# Financial Markets and Economic Literacy Explain how major asset classes and market participants relate. Use this workbook alongside the course. Write your answers before opening the solutions. Practical work is self-reviewed; scored knowledge checks are in the Academy. ## 1. Asset classes ### Cash and deposits Cash is a claim or a directly held currency used for payments. A bank deposit is a liability of that bank; access terms, currency and applicable protection arrangements matter. Nominal stability does not guarantee stable purchasing power when prices change. ### Bonds and yields A bond represents contractual payments from an issuer. Its market price can change before maturity. Yield expresses a return measure based on price and assumed cash flows; distinguish coupon rate, current yield and yield to maturity rather than treating every quoted rate as equivalent. ### Equities and funds A share is an ownership interest in a business. A fund pools investments under a stated mandate. Read what it owns: a fund tracking bullion has different exposure from a fund holding mining companies, whose costs, debt and management also affect returns. ### Commodities and derivatives A commodity is a physical good; a derivative is a contract whose value depends on an underlying reference. Buying physical gold, holding fund shares and trading a leveraged gold contract produce different ownership, funding and counterparty arrangements even when prices are related. ### Worked example An investor holds bullion and shares in a gold miner. Gold rises while the miner reports higher operating costs and its shares fall. The result is consistent: the share is exposure to a business, not ownership of an equivalent quantity of bullion. ### Independent exercise Classify a cash balance, a government bond, mining shares and a gold futures contract. For each, identify the source of a possible loss and whether the holding represents direct ownership of gold. My inputs and assumptions: My calculation or decision: Evidence that would change my conclusion: ## 2. Market participants ### Investors and speculators Investors generally commit capital to meet longer-horizon objectives; speculators deliberately accept price exposure. These labels describe purposes rather than a guaranteed holding period or profitability. The same organization may use different positions for different objectives. ### Hedgers and commercial users A hedger uses a position to offset an existing or expected exposure. A producer concerned about a lower selling price and a buyer concerned about a higher purchase price have opposite risks. A hedge can lose money while helping the overall commercial objective. ### Dealers and market makers Dealers quote or facilitate transactions; market makers may maintain two-sided prices under specific arrangements. Their willingness to trade depends on inventory, volatility, credit and market conditions. A displayed quote is not a promise of unlimited liquidity at that price. ### Exchanges and clearing organizations An exchange establishes trading arrangements for listed contracts. A clearing organization manages specified obligations between participants under its rules. Clearing changes the structure of counterparty risk; it does not remove market losses, funding needs or every operational failure. ### Worked example A jewellery manufacturer expects to buy gold later and worries about rising prices. A producer expects to sell gold and worries about falling prices. A price increase hurts the buyer's unhedged input cost but helps the producer's unhedged sales revenue. ### Independent exercise Explain why two commercial firms could rationally take opposite exposures to the same gold price. Then explain why the result of the hedge should be assessed alongside the commercial transaction. My inputs and assumptions: My calculation or decision: Evidence that would change my conclusion: ## 3. Market organization ### Primary versus secondary markets In a primary transaction, an issuer or creator sells a newly issued security or interest. Secondary trading transfers an existing instrument between holders. Price changes in secondary markets do not necessarily send new cash to the original issuer. ### Exchange versus over-the-counter trading Exchange trading uses a specified venue and rules. Over-the-counter transactions are negotiated through counterparties or networks. OTC does not mean that there are no rules, and exchange trading does not make every contract suitable for a particular learner. ### Trading hours and settlement Trading hours describe when orders can be matched; settlement describes when contractual obligations are discharged. These may occur on different schedules. Holidays, maintenance and local time conventions must be checked against the instrument and provider actually used. ### Liquidity and price discovery Price discovery is the process through which transactions and quotes incorporate participants' information and preferences. Liquidity includes available quantity, transaction cost and resilience after orders arrive. High historical trading activity does not guarantee a low-cost exit during stress. ### Worked example A security trades today but settles later. The trade price is agreed now, while the cash and security obligations follow the settlement convention. A learner who confuses these times may incorrectly conclude that an unsettled obligation does not exist. ### Independent exercise Create separate fields for trade time, settlement date, venue and counterparty on a hypothetical transaction record. Explain which field tells you when the economic transaction was agreed. My inputs and assumptions: My calculation or decision: Evidence that would change my conclusion: ## 4. Reading market information ### Price versus return A price is a level measured in units such as dollars per ounce. A return measures change relative to an investment or earlier price. Comparing a dollar price change in one instrument with a percentage return in another mixes quantities and can mislead. ### Nominal versus real measures Nominal measures use stated currency units; real measures adjust for a measure of purchasing power. An inflation adjustment depends on the index, dates and population represented. A nominal gain therefore does not automatically mean an equal improvement in purchasing power. ### Index construction basics An index summarizes a defined basket using a calculation methodology. Constituents, weights, rebalancing and currency denomination determine its meaning. Two indexes associated with the same broad theme can behave differently because their construction is different. ### Separate fact from explanation Separate observations from explanations. A statement that gold and the dollar both rose is an observation about specified data. Claiming that one caused the other requires additional evidence and consideration of common drivers, timing and alternative explanations. ### Worked example An illustrative price rises from 100 to 105: the price change is 5 and the simple return is 5%. A different price rises from 1,000 to 1,005: the same absolute change corresponds to 0.5%, so the moves are not equal in return terms. ### Independent exercise Calculate both percentage returns in the example. Write one purely descriptive statement about them and one causal claim that the data alone cannot support. My inputs and assumptions: My calculation or decision: Evidence that would change my conclusion: ## Course project Draw an annotated map linking gold, currencies, rates and equities without claiming fixed correlations. ### Self-review rubric - Concepts and reasoning: 25% - Calculations, data and evidence: 30% - Process and risk controls: 25% - Limitations and communication: 20% Record one correction and one next practice task. This rubric is not automatically graded. ## Worked solutions ### Exercise 1 Cash can lose purchasing power; a bond can face rate and issuer risk; mining shares face business and market risk; futures face contractual price and margin risk. None of these descriptions alone establishes direct ownership of allocated bullion. ### Exercise 2 Their underlying business exposures differ. The buyer is exposed to higher purchase costs; the seller to lower sales proceeds. A hedge is evaluated against the combined outcome, including basis, timing and costs, rather than as an isolated winning trade. ### Exercise 3 Trade time identifies the agreement event; settlement records discharge of obligations. Venue and counterparty identify the trading arrangement. Recording all four prevents a delay in settlement from being confused with an absence of exposure. ### Exercise 4 The returns are 5% and 0.5%. A valid description says the first percentage move was larger. The two observations alone cannot establish why either moved or that a trade in one caused the other. ## Further reading - https://www.investor.gov/introduction-investing/investing-basics/investment-products - https://www.cmegroup.com/education/courses/introduction-to-futures