Feedback: The purpose of this question is to ascertain if the student understands the difference between real and financial assets, both in the aggregate balance sheet context and the relative contribution of the two types of assets to the productive capacity of the economy.
Difficulty: Moderate
53. Discuss the euro in relation to its impact on globalization. How is it currently used and what are the plans for its future use?
The euro was introduced in 1999 as a new currency and has replaced the currencies of twelve participating countries so there will be one common European currency in the participating countries. A common currency is expected to facilitate global trade and encourage the integration of markets across national boundaries.
Feedback: The purpose of this question is to test the student's understanding of the use and impact of the euro.
Difficulty: Moderate
54. Discuss the following ongoing trends as they relate to the field of investments: globalization, financial engineering, securitization, and computer networks.
Globalization offers a wider array of investment choices than what would be available to investors who could only choose domestic securities. As efficient communication technology has become available, globalization of markets has been significantly enhanced. There are many mechanisms by which one country's investors can hold foreign companies' securities. Some examples are ADRs, WEBS, and direct purchase of foreign securities.
Securitization refers to aggregating underlying financial assets, such as mortgages, into pools and then offering a security that represents a claim on these underlying assets. Examples are GNMAs. Securitization allows investors to hold partial ownership in financial assets that would otherwise be beyond their reach (e.g., mortgages).
Financial engineering involves bundling or unbundling. Bundling involves combining separate securities together into one composite security. Examples are combining primitive and derivative securities, and combining three primitive securities such as common stock, preferred stock, and bonds. Unbundling is the opposite - two or more security classes are created by separating a composite security into parts.
Computer networks have permitted online trading, online information dissemination and automated trade crossing. Each of these major breakthroughs has significant implications for investments.
Feedback: The purpose of this question is to test the student's understanding of the major trends that impact the field of investments.
Difficulty: Moderate