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Oana Nesteriuc

Comunicare în limba engleză de afaceri

- Curs pentru anul al II – lea -

2019
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COURSE NOTES

UNIT ONE

THE ECONOMY

What drives the world economy? The simplest answer to this question is
“consumer spending.” And what drives consumer spending? Some combination of
the factors below is generally considered to provide a reasonable answer.

GDP growth for different countries

Gross domestic product (GDP) measures the size of a country’s economy. It

represents the total value of all goods and services produced over a specific
period of time period. Growth in GDP is one of the primary indicators used to
gauge (=measure) the health of a country’s economy. Usually, GDP is expressed as
a comparison to the previous quarter or year.

Government trade policy

The two poles of government policy are liberalization and protectionism.

“Liberalization” is associated with free markets, open borders, deregulation and
the free movement of capital around the world. “Protectionism” is associated
with government intervention, subsidies, quotas and tariffs, and restrictions on
the movement of the capital.

National governments do have some genuine choices here, even if they are
constrained by the policy of their regional trading bloc (e.g. EU, NAFTA, ASEAN). In
the end, most countries have a mixed economy which is somewhere between the
two extremes.

Generally speaking, free markets promote growth in the world economy,

and protected markets slow down the process (although they may have a
beneficial effect on particular industries inside a country).

Consumer confidence
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If consumers are confident about tomorrow, they will spend more. The
main factors affecting consumer confidence are the level of unemployment – if
people’s jobs are at risk, or they don’t have a job, they will spend less – and house
prices – if people’s houses are worth more than they paid for them, they feel rich
and will spend more freely.

Interest rates

Interest rates are set by central banks. When interest rates are low,
consumers and businesses can borrow money cheaply and there is a stimulus to
the economy. But the cheap credit also causes inflation and too much liquidity in
the system. This liquidity leads to bubbles in stock markets, house markets etc.
When the central bank sees the need to control inflation and cool growth al little,
it raises interest rates.

Exchange rates

Currencies fluctuate against each other: the euro against the dollar, the yen
against the yuan. This is due to many complex factors such as the underlying
strength of the economy, the interest rate differentials and speculation. Having a
strong currency makes imports cheap for domestic consumers, but hurts
exporters (whose products become more expensive overseas).

The business cycle

Economies go through cycles of growth and contraction (=slowdown).

Effects of globalization

Economic: Worldwide supply chains, markets and products;

Financial: Worldwide financial markets; easier access to external financing;

Political: Closer relationships between governments;

Informational: Rapid flow of information across the globe;

Cultural: Cross-cultural contacts; travel and tourism; immigration; access to

foreign products and ideas;
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Ecological: Global environmental challenges needing international co-operation.

Arguments in favour of globalization Arguments against globalization

 General prosperity, lower prices,
more employment, higher
standard of living;
 Increased opportunity and
social/personal mobility;
 Improvements for poor countries
(life expectancy, infant mortality,
literacy, participation of women
in society).
 Inequality of wealth within
nations;
 Human costs, injustice due to
increased power of local elites,
erosion of traditional cultures;
 Environmental damage.

PRACTICE

Exercise 1 Make up word combinations by matching an item from each column:

Example: consumer spending

consumer movement of capital

free and contraction

growth borders

life spending

open of living

standard expectancy

environmental rates

goods strength

interest and services

cheap mobility

social damage
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underlying credit

Exercise 2 Use the word combinations from Exercise 1 to complete the sentences
below (the word combinations are not in order):

a. The economy will grow if……………………….is rising.

b. Consumer and businesses can take on too much debt if there is easy access
to ……………………. .
c. Economic growth brings material comforts, but also higher prices for the
basic necessities of life. In other words, your ………………………….. goes up,
but so does your cost of living.
d. Economies go through cycles of ……………………… (=boom and bust).
e. The main tool available to t Central Bank is its ability to
set……………………………………. .
f. Over the long term, exchange rates depend on the ……………………………………
of the economy.

Exercise 3 Write a paragraph (approximately 200-250 words) by answering to one

of the following questions:

a. In your country, what do people think about the issue of free trade versus
protectionism?
b. Free trade creates jobs in some industries and unemployment in others.
Which? Why?
c. Should certain industries be protected? Which? Why?

Exercise 4 Complete the following sentences with the correct form of the
underlined word:

analyze

 By …………………. the results in detail, the professors were able to reach

some interesting conclusions.
 Investment ……………….. evaluate the investment merits of different stocks
and shares.
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 If you work in financial management, you probably need to have an

……………………….. mind.

economy

 What sort of ………………………………system do you have in your country?

 Strict financial controls ensure that an organization’s resources are used
……………………. .
 Some countries have a mixed ………………………………. while others have a high
degree of state control.

research

 Cambridge University has a worldwide reputation in the field of scientific

………………… .
 Brian works in our R&D Department. He is one of ten ……………………….. .
 The effects of the factory environment on shop floor workers have been
extensively ………………………….. by a well-known industrial psychologist.

innovate

 Sony has always been seen as an ……………………………… in the field of hi-fi

equipment.
 In certain areas of business – for example, high fashion – it is important to
be ………………………………. and keep coming up with new styles and original
designs.
 ……………………………. or stagnate!

COURSE NOTES

UNIT TWO
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COMPANY TYPES AND CORPORATE GOVERNANCE

Company types

In law, there are various types of business entities. For each and every of
them there are different legal arrangements to register the company, different
requirements for presenting accounts etc. The main business types are:

Sole trader (UK)/Sole proprietorship (US)

A single person owns and operates a business. Legally, the business has no
separate existence from its owner (proprietor). This means that all the debts of
the business are the debts of the owner.

Partnership (UK and US)

Two or more people work together and share the risks and profits. Just like
the sole proprietor, the partners are fully liable for (=responsible for) any debts
the business has. This is referred to in law as “unlimited liability.”

Company (US and UK) / Corporation (US)

The business is a legal entity that is separate from its owners – the
shareholders. The owners are not fully liable for the debts the business. Instead,
their liability (=potential risk) is restricted to their share capital. This is the amount
of cash that they have contributed to the company. This is referred to in law as
“limited liability.” There are two main types of companies:

 Private company where the shares (AE stocks) are private in the sense that
they cannot be bought by members of the public. The vast majority of
companies fall into this category. They are often smaller companies, with
shares held by a few business associates or family members.
 Public company where the shares are openly traded on a public stock
exchange. These are the large, often well-known businesses. The word
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“public” should not be confused with “state-owned.” A “state-owned

enterprise” (SOE) is owned by the government.

The Board

Public companies are controlled by a board of directors (“the Board”) which

is elected by the shareholders. Not all the Boards are fully independent, but, in
general, their role is to:

 Set long – term strategy;

 Appoint a Chief Executive Officer (CEO) and other members of the
senior management team to run the company on a daily basis;
 Ask questions about any short or medium –term strategy developed
by the CEO, and then support it once they have agreed;
 Oversee the preparation of the financial statements;
 Appoint and ensure the independence of the company’s auditors;
 Oversee and manage risk;
 Set an annual dividend.

In theory, the shareholders choose the Board. At the Annual General

Meeting (AE Annual Meeting of the Stockholders) the shareholders can question
the Board members, vote to accept or reject the dividend, vote on replacements
for retiring Board members, etc. But, in practice, the situation may be different. In
particular, most shares are held by large institutions, and these may simple sell
their stake if they aren’t happy, instead of trying to change the Board. In reality,
many Board members are chosen by the CEO and the shareholders simply
approve these members.

Corporate governance

This whole issue of the role of the Board, how senior managers are
responsible to shareholders, and how the company is run is referred to as
“corporate governance.” Traditionally, different regions of the world have had
different models of corporate governance:
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 The Anglo-American model: separation of ownership (i.e. shareholders) and

control (i.e. managers); priority given to the interests of shareholders;
 The European/Japanese model: similar to the Anglo-American model, but a
greater recognition of the interests of other stakeholders such as:
employees, suppliers, customers, lenders (e.g. banks), and the community;
 The East Asian/Latin model: family-owned companies with no independent
Board or outside shareholders.

