Chapter 29: Overview of Financial Markets (JAIIB - MODULE D)
1. What is the primary function of a financial market?
A. To provide government subsidies
B. To regulate tax collection
C. To facilitate mobilization and allocation of funds
D. To create employment directly
A financial market exists to channel savings into investments by mobilizing funds from surplus units and allocating them to deficit units.
2. Which of the following is NOT a component of financial markets?
A. Money Market
B. Capital Market
C. Foreign Exchange Market
D. Agricultural Commodity Warehouses
Financial markets include money, capital, foreign exchange, and derivative markets. Agricultural warehouses are part of commodity storage, not financial markets.
3. Which of the following statements correctly defines a financial market?
A. A marketplace for selling only physical goods and services
B. A system where financial instruments like equities, bonds, and currencies are traded
C. A forum for only government borrowing activities
D. An informal exchange among individuals
A financial market is a structured system where financial instruments such as shares, bonds, derivatives, and currencies are traded.
4. In a financial market, which of the following are considered the "surplus units"?
A. Households and institutions with savings
B. Businesses borrowing for expansion
C. Government issuing bonds
D. Banks providing loans
Households and certain institutions often act as surplus units, providing savings that can be mobilized into financial markets for investment.
5. Which of the following is a key difference between money market and capital market?
A. Money market deals in equity shares, while capital market deals in bonds
B. Money market is for long-term funds, while capital market is for short-term funds
C. Both are exclusively regulated by SEBI
D. Money market deals with short-term funds, while capital market deals with long-term funds
The money market is for short-term financial instruments (less than 1 year), while the capital market is for long-term instruments (more than 1 year).
6. The evolution of financial markets in India can be traced back to which of the following institutions?
A. Reserve Bank of India
B. Presidency Banks and Indigenous Bankers
C. Industrial Development Bank of India
D. Securities and Exchange Board of India
India’s financial market evolution began with indigenous bankers and later Presidency Banks (Bombay, Madras, Bengal), which laid the foundation for modern banking.
7. The establishment of SEBI in 1988 (statutory in 1992) was a milestone in financial market evolution because:
A. It nationalized private banks
B. It introduced GST
C. It replaced RBI as the banking regulator
D. It regulated and developed the securities market
SEBI was set up to protect investors, regulate stock exchanges, and ensure fair practices in the securities market, strengthening India’s financial system.
8. Which event led to rapid modernization and globalization of Indian financial markets?
A. Economic Liberalization of 1991
B. Nationalization of Banks in 1969
C. Establishment of NABARD in 1982
D. Creation of UTI in 1964
The 1991 economic reforms introduced liberalization, privatization, and globalization, leading to foreign investment inflows and modernization of Indian financial markets.
9. Which of the following technological advancements transformed the functioning of financial markets in India?
A. Introduction of paper-based settlement
B. Manual open outcry system
C. Dematerialization and electronic trading platforms
D. Barter exchange of securities
With the advent of NSDL (1996) and electronic platforms like NSE, securities trading became faster, transparent, and paperless.
10. The introduction of which institution marked the beginning of organized capital markets in India?
A. Bombay Stock Exchange (BSE) in 1875
B. SEBI in 1992
C. RBI in 1935
D. NSE in 1994
BSE, established in 1875, was Asia’s first organized stock exchange and laid the foundation of India’s capital market structure.
11. Which of the following markets deals with short-term financial instruments, usually with maturity less than one year?
A. Capital Market
B. Derivatives Market
C. Money Market
D. Foreign Exchange Market
The money market provides short-term funds through instruments like Treasury Bills, Commercial Papers, and Certificates of Deposit.
12. Which of the following is a key instrument of the Capital Market?
A. Treasury Bills
B. Equity Shares
C. Commercial Papers
D. Call Money
The capital market deals in long-term funds, and equity shares are a prime instrument of this market.
