker lending standards, too big to fail and moral hazard, the collapse of interbank lending and the credit crunch, speculation and asset bubbles, bank culture and bonuses, capital requirements, ring-fencing, deposit guarantee schemes, the costs of tighter regulation, and the crisis's effects on government finances, households and firms. | 18 |
How the guide is worked
Answering a question from memory stores it far better than reading the answer again. The guide runs that as a fixed procedure on one subtopic at a time, about twenty minutes a session.
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Step 1 · Closed book
Cover the answers. Work through one subtopic and write down what you can. Leave blanks where you have nothing.
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Step 2 · Open book
Go back to the top. Read each printed answer and write it out in full, including the ones you had right.
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Step 3 · Closed book again
Same questions, same order, from memory. The gap between pass one and pass three is the session result.
Read the full method, the return schedule and the research behind it.
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