Nowadays, this traditional pattern is breaking down, and the situation is more
mixed. However, the following basic principles of corporate governance are
widely accepted:

 Respect for the rights of the shareholders;

 A clear definition of the roles and responsibilities of Board members;
 Integrity and ethical behavior;
 Disclosure (=giving full information) and transparency.

PRACTICE

Exercise 1 Read the definition below and find the word in the text (it appears
twice):

(formal) “a general term for any institution, company, partnership, government

agency, or any other organization which exists in law as a separate and complete
unit.”

Exercise 2 Find a word in the above text (The Board section) that matches each
definition given below:

1. watch the progress of something to make sure it’s done correctly;

supervise……………………………………
2. external companies that officially examine the financial records of a
company to see that they’re true and correct
…………………………………………………
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3. an amount of the profits that the company pays to shareholders

……………………………
4. money invested in a business ……………………………………………….

Exercise 3 Based on the information given in the above text, match the words
given below with their appropriate definition (a-d):

Director……………………………………….

Executive director ……………………………………………..

Non-executive director ……………………………………….

Board of directors ……………………………………………..

a. A company director with a seat on the board who is also a salaried

employee of the company, and actively involved in the running of the
company.
b. A director with a seat on the board who is not a working employee of the
company, sometimes brought onto the board for his or her specialist
knowledge. He or she takes no part in the running of the company.
c. The management committee of a limited company, the members of which
are appointed by the shareholders whose interests they represent. They
meet under the company chairman to decide on major policy matters and
the appointment of key managers.
d. A person who is appointed an elected officer of the company at the annual
general meeting (AGM) and manages the company on behalf of the
shareholders. He or she acts by resolutions made at the meetings of the
board.

Exercise 4 Which of the following people are likely to be on the board of

directors of a company?

a. Company secretary
b. Non-executive-directors
c. CEO
d. Managers
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e. Executive directors
f. Members of staff

Exercise 5 Fill in the gaps with the appropriate word:

board of directors/ board/ senior executives/ chief executive officer/ managing

director/ company secretary/ chair

People at the head of an organization are…………………………….or senior managers.

The ………………………is the person who has overall responsibility for the day-to-day
running of an organization. In the case of a limited company, the CEO is normally
the ………………………………….appointed by the ………………………………on the authority
of its members. The same person is usually the ………………………………….of meetings
of the ………………………………i.e. the people who are legally responsible for a
company. The person responsible for keeping the minutes of board meetings is
the……………………………. .

Exercise 6 Underline the correct words in italics:

a. Money that a person or company owes is debt/liability.
b. The word owner/proprietor means that you legally have something-
anything. The word owner/proprietor means that you have a business (and
is more formal).
c. If you and your business partners all have the same risks at the same time,
then you divide/share them.
d. A shareholders/ stakeholder is someone who owns a part of the business in
British English. A shareholder/stakeholder/stockholder is the same in
American English
e. If you’re a shareholder in a company, then every year you receive an
income/a profit/a dividend paid out of the company’s
income/profits/dividends.

Exercise 7 Fill in the missing letters:

a. If you’re completely liable for something, then you’re f _ _ _ y liable.

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b. If you’re liable for something in law, then you’re l _ _ _ _ _ y liable.

c. If you as an individual are liable for something, then you are p _ _ _ _ _ _ _
_ y liable.
d. If you keep share for a long time, then you h _ _ _ _ them.
e. If you buy and sell shares, then you t _ _ _ _ them.

Discussion topics

1. “The Anglo-American model” of putting the shareholder first is bad for the
employees, bad for the community and bad for the business. Do you agree
or disagree?
2. What are the advantages and the disadvantages of working for a medium-
sized family-owned business, as compared to a large public company?

COURSE NOTES

UNIT THREE

MANAGEMENT STYLES AND QUALITIES

Management styles

Every manager will be different, but over the years, management theory
has established three broad categories of management style:
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1. The authoritarian (autocratic) manager

This person is strict, demanding, controlling and probably too rigid in their
views. They take a top-down approach. But some staff like this – they know where
they stand and what their responsibilities are. Their jobs are clearly defined.

2. The consensual (democratic) manager

This person believes in consultation, and in coaching and mentoring their staff
to help them develop. Subordinates usually like this type of manager, but the
manager may lack vision and fail to show leadership.

3. The hands-off (laissez-faire)manager

This person delegates everything or just leaves problems in the hope that they
go away. They will justify their style as empowerment (i.e. giving control over
decisions to other people), but subordinates will feel a lack of guidance and
support. Liaison between colleagues (co-workers) will be uncoordinated.

An important point is that management style might reflect the company

culture as much as the personality of the individual. So a hierarchical company
with a bureaucratic decision-making process will suit one type of manager. On the
other hand, a decentralized company where low-level managers can take the
initiative will suit another. We also have to remember that different business
situations will require different management qualities:

 Consider the manager who is methodical, systematic and organized. Is

that always a good thing? Maybe there are situations where it’s better
to be intuitive and flexible, or to take decisions quickly without knowing
all the facts.
 Consider the manager who is a good team-player, cooperative and
supportive. Is that always a good thing? Maybe there are situations
where it’s better to work on your own, being self-motivated and
proactive.

Qualities or skills?
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Here is something interesting to think about: notice that in the text above
there is reference to styles and qualities, not to skills. This distinction is important.
Qualities are part of your character and personality – they were present at birth
or formed early in your life and you will find it hard to change these things. Skills,
however, are things you can learn – like how to speak another language, or give a
good presentation. Skills can be developed and improved through practice and
experience, qualities much less so.

Person specification

When looking for candidates for a particular type of job, many companies
produce both a job specification and a person specification. This helps
recruitment agencies and/or the human resources department to find suitable
people. The person specification will include the skills needed, experience needed
and personal qualities of the ideal candidate as shown in the example given
below:

PERSON SPECIFICATION

Skills and abilities

The ideal candidate will be able to demonstrate the following skills:

 An ability to……………

Personal qualities

Business knowledge

The ideal candidate will:

 have a good understanding of the market

 keep up to date with developments in the field

Strategic ability

The ideal candidate will:

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 be able to translate company strategy into individual business unit

objectives
 be able to balance conflicting business interests within the organization
Organizational ability

The ideal candidate will:

 be a good administrator
 be a good time-manager
 be conscientious and thorough
 be a good team-builder

Relation to the subordinates

The ideal candidate will:

 have an ability to motivate

 know when to delegate
 keep good lines of communication
 have an “open door” policy
 be a good listener
 have an ability to control and give feed-back in an appropriate way

Character

The ideal candidate will:

 like changes
 be prepared to take risks
 be honest and transparent
 be determined
 be able to recover quickly after a setback
 stay calm under pressure

PRACTICE

Exercise 1 Find a word in the text that matches each definition below:
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a. expecting other people to obey rules completely

………………………………………………………
b. needing a lot of your time and energy …………………………………………………
c. giving training or advice for a specific job or task ……………………………………
d. advising and helping someone more generally over a longer period of
time……………………..
e. exchange of information between people so that they work well together
………………………
f. where people and jobs are divided into many levels of importance
…………………………
g. taking action before it is needed, rather than waiting until problems develop
………………..
h. showing a lot of care and attention ……………………………….
i. a problem that delays or stops progress ………………………………..