13. Which segment of the financial market facilitates trading in currencies?
A. Derivatives Market
B. Capital Market
C. Money Market
D. Foreign Exchange Market
The foreign exchange market (Forex) deals with the buying and selling of currencies and determines exchange rates.
14. Futures and options contracts are traded in which segment of the financial market?
A. Derivatives Market
B. Capital Market
C. Money Market
D. Forex Market
The derivatives market deals in financial contracts like futures, options, and swaps, which derive their value from underlying assets.
15. Which of the following pairs is correctly matched?
A. Money Market – Equity Shares
B. Capital Market – Debentures
C. Forex Market – Treasury Bills
D. Derivatives Market – Call Money
Debentures are long-term debt instruments and belong to the Capital Market, which deals in instruments with maturity greater than one year.
16. Which of the following is the most fundamental function of a financial market?
A. Mobilization and allocation of savings
B. Collection of taxes for government
C. Promotion of only foreign trade
D. Regulation of population growth
Financial markets act as intermediaries between savers and borrowers, mobilizing funds from surplus units and allocating them to deficit units efficiently.
17. By providing liquidity to financial instruments, financial markets help investors in:
A. Increasing government revenue
B. Avoiding monetary policy
C. Buying and selling securities easily
D. Reducing the number of banks
One of the key functions of financial markets is to provide liquidity, allowing investors to easily buy and sell financial instruments when required.
18. Financial markets contribute to price discovery. What does price discovery mean?
A. Government fixing prices of all commodities
B. RBI fixing all interest rates
C. Banks fixing loan repayment schedules
D. Determination of the fair price of financial instruments through demand and supply
Price discovery is the process by which the interaction of demand and supply in financial markets determines the fair market price of securities.
19. Which of the following best explains the risk management function of financial markets?
A. Financial markets eliminate all risks for investors
B. Financial markets provide instruments like derivatives to hedge against risks
C. Financial markets only transfer risks to government
D. Financial markets prevent inflation completely
Financial markets offer risk management through instruments like futures, options, and swaps that allow investors and businesses to hedge against uncertainties.
20. Case Study: A company issues debentures in the market to raise long-term funds. Which function of the financial market is being demonstrated?
A. Liquidity creation
B. Price discovery
C. Mobilization of savings and capital formation
D. Risk transfer through derivatives
By issuing debentures, the company channels household and institutional savings into productive investments, contributing to capital formation.
21. In financial markets, price discovery refers to:
A. RBI announcing repo rate
B. Government fixing minimum support price (MSP)
C. Company deciding face value of shares
D. Determination of asset prices through demand and supply in the market
Price discovery is the process by which buyers and sellers interact in a market to determine the fair price of an asset based on demand and supply.
22. Which of the following instruments is most directly involved in the process of price discovery in stock markets?
A. Treasury Bills
B. Equity Shares
C. Certificates of Deposit
D. Fixed Deposits
Equity shares are actively traded on stock exchanges, and their prices fluctuate based on demand and supply, making them key in price discovery.
23. Case Study: An IPO is oversubscribed 5 times. During book building, the price is fixed at the higher end of the band. Which market function is reflected here?
A. Price Discovery
B. Liquidity Creation
C. Risk Diversification
D. Capital Formation
In book building, investor demand determines the final issue price, demonstrating the price discovery role of financial markets.
24. Which of the following factors influences price discovery in financial markets?
A. Only government policies
B. Only interest rates fixed by RBI
C. Demand, supply, information flow, and investor sentiment
D. Only global oil prices
Price discovery is influenced by multiple factors like demand-supply conditions, availability of information, government/RBI policies, and market sentiment.
25. In derivatives markets, price discovery happens because:
A. Derivatives are risk-free instruments
B. Futures and options reflect expectations of underlying asset prices
C. RBI fixes the derivative prices
D. Investors trade only at face value
Futures and options derive their value from underlying assets, and their trading reflects collective market expectations, aiding price discovery.
