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Dear Sir,
I am studying the Revision Kit (BPP),
Question 26: Which of the following is not a function that financial intermediaries fulfill for customers and borrowers:
A – Maturity transformation
B – Fund aggregation
C – Dividend creation
D – Pooling of lossesThe answer is C however i don’t understand what “pooling of losses” mean. Please help to explain.
Question 25: Which of the following organisations is most likely benefit from a period of high price inflation?
A – An organisation which has a large number of long term payable
B – An exporter of goods to a country with relatively low inflation
C – …..
D – ….
The answer is A. I don’t understand why A is correct and why B is wrong. Please help to explain.Thanks,
1. An example of an intermediary is a unit trust / mutual fund, where an individual can invest a relatively small amount but the unit trust invests the total money in many investments (which the individual could not do themselves because they do not have enough money). So losses on some investments can be set off against profits on others.
2. A is correct because high inflation will mean higher cash earnings, but the amount owed to the long-term payables will stay unchanged. High inflation will mean the exporter charges higher prices, which will mean the importing country will likely buy less.
Dear John,
In Q25 above, high inflation (currency is weak), exporter charges higher prices, so the goods will be less competitive and the result should be export will be worse off.
In question 246: If a country’s currency strengthens, what effect will it have on its exporters and importers? The answer is exporters is worse off.
The result for both question: exporter is worse off however in Q25, currency is weak, in Q246, currency is strengthen.
I am confused. please help to clarify.
Thanks,
KTIn Q25 there is no mention of whether the currency is strong or weak (inflation may well have an effect on the exchange rate but nothing is said about that in the question). Even assuming the the currency does weaken there will not necessarily be a net benefit (which is what the question is asking about).
The question simply says which of the items listed is most likely to benefit and (a) is the most likely.
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