Exercise 2 Change each adjective into an opposite meaning by filling in the letters.
If there is a prefix, it may be de-, dis-, in- or un-:

simple bureau_ _ _ _ _ c

centralized _ _ centralized

co-operative _ _ co-operative/_ _ helpful

coordinated _ _ coordinated

direct _ _ direct

flexible _ _ flexible/ri_ _ d

hands-off hands- _ _

honest _ _ _ honest

intuitive r_ _ _ _ _al

methodical care_ _ _ _
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organized _ _ _ organized

stressed re_ _ _ed/c _ _ m

supportive _ _supportive

top-down b_ _ _ _ _ - _ _

transparent _ _clear

Exercise 3 Choose the best adjective from those in Ex.2. (from both columns) to
describe these managers:

a. He’s under a lot of pressure and looks worried all the time. He’s
really……………………………
b. Once she’s made a plan, she doesn’t like changing it. She’s a
bit……………………………………..
c. He likes to get involved and do things, rather than just talking about them
or making other people do them. He’s very…………………………………..
d. Her desk is so untidy. Papers are everywhere! It’s
really…………………………………
e. He produces complicated rules for everything. His approach is
very…………………..
f. She’s honest and open and doesn’t try to hide anything. She’s
very……………………..

Exercise 4 Make phrases by matching an item from each column:

Example: lack vision and fail to show leadership

lack on your own and be self-motivated

know the initiative

work vision and fail to show leadership

take where you stand

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keep quickly after a setback

give general strategy into specific objectives

recover up-to-date with developments in the field

translate feedback in an appropriate way

Exercise 5 Complete the text about teams with the words given below:

breathing carry out feedback guiding issuing progress report back running

The ability to lead teams is a key skill in the modern business world. The
team leader has to move between a variety of approaches: ………………………………….
Instructions and supervising closely at times, ……………………………….. and
encouraging and offering advice at other times.

The team leader is, of course, responsible for monitoring overall

……………………………, but once the team is up and ………………………………, the
objectives and team roles are clearly defined, then he or she may be able to take
a back seat for short periods of time.

Team members like to feel that they can ………………………their roles without
the leader …………………………..down their neck all the time. However, they do need
to ………………………….regularly, and the team leader is expected to give them
constructive …………………………. on their performance.

Exercise 6 Put these four terms into the correct place in the table below: laissez-
faire / democratic/ autocratic

Management style Method

1. Leader makes decisions. Others are
informed and carry them out.
2. Leader discusses with others before the
decision is made. The group can
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influence the decision that is made.

3. There is no formal structure to make
decisions. The leader does not force his
or her views on the others.

Exercise 7 Choose the correct answer:

a. If management delegate responsibility, to whom is it given?

1. Superiors 2. Subordinates 3. No one
b. Which of the following is least likely to delegate responsibility?
1. An autocratic leader 2. A democratic leader 3. A laissez-faire leader
c. Which of these leaders is most likely to involve staff in collective decision-
making?
1. An autocratic leader 2. A democratic leader 3. A laissez-faire leader
d. Which of these leaders is most likely to develop a strong hierarchy?
1. An autocratic leader 2. A democratic leader 3. A laissez-faire leader
e. Which of these leaders is most likely to leave decision-making to individual
members of the staff?
1. An autocratic leader 2. A democratic leader 3. A laissez-faire leader

Exercise 8 Which book would be useful for each of these individuals?

a. “Democratic Management: You Can Reap the Rewards”

b. “Delegate: The Way to Clear Your Desk and Your Head”
c. “Crisis Management Systems: Planning to Cope”
d. “Change Management: The Manager’s Handbook for Interesting Times”

Bob: “There are lots of new developments in our field. We need to be prepared to
cope with their effects on our company.”

Ian: “My boss finds it very hard to accept ideas. I need to convince her that this
can be good for the company.”
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Susan: “I’m always worrying that something might go wrong at the factory, or
with our delivery system. What would happen if it did?”

George: “I’m simply overloaded. I spend all my day making decisions and meeting
all kinds of people so I never have any time to actually manage the company.”

Exercise 9 Read the text about management ability and answer the questions:

In a competitive environment being able to cope with change is very

important. A good leader needs to know what direction the company should be
going in and be able to lead it through change. They need to plan how to achieve
their goals and be able to persuade the others that their decisions are the right
ones. A person with management ability will be able to do all of these and be able
to motivate their staff.

a. The text lists five management abilities. What are they?

b. Can you add any other management abilities that you think are important?

COURSE NOTES

UNIT FOUR

MARKETS AND MARKETING

What is a market?
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The phrase “the French market” is just another way of saying “the
population from France,” but marketing professionals think of a market in a more
specific way. The whole population of a country can be broken down into market
segments.

In a business to consumer company, customers can be divided according to:

 Demographics: age group, gender, ethnicity, income, occupation, social

class, marital status;
 Psychographics: personality, attitudes, lifestyle;
 Geographics: national or regional divisions, city-center or suburban
customers;
 Benefits looked for by the customer: price, overall value, specific features,
image with peers, ease-of-use, service etc.;
 Current purchasing situation of the customer: brands used now, how and
where purchased, how and when used.

For a business to business company there may be other factors. For

example, a business to business company needs to know the type of customer
(e.g. manufacturer, retailer etc.), the industry group of customer (e.g. toy
manufacturer or clothing manufacturer), the size (e.g. sales volume, number of
retail outlets), the ownership (i.e. private or public), etc. Business to business
customers are less interested in image and more interested in things like ability to
meet changing patterns of demand, consistent quality.

Who should we target?

Once a company has decided how to segment the market, it can then do
any one of the following:
 Target the mass market: the company targets one large market with a
single marketing strategy. This was popular in the early day of marketing
(e.g. consumer products in the 50s and 60s), but few companies today view
this option as feasible.
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 Target multiple segments: here, each segment will have its own marketing
strategy. Most large consumer products companies do this – they offer
multiple products at different price points with different messages, all
within the same product category.
 Target one segment: a niche market. The company targets a small market,
often with just one or two very specialized products.
 Target individual customers with tailor-made products: there may be a
personal dialogue to establish specialized requirements, or the company
may use data about previous purchases (e.g. Amazon’s book
recommendations based on what you have previously ordered from their
site). The Internet has been the catalyst for this approach.

What is marketing?

Marketing begins with “the four P’s”: product, place, promotion and price.
These combine to form the marketing mix for any product or service. Elements of
“the four P’s” are shown below:

Product Place(Distribution)
 Features and associated benefits  Retailer
 Wholesaler
 Branding (i.e. product identity)  Business to business distributor
 Agent
 Packaging
 Label
Promotion Price
 Advertising  External factors (e.g. elasticity of
demand, customer expectations,
competitor’s products)
 Internal factors(e.g. profit
required, market share required)
 Sales promotions (e.g. special
offers, discounts)
 Public relations
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As well as “the four P’s”, the term “marketing” also includes marketing
strategy. At its simplest, this includes:

 Analyzing the business environment using market research;

 Developing new products and new markets;
 Responding to external forces: the economy, activity of competitors,
innovation, cultural change etc.

PRACTICE

Exercise 1 Find a word in the above text that matches each definition below:

separate parts …………………………………………………….

the fact of being male and female ……………………………………………..

people of the same age or who belong to the same social group
………………………………

(formal) buying ………………………………………………………

the ways that a product is needed in different amounts at different times (three
words) ………………………………………………………………..

people who sell products for a company (informal)

………………………………………………………

try to influence ………………………………………………………………………

possible and likely to succeed ………………………………………………….

small group of potential customers who have similar needs or interests (two
words)…………………………………………………………….

something that results in important changes

………………………………………………………….

important parts of a product …………………………………………………………..

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how much sales volume changes when you change the price (three words)
…………………………………………….

Exercise 2 Write each of these words next to its best definition: advertising,
marketing, promotion, publicity

a. all the ways used to encourage demand for a product

…………………………………….
b. an activity that attracts people’s attention to a product
c. telling people about a product (e.g. on TV, in magazines) in order to
persuade to buy it ……………………………………………
d. any information that makes people notice a product (this may be
unplanned, out of control of the company and not part of its marketing
strategy) ……………………………….

Exercise 3 Match each word on the left with five words on the right:

agency
campaign
forces
leader
market mix
marketing price
sector
share
strategy
tool

Exercise 4 Fill in the blank spaces with a word partnership from Exercise 3:

a. If the government doesn’t interfere, then prices are set by

……………………………………….
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b. The “four P’s” give the …………………………………………… for a particular

product.
c. The percentage of the market that you have is your ……………………………
d. Sponsored links on Google (when a customer searches for your product
type) is a very effective ……………………………..

Exercise 5 Read what a marketer says about the history of a product:

We chose to focus our strategy on people in their late teens, and so we

launched the product at a series of big rock concerts over the summer. We soon
gained market share, and after two years we were the market leader. But after a
while, consumers wanted something different. Our competitors noticed this before
we did, and our sales dropped drastically. Retailers stopped stocking our brand
and we had to stop making the products. We had a big meeting and thought
again about our whole strategy. We agreed that we would try one more time.

The phrases below can all be used with the word “market.” Put them in order (1-
8) so that they match the order in the above text.

o a. to be forced out of
o b. to put a product onto
o c. to break into
o d. to reassess
o e. to decide to target
o f. to re-enter
o g. to fail to see changes in
o h. to take over

COURSE NOTES

UNIT FIVE

MARKETING MANAGEMENT
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Understanding a business

Marketers must first have a detailed understanding of their business in

order to develop their marketing strategies. This is often done using the “5 C’s”
analysis:

1. Customer analysis involves breaking down the market into segments.

2. Company analysis refers to the fact that marketers need to understand
their company’s cost structure, look how profits are generated from
different product lines and different customer accounts, and identify
core competencies in the organization.
3. Collaborator analysis means producing a profile of all channel partners
(e.g. suppliers, distributors).
4. Competitor analysis refers to the fact that marketers build profiles of
each competitor by focusing on their relative strengths and weaknesses.
5. Context analysis as well as the economic and social context include
things like potential threats in the industry (e.g. substitute products,
new entrants), and also the changing bargaining power of the suppliers
and customers.

Market research

In order to collect all this data, it is necessary to do market research. A

variety of techniques are used:

 Quantitative research: the most common research tool in this case is a

survey that captures information with a questionnaire. Information can also
come from doing small-scale experiments such as looking at the effect on
sales of changing price points, or moving displays within a store. Websites
also offer many opportunities for collecting data as customers’ behavior on
a site can be easily tracked.
 Qualitative research: the company may carry out individual interviews, or
focus groups. A modern technique is to use observational research where
customers are watched in a natural setting as they shop or use products at
home.
 27

 Secondary research: data can be collected from other sources such as

consulting companies, trade associations, magazine articles, government
statistics etc.
 Test marketing which involves trying out new products in certain locations.

Developing a marketing strategy

Once a company has done the kind of research outlined in the two sections
above, it is in a better position to understand its customer base and its
competitive position in the industry. Marketing managers are then able to
develop a strategy. This will relate to:

 Identifying new markets and gaps in the market.

 Developing new products and identifying their desired positioning.
 Developing the company's competitive advantages.
 Maximizing revenues and profits.
 Gaining market share.

The second of these, new product development, will go through a process that
includes some or all the stages as mentioned below:

New product development:

Stage 1 Idea generation: ideas can come from customers, competitors, focus
groups, sales people.

Stage 2 Idea screening: Marketers have to ask some basic questions to screen the
initial ideas (e.g. How will customers benefit? Is it technically feasible to make it?)

Stage 3 Concept development: At this stage, marketers need to think in much

greater detail about the concept (e.g. Who is exactly the target market? How will
it fit with other existing products?)

Stage 4 Business analysis: Here marketers work closely with collegues from sales
and finance to try to estimate the likely selling price, sales volume, profitability.
 28

Stage 5 Beta testing and market testing: At this point, the company produces a
prototype and tests the product in use. Marketers will hold focus grouos.
Adjustments will be made on the basis of these tests and a more final version of
the product might be sold in a test market.

Stage 6 Technical implementation: The company has to allocate resources and

plan engineering operations, logistics and work schedules.

Stage 7 Comercialization: The distribution channels are filled with the product
and it is launched. Advertisements are produced and placed in order to attract
customers to buy and use it.

PRACTICE

Exercise 1 Find a word in the above text that matches each definition below.

a. Things that a company can do well ………………………………………………

b. Things that could cause damage or harm …………………………………….
c. Set of questions that you ask a large number of people in order to find out
their opinion ……………………………………………………
d. A written list of questions ………………………………………….
e. Relating to things that cannot easily be measured with numbers such as
opinions or attitudes ………………………………….
f. Small groups of people who are asked to discuss and give their opinions
about a particular subject …………………………………………
g. Things that help a company be more successful than others
……………………………………………

Exercise 2 Make up word combinations by matching an item from each column:

Example: cost structure

cost competencies

product research

core group
 29

bargaining structure

quantitative power

focus line

customer development

competitive base

concept test

breakeven implementation

beta advantage

technical point

Exercise 3 One word or phrase from each group written in italics does not make
sense. Cross it out:

a. We are up against/come up against/look towards/face a lot of competition.

b. This legislation will encourage/gain/promote/stimulate competition.
c. We’re doing our best to cope with/handle/respond to/treat with the
competition.
d. We try to avoid/carry out/stay away from/steer clear of the market
segments where there is too much competition.
e. We face cut-throat/fierce/intense/particular/severe/strong/tough
competition.
f. We welcome fair/free/healthy/large/open competition.

Exercise 4 Put the following verbs into the most likely chronological order:
design, launch, discontinue, manufacture, sell, upgrade

 1. …………………
 2. …………………
 30

 3. launch a product
 4. …………………
 5. ………………..
 6. ………………..

Exercise 5 Arrange these phrases into the most likely chronological order: carry
out, cut back on, put money into, abandon, suggest the need for, see the
limitations of:

 1. ……………………
 2. ……………………
 3. carry out market research
 4. …………………..
 5. …………………..
 6. ………………….

Exercise 6 Read carefully each and every multiple choice test on Marketing. Then
choose one best answer:

A. It does little good to manufacture a fantastic product that will meet the needs
of the …………….. unless there is a mechanism for……………………….
and……………….. the product and receiving payment.
1. consumer/ delivering/ servicing
2. producer/ deliver/ service
3. consumer/providing/ service

B. Outdoor advertising could be defined as…………………………….

1. frequently repeated phrase that provides continuity to an advertising
campaign.
2. promotion of a product, service, or message by an identified sponsor using
paid-for media.
 31

3. commercials with a message that is presented musically.

4. any outdoor sign that publicly promotes a product or service, such as
billboards, movie kiosks etc.

C. A …………………………….. is a name used to identify the goods or services of a

particular manufacturer, seller or supplier, and to differentiate them from the
goods or services of competitors.
1. brand
2. product line
3. convenience store

D. ……………………….. are durable goods with unique characteristics that informed

consumers have to go to a particular store to buy.
1. Shopping goods
2. Specialty goods
3. Convenience goods

E. We ……………………. the product two years ago after doing a lot of research and
testing.
1. introduced
2. launcht
3. launched

F. We …………………………young people, the 18s to 25s, but a lot of older people

bought our product, too.
1. were attaining
2. were segmenting
3. were targeting

G. Price reductions or……………………… can be used to attract price-conscious

……………………..to try a mature brand, or to reward regular users for their
………………… and to maintain market share.
1. coupons/ brand switchers/ brand loyalty
 32

2. free samples/brand switchers/brand location

3. free samples/ brand users/ brand awareness

H. Marketing is a technique that aims ………………………., and

………………………….consumer demand.
1. to satisfy, antecedent/satisfy
2. to identifying, receiving/satisfy
3. to identify, anticipate/satisfy

I. How can a manufacturer know whether a product will sell or not? The answer
to this is a …………………….., which usually consists of a …………………………………..
that is made on a representative sample of the …………………..population
chosen.
1. market researcher/ survey/ target
2. market survey/ questionnaire/ target
3. market analysis/questions/target

J. Advertising informs consumers about the existence and…………………….of

products and services, and attempts ……………………… them to buy them.
1. benefits/ to persuade
2. advantages/ manipulate
3. characteristic/ convince

K. Sales promotions can be used by ……………………… of components, who are

industrial buyers.
1. supplies
2. suplies
3. supliers
4. suppliers

L. Most members of the team believe …………………………….. the success of the

negociation.
1. about
 33

2. on
3. in
4. at

M. The world’s soft drinks market is…………………………. by Pepsi and Coca-Cola.

1. dominated
2. admired
3. segmented

N. At present, I’m running the advertising …………………………… for the launch of

the new car model.
1. promotion
2. endorsement
3. campaign

O. Most of the ……………………….. who use our newspaper are small, local
businesses.
1. adverts
2. advertisers
3. advertising

COURSE NOTES

UNIT SIX

BUSINESS ENVIRONMENT: “THE STEEP ANALYSIS”

“Nothing can be certain except for death and taxes” (Benjamin Franklin)

Introduction
 34

A. Imagine that the following changes happen in your country over the
next five to ten years. Which of them do you think might affect your
future career or the company you work for the most? Explain why.
1. A law is passed to reduce the average working week to 30 hours.
2. Friends see each other far less. Online friendship is the norm.
3. Immigration increases dramatically.
4. Bank interest rates go down 50%.
5. The price of oil rises significantly.
6. The government refuses to sign international agreements to limit carbon
emissions.
7. Higher broadband speeds lead to a huge increase in online distance-
learning courses.

B. How much do you think individuals and companies are able to control
their own future?

Understanding how business deals with future uncertainty: The STEEP Analysis

The STEEP ANALYSIS is a commonly used tool in business that companies

and organizations use to make sense of their wider macro-environment. It is used
to identify the external forces affecting how individual companies compete within
their industry sector. These external forces within the wider macro-environment
consists of Socio-cultural, Technological, Economic, Environmental and Political
factors.

Socio-cultural factors

This aspect focuses its attention on forces within society such as: family,
friends, colleagues, neighbours and the media. Social forces affect our attitudes,
interests and opinions. These forces shape who we are as people, the way we
behave and what we purchase. Population changes also have a direct impact on
organisations. Changes in the structure of a population will affect the supply and
demand of goods and services within an economy. Falling birth rates will result in
decreased demand and greater competition as the number of consumers fall in
developed countries. Conversely, an increase in the global population is currently
 35

leading to calls for greater investment in food production. Due to food shortages,
African countries, such as Uganda, are now reconsidering their rejection of
genetically modified goods.

Technological factors

Technological advances have greatly changed the manner in which

businesses operate. Technology has created a society which expects instant
results. This technological revolution has increased the rate at which information
is exchanged between the stakeholders (customers, suppliers, employees,
government etc.). A faster exchange of information can benefit businesses as they
are able to react quickly to changes within their operating environment. However,
an ability to react quickly also creates extra pressure as businesses are expected
to deliver on their promises within ever-decreasing timescales. Consumers can
now shop online 24 hours a day from their homes, work, or on the move from
their phones. Technology will continue to evolve and impact on consumer habits
and expectations. Organisations that ignore this fact face extinction.

Economic factors

All businesses are affected by national and global economic factors.

National and global interest rates and tax policies will be set around economic
conditions. The climate of the economy dictates how consumers, suppliers and
competitors behave within society. For example, an economy in recession will
have high unemployment, low spending power and low confidence. A successful
organisation will respond to economic conditions and respond appropriately. IN
this global business world, organisations are affected by economies throughout
the world and not just the countries in which they are based or operate from. For
example, cheaper labour in developing countries affects the competitiveness of
products from developed countries.

Environmental factors

Companies and organisations are increasingly aware of the huge impact the
natural environment can have on the other STEEP factors and on business in
general. Factors include: global warming and climate change, increased pollution
 36

levels, deforestation etc. If, for example, there are adverse weather conditions in
India, consumers throughout the world will pay more for tea at their local
supermarket. Environmental factors are particularly important when it comes to
the question of energy and the decreasing availability of natural resources such as
oil, fresh water and minerals (i.e. iron and uranium). Rapidly increasing
competition for these resources is leading to rising prices and, in some cases, to
wars and large-scale social unrest.

Political factors

Political factors can create advantages and opportunities for organisations.

Conversely, they can place obligations and duties on organisations. Political
factors include legislation such as the minimum wage, employment law and
environmental legislation. An example of tough environmental laws is California,
which became the first state in the USA to regulate emissions of the greenhouse
gas carbon dioxide from motor vehicles. Vehicles with high levels of emissions
simply cannot be sold any longer in California. Regulations and laws are not at a
national or a local level but are increasingly coming from international bodies
such as the EU or WTO (World Trade Organisation) on issues such as market
regulations, trade agreements, import taxes etc. Failure to conform to these legal
obligations can lead to sanctions such as fines, adverse publicity and
imprisonment.

PRACTICE

Exercise 1 Read the first part of the text above on the STEEP analysis and find
words which have the same meaning as these:

a. Influence(verb) ………………………………
b. Buy ………………………………………
c. Very large ……………………………..
d. Natural foods grown without chemicals ………………………………
e. On the other hand ………………………………….
f. Insufficient supplies ……………………………….
g. Thinking again …………………………………………
 37

Exercise 2 Complete the expressions for the different types of consumer goods
sectors:

a. Food and d…………………………………..

b. Consumer e………………………………….
c. Supermarket r……………………………...
d. Home e………………………………………..

Exercise 3 Look at the predictions about trends in the consumer goods industry
and underline the verbs that are used to talk about the future:

a. Technology will continue to evolve and impact on consumer habits and

expectations.
b. Some people could become fed up with the amount of technology and move
back to more face-to-face business.
c. Car manufacturers might consider selling direct to the consumer via their
own websites.
d. Marketing and selling online will probably grow much further, particularly
in certain fields of business like retail.
e. Falling birth rates will definitely result in decreased demand and greater
competition as the number of consumers fall.
f. Due to increasing health awareness in developed countries, it is highly
unlikely that the demand for the genetically modified foods will rise.
g. The regulations for companies producing healthcare products are going to
become stricter.
h. I guess there may be more global products like Coca-Cola which is drunk all
over the world.
i. It looks probable that the subject of CO2 emissions will be the dominating
subject over the next few years.

Match the sentences above with the correct degree of certainty a-c:
a. Possible ………………………..
 38

b. Probable……………………….
c. Certain ………………………..

Exercise 4 Analyze the following pairs of predictions and decide which in each pair
is the most certain:

1. A: I guess we will have to do things differently in the future.

B: It’ll probably be another year before they have broadband in the rural
areas.

2. A: We might well recruit forty people in the New Year.

B: I suppose we’ll have to refund them if we don’t get the order to them on
time.

3. A: It looks probable that the company will offer him a promotion.

B: There could be a problem with that.

4. A: We may have to move people to other departments.

B: I’ll be back by then.

5. A: It’s highly unlikely that the flight will be cancelled because of the fog.
B: Sales could increase over the holiday period.

6. A: Some renewable fuels may even be doing more harm to the environment
than oil and gas.
B: Companies will need to take a more multicultural approach to business.

Exercise 5 Mark the following sentences dealing with Economic indicators with
True or False. If they are False, explain why:

Example: Inflation is a measure of increasing prices. → True

a. High inflation generally means increasing unemployment. →

 39

b. A healthy consumer economy always means lower unemployment. →

c. Higher investment in training and education is easier during a low point in
the economic cycle. →
d. A tight fiscal policy means high taxation and high government spending. →
e. Governments need to control their borrowing requirement.→
f. A high value of the local currency is good for exports. →
g. Generally, high levels of supply and low levels of demand means
unemployment. →
h. Growth creates wealth and wealth creates jobs.→
i. Rationalization means cutting labour costs so people lose their jobs. →
j. Increased investment in real terms means increased investment above
inflation rates. →
k. A balance of payments deficit means a company is spending more than it
earns. →
l. Fluctuations in exchange rates do not trouble financial planning. →
m. If inflation is rising, a central bank will probably raise interest rates. →
n. Stable and low inflation and interest rates are an economic “good thing.”→
o. High government spending can help to control inflation. →
p. High labour mobility is generally good for an economy. →

COURSE NOTES

UNIT SEVEN
 40

FINANCIAL MARKETS

Stock and bond markets

Stock markets are the best-known financial markets. Their function is

firstly to raise capital when a company goes public (i.e. issues shares for the first
time), and, secondly, to provide a place where buyers and sellers of those shares
can then exchange them.

When a business reaches a certain size, the original owners might decide
that they want to go public and list their shares (AE stocks) on a stock market.
With the help of an investment bank, they sell these shares to the market at an
IPO (initial public offering). A huge sum of money enters the business as a one-
time event and can be used to expand the business. Ownership of the business
passes from the original founders to the shareholders.

The bond market is also used to raise capital, but in this case the capital is
raised as a loan. Bonds can be issued by companies, governments and some
municipal or state authorities. The investor provides money, and this is paid back
with interest over the term of the loan. Stocks and bonds, which are collectively
known as “securities”, are actively traded on the markets after they have been
issued.

Money market

The money market is less well-known, but it provides important short-term

liquidity for the financial system. Companies can fund their short-term needs with
a range of debt instruments, often referred to as “commercial paper.” Banks use
this paper to borrow and lend amongst themselves. Governments, states and
local governments also have access to money market instruments to fund their
shot-term debt.

FX market
 41

By far the largest financial market in the world is the foreign exchange
market (FX market). Companies need currencies to pay their foreign bills. Central
banks buy and sell currencies to manipulate the exchange rate. Governments use
currencies to buy the bonds of other countries. Pension funds need currencies to
make investments overseas. Speculators buy and sell currencies as they chase
short-term trends, adding a lot of volatility to the system. Everybody wants to
hold their spare cash in a currency with a good rate of interest.

Commodity markets

Commodity markets exist to trade physical products such as oil, gas,

metals, grains and meat.

Derivative markets

A derivative is a financial instrument whose value is derived from

(=depends on) another asset. For example, an options contract on a stock allows
you to make money if the value of the underlying stock rises (or falls) to a certain
level by a certain date. If it does, you gain more as a percentage than the
movement of the underlying stock. If it doesn’t, you lose everything. So, in
exchange for some risk, you can increase your potential return. But notice that an
options contract also allows you to be more careful with your investments: if you
own a stock and it falls in value then you lose money – but with an options
contract on the same stock you can make money as the stock falls. In this way you
have “hedged” (i.e. protected yourself against) the risk.

WHO ARE THE PLAYERS? WHAT DO THEY DO?

Retail investors They are the individuals who purchase
small amounts of securities for
themselves.
Institutional investors Investment banks buy and sell
-investment banks securities on behalf of their clients
-pension funds (large companies), and on their own
- insurance companies behalf.
-mutual funds Pension funds invest money that
people are saving for their retirement.
 42

Insurance companies invest the money

Hedge funds
Private equity companies
Sovereign wealth funds
they receive from policyholders.
Mutual funds (BrE unit trusts) pool the
money of many small investors to
invest in selected companies in a
particular field.
Often quite secretive, these are the
companies that pool the money of
wealthy investors and act in an
aggressive way by speculating on a
short-term basis , by using leverage (i.e.
borrowing money to increase potential
profits), by using derivatives etc.
These companies typically invest in
private companies, not publicly listed
companies. There are two very
different types of activity:
 venture capital to support start-
ups;
 buy-outs (where a company is
taken over, restructured, and
then sold).
These are investment vehicles owned
by national governments with a large
budgetary surplus (e.g. because of oil
revenues). They invest in a range of
assets (e.g. stocks, bonds).

PRACTICE

Exercise 1 Group the words based on their meaning:

a. bear/ booming/ bull/ depressed/ falling/ healthy/ rising/ strong/ weak

market
b. good/ high-risk/ profitable/ risky/ secure/ sound/ speculative/ worthwhile
investment
 43

Exercise 2 Make up word combinations by matching an item from each column:

Example: go public with an IPO

go capital by issuing bonds

list short-term debt with “commercial paper”
raise shares on a stock market
pay back public with an IPO
fund a loan with interest
manipulate a start-up with venture capital
chase the exchange rate
buy shares short-term trends in the market
support a company then restructure it
take over on behalf of a client

Exercise 3 Fill in the blank spaces about currencies with these words: appreciates/
depreciates/ floats/ pegs/ props up:

a. If a government …………………………………… its currency to another, then it

keeps it at the same level.
b. If a government …………………………………..a currency, then it supports it and
prevents it from falling.
c. If a currency ………………………………..freely, then its value is allowed to change
against other currencies.
d. If the euro rises against the dollar, it………………………………………………..
e. If the euro falls against the dollar, it …………………………………………………

Exercise 4 Fill in the blank spaces with the following words:

commodity contracts/ downside risk/ hedging/ leverage/ underlying asset

 44

Two fundamental concepts that are fundamental to modern finance are

“leverage” and “hedging.”

…………………………… is using borrowed money to buy an investment. You invest 100

euros or 1000 euros of the bank’s. This gives you enormous profits if your
investment is a good one, but also magnifies the…………………………. . A lot of
leverage in a market increases volatility. If the market moves against you, it’s not
just your own money you’re losing, but the borrowed money as well. So you have
to sell shares quickly to minimize losses, and this drives down the market very
quickly.

………………………….. means trying to protect yourself against risk. If you hold a lot of
shares, foreign currency or ………………………………, you’ll clearly make money if the
price of the asset goes up. But if the price goes down, you’ll lose. You can hedge
this risk by buying a derivative that is structured to make money as the price of
the ………………………………….. falls. So, if the market moves against you, at least you
have some protection.

COURSE NOTES
 45

UNIT EIGHT

FINANCIAL INSTITUTIONS

Types of financial institutions

For most of the 20th century, most banks operated in one country only (in
the US in one state inly). Different kinds of banks did specialized kinds of financial
business:

 Retail banks or commercial banks worked with individuals and small

companies, received deposits and made loans;
 Investment banks worked with big companies, gave financial advice, raised
capital (increased the amount of money companies had by issuing stocks or
shares1 and bonds2), organized mergers3 and takeover bids4;
 Insurance companies that provided life insurance and pensions;
 Building societies that specialized in mortgages. Many now become normal
commercial banks.5

Deregulation

The financial industry changed radically in 1980s and 90s when it was
deregulated (i.e. there are now fewer restrictions and regulations than before).

 Before deregulation: rules and regulations in the US, Britain and Japan
prevented commercial banks doing investment. Some other countries
(Germany, Switzerland) already had universal banks doing all kinds of
financial business.

1
Stocks or shares certificates represent one unit of ownership of a company.
2
Bonds are debts that pay interest and are repaid at a fixed future date.
3
A merger happens when two or more companies join together.
4
A takeover bid happens when one company offers to acquire or buy another one.
5
Merchant bank (BE); investment bank (AE)
Retail bank/commercial bank/High Street bank (BE); retail bank/commercial bank (AE)
Building societies (BE); savings and loans associations (AE)
 46

 Today: many large international conglomerates6 offer a complete range of

financial services. Individuals and companies use a single financial
institution for all their financial needs.

Specialized banks

The other types of banks still have specialized functions:

 Central banks issue currency and carry out the government’s financial
policy;
 Private banks manage the assets of rich people (or high net worth
individuals);
 Clearing banks pass cheques and other payments through the banking
system;
 Non-bank financial intermediaries such as car manufacturers, food
retailers and department stores now offer products like personal loans,
credit cards and insurance.

PRACTICE

Exercise 1 Find words in the text above with the following meanings:

a. a company offering financial services: ……………………………….

b. the money a company uses, raised by way of shares and bonds:
…………………………
c. when two formerly separate companies agree to join together:
………………………….
d. a company formed by the merger or takeover of several other companies:
………………….
e. the ending of some rules and restrictions: …………………………………….
f. when a company offers to buy the shares of another company to gain
control of it: …………………………..

6
Conglomerates are companies that were formed by mergers and takeovers.
 47

Exercise 2 Before financial deregulation, which types of financial institutions did

these types of businesses? Look at Types of financial institutions section of the
text above:

a. arranging mergers →
b. offering life insurance →
c. issuing shares and bonds →
d. providing mortgages →
e. receiving deposits and making loans to individuals and small companies →
f. organizing (or defending against) takeover bids →
g. providing pensions →

Exercise 3 The excerpts below are from websites. Read them through and decide
which types of banks do the websites belong to? Refer to Types of financial
institutions and Specialized banks sections from the text above:

a. The Federal Reserve was founded by Congress in 1913 to provide

the nation with a safer, more flexible, and more stable monetary
and financial system.

b. We provide a full range of products and services, including advising on

corporate strategy and structure, and raising capital in equity and debt
markets.

c. How can we help you? We can:

 Build a long-term, one-to-one relationship with your banker;

 Manage your family’s diverse business and personal assets;
 Build a portfolio tailored to your family’s unique needs;
 Play an active part in managing your assets.
 48

d. Nearly twelve million cheques and credits pass through the system each
working day. Cheque volumes reached a peak in 1990 but usage has fallen
since then, mainly owing to increased use of plastic cards and direct debits
by personal customers.

e. Why bank with us? Because we offer:

 a comprehensive range of accounts and services;
 over 1,600 branches, many with Saturday opening;
 free withdrawals from over 31,000 cash machines;
 online and telephone banking for round-the-clock access to your
accounts.

COURSE NOTES
 49

UNIT NINE

PERSONAL BANKING. COMMERCIAL AND RETAIL BANKING

Personal Banking. Current accounts7

A current account is an account which allows customers to take out or

withdraw money with no restrictions. Money in the account does not usually earn
a high rate of interest: the bank does not pay much for “borrowing” your money.
However, many people also have a savings account or deposit account which
pays more interest but has restrictions on when you can withdraw your money.
Banks usually send monthly statements listing recent sums of money going out
(called debits), and sums of money coming in (called credits). Nearly all customers
have a debit cards allowing them to make withdrawals and do other transactions
at cash dispensers8. Most customers have a credit card which can be used for
buying goods and services as well as for borrowing money. In some countries,
people pay bills with cheques9. In other countries, banks do not issue
chequebooks and people pay bills by bank transfer. These include standing
orders which are used to pay regular fixed sums of money, and direct debits,
which are used when the amount and payment date varies.

Banking products and services

Commercial banks offer loans – fixed sums of money that are lent for a
fixed period. They also offer overdrafts which allow customers to overdraw an
account – they can have a debt up to an agreed limit on which the interest is
calculated daily. This is cheaper than a loan if, for example, you need to overdraw
for a short period of time. Bank also offer mortgages to people who want to buy a
place to live. These are long-term loans on which the property acts as a collateral
or a guarantee for the bank. If the borrower doesn’t repay the mortgage, the
bank can repossess the house or flat – the bank takes it back from the buyer and

7
Current account (BE); checking account (AE)
8
Cash dispenser, cash machine(BE); ATM (Automated Teller Machine) (AE)
9
Cheque (BE); check (AE)
 50

sells it. Banks exchange foreign currency for people going abroad and sell
traveller’s cheques (BE)/traveler’s cheques (AE) which are protected against loss
or theft. They also offer advice about investments and private pension plans –
saving money for when you retire from work. Increasingly, banks also try to sell
insurance products to their customers.

E-banking

In the 1990s, many commercial banks thought the future would be in

telephone banking and internet banking or e-banking. But they discovered that
most of their customers preferred to go to branches – local offices of the bank –
especially the ones that had longer opening hours, and which were conveniently
situated in shopping centres.

Commercial and retail banks

When people have more money than they need to spend, they may choose
to save it. They deposit it in a bank account, at a commercial or retail bank, and
the bank generally pays interest to the depositors. The bank then uses the money
that has been deposited to grant loans – lend money to borrowers who need
more money than they have available. Banks make a profit by charging a higher
rate of interest to borrowers than they pay to depositors. Commercial banks can
also move or transfer money from one customer’s bank account to another one,
at the same or another bank when the customer asks them.

Credit

Banks also create credit – make money available for someone to borrow –
because the money they lend, from their depositors, is usually spent and so
transferred to another bank account. The capital a bank has and the loans it has
made are its assets. The customers’ deposits are liabilities because the money is
owed to someone else. Banks have to keep a certain percentage of their assets as
reserves for borrowers who want to withdraw their money. This is known as the
reserve requirement. For example, if the reserve requirement is 10%, a bank that
receives a £100 deposit can lend £90 of it. If the borrower spends the money and
writes a cheque to someone who deposits the £90, the bank receiving that
 51

deposit can lend £81. As the process continues, the banking system can expand
the first deposit of £100 into nearly £1,000. In this way, it creates credit of almost
£900.

Loans and risks

Before lending money, a bank has to assess or calculate the risk involved.
Generally, the greater the risk for the bank of not being paid, the higher the
interest rate they charge. Most retail banks have standardized products for
personal customers, such as personal loans. This means that all customers who
have been granted a loan have the same terms and conditions – they have the
same rules for paying back the money. Banks have more complicated risk
assessment methods for corporate customers – business clients – but large
companies these days prefer to raise their own finance rather than borrow from
banks. Banks have to find a balance between liquidity – having cash available
when depositors want it – and different maturities – dates when loans will be
repaid. They also have to balance yield – how much money a loan pays – and risk.

PRACTICE

Exercise 1 Find words in the Banking products and services section with the
following meanings:

a. what you can earn when you leave your money in the bank →
b. an amount of money borrowed from a bank for a certain length of time,
usually for a specific purpose →
c. something that acts as a security or a guarantee for a debt →
d. an arrangement to withdraw more money from a bank account than you
have placed in it →
e. a long-term loan to buy somewhere to live →
f. an arrangement for saving money to give you an income when you stop
working →
g. to take back property that has not been completely paid for →

Exercise 2 Are the following statements True or False? Find reasons for your
answers in the first three paragraphs of the above text:
 52

a. Current accounts pay more interest than savings accounts. ……………

b. There is less risk for a bank with a mortgage than with unsecured loans
without collateral. …………
c. Traveller’s cheques are safer for tourists than carrying foreign currency.
……………
d. The majority of customers prefer to do their personal banking at the bank.
…………….
e. Bank branches are now all in shopping centres. ……………..

Exercise 3 Match the two parts of the sentences:

a. Banks lend savers’ deposits

b. They also create credit by
c. How much credit banks can create
d. Before lending money,
e. The interest rate on a loan
f. Banks always need liquidity

1. banks have to assess the risk involved.

2. depends on the reserve requirements.
3. depends on how risky it is for the bank to lend the money.
4. so they can’t lend all their money in loans with long maturities.
5. lending the same original deposit several times.
6. To people who need to borrow money.

Exercise 4 Find verbs in the last three paragraphs that can be used to make word
combinations with the nous given below. Then use some of the verbs to fill in the
gaps in the sentences:

…………………………….. …………………………

interest risks

……………………………. …………………………
 53

……………………………...

money

………………………………

A. With standardized products, all customers are ………………………….. the same

interest rate.
B. Banks generally know from experience how much cash to keep in their
reserves for customers who want to …………………………. It.
C. Banks carefully study the financial situation of a company to ………………………
the risk involved in lending it money.

COURSE NOTES

UNIT TEN
 54

CENTRAL BANKING

The functions of central banks

Most countries have a central bank that provides financial services to the
government and to the banking system. If a group of countries have a common
currency, for example the euro, they also share a central bank, such as the
European Central Bank of Frankfurt.

Some central banks are responsible for monetary policy – trying to control
the rate of inflation to maintain financial stability. This involves changing the
interest rates. The aim is to protect the value of the currency – what it will
purchase at home and in other currencies.

In many countries, the central bank supervises and regulates the banking
system and the whole financial sector. It also collects financial data and publishes
statistics, and provides financial information for consumers. In most countries, the
central bank prints and issues currency – putting banknotes into circulation. It also
participates in clearing cheques settling debts among commercial banks.

The central bank and the commercial banks

How exactly does the central bank supervise the commercial bank?
Commercial banks have to keep reserves – a certain amount of their deposits –
for customers who want to withdraw their money. These are held by the central
bank, which can also change the reserve-asset ratio (= the minimum percentage
of its deposits a bank has to keep in its reserves).

If one bank goes bankrupt, it can quickly affect the stability of the whole
financial system. And if depositors think a bank is unsafe, they might try to
withdraw their money. If this happens, it is called a bank run or a run on the bank
and the bank will quickly use up its reserves. Central banks can act as lender of
last resort, which means lending money to financial institutions in difficulty to
allow them to make payments. But central banks don’t always bail out or rescue
banks in difficulty, because this could lead banks to take risks that are too big.
 55

Central banks and exchange rates

Central banks manage a country’s reserves of gold and foreign currencies. They
can try to have an influence on the exchange rate (=the price at which their
currency can be converted into other currencies). They do this by intervening on
the currency markets, and moving the rate up or down by buying and selling their
currency. This changes the balance of supply – how much is being sold – and
demand – how much is being bought.

PRACTICE

Exercise 1 Match the two parts of the sentences:

a. The central bank will sometimes lend money

b. Banks would probably start taking too many risks
c. Central banks are usually responsible for
d. The central bank can alter
e. There will be low and stable inflation

1. if they could always be sure of rescue by the central bank.

2. if there is a run on a commercial bank.
3. if monetary policy is successful.
4. printing and distributing banknotes.
5. the amount of money commercial banks are able to lend.

Exercise 2 Fill in the gaps with words from the The functions of central banks
section of the text given above:

Today the Federal Reserve’s duties fall into four general areas:

 conducting the nation’s …………………………………….. policy;

 ……………………………………………… and regulating banking institutions and
protecting the credit rights of consumers;
 maintaining the……………………………………of the financial system; and
 56

 providing certain …………………………………………..services to the US

government, the public, financial institutions, and foreign official
institutions.

Exercise 3 Make word combinations by using a word from each box. One
word can be used twice. Then use the word combinations to complete the
sentences below:

bank markets

currency run

exchange system

financial policy

monetary rate

stability

1. ………………… ……………………, including setting interest rates, is designed to

maintain ………………………… …………………... .
2. If there’s a…………………………… and the bank goes bankrupt, this can have a
rapid effect on the whole ………………….. ………………………… .
3. On one day in 1992, the bank of England lost over £1 billion (more than a
half of the country’s foreign reserves) in the ……………… ……………………,
trying to protect the ………………. of the pound.

Is the central bank in Romania independent from the government? Write

down a short presentation on its powers and responsibilities.

COURSE NOTES
 57

UNIT ELEVEN

MONEY SUPPLY AND CONTROL

Measuring money

Money supply is the stock of money and the supply of new money. The
currency in circulation – the coins and notes that people spend – make up only a
very small part of the money supply. The rest consists of bank deposits. There are
different ways of measuring the money supply. It depends on whether you
include time deposits – bank deposits that can only be withdrawn after a certain
period of time. The smallest measure is called narrow money. This only includes
currency, and sight deposits – bank deposits that customers can withdraw
whenever they like. The other measures are of broad money. This includes saving
deposits and time deposits, as well as money market funds, certificates of
deposit, repurchase agreements.

To measure money, you also have to know how often it is spent in a given
period. This is money velocity of circulation – how quickly it moves from one
institution or bank account to another. In other words, the quantity of money
spent is the money supply times its velocity of circulation.

Changing the money supply

The monetary authorities – sometimes the government, but usually the

central bank – use monetary policy to try to control the amount of money in
circulation and its growth. This is in order to prevent inflation – the continuous
increase in prices which reduces the amount of things that people can buy.

 They can change the discount rate at which the central bank lends short-
term funds to commercial banks. The lower the interest rates are, the more
money people and businesses borrow, which increases the money supply.
 They can change commercial banks’ reserve asset ratio. This sets the
percentage of deposits a bank has to keep in its reserves (for depositors
 58

who wish to withdraw their money), which is generally around 8%. The
more a bank has to keep, the less it can lend.
 The central bank can also buy or sell treasury bills in open-market
operations with commercial banks. If the banks buy these bonds, they have
less money (and so can lend less), and if the central bank buys them back,
the commercial banks have more money to lend.

Monetarism

Monetarist economists are those who argue that if you control the money
supply, you can control inflation. They believe the average levels of prices and
wages depend on the quantity of money in circulation and its velocity of
circulation. They think that inflation is caused by too much monetary growth: too
much new money being added to the money stock. Other economists disagree.
They say the money supply can grow because of increased economic activity:
more goods being sold and more services being performed.

PRACTICE

Exercise 1 Are the following true or false? Refer to Measuring money and
Changing the money supply sections:

a. Most money exists on paper, in bank accounts, rather than in notes and
coins.
b. Banking customers can withdraw time deposits whenever they like.
c. The amount of money spent is the money supply multiplied by its velocity
of circulation.
d. Central banks can try to control the money supply.
e. Commercial banks can choose which percentage of their deposits they keep
in their reserves.

Exercise 2 Use the words below to make word combinations with “money”. Then
use the word combinations to complete the sentences. Refer to Measuring
money section of the text:

broad/ supply/ narrow

 59

a. The …………… …………… is the existing stock of money plus newly created
money.
b. The smallest or most restrictive measure is ……………... …………………… .
c. …………………… …………………………. is a measure of money that includes
savings deposits.

Exercise 3 Find three nouns in Changing the money supply and Monetarism
sections that make word combinations with “monetary”. Then use the word
combinations to complete the sentences below:

…………………………

monetary …………………………

…………………………

a. The ………………… …………………… are the official agencies that can try to
control the quantity of money.
b. The attempt to control the amount of money in circulation and the rate of
inflation is called ………………….. ………………………… .
c. Monetarism is the theory that the level of prices is determined by
………………… …………………. .

What is wrong with having inflation? What is the current inflation rate in
your country? Has this changed a lot over the past 20 years? What factors have
caused any changes?

COURSE NOTES

UNIT TWELVE
 60

STOCKS AND SHARES

Stocks, shares and equities

Stocks and shares are certificates representing part ownership of a company. The
people who own them are called stockholders and shareholders. In Britain, stock
is also used to refer to all kinds of securities, including government bonds. The
word equity or equities is also used to describe stocks and shares. The places
where the stocks and shares of listed or quoted companies are bought and sold
are called stock markets or stock exchanges.

Going public10

A successful existing company wants to expand and decides to go public.

The company gets advice from an investment bank about how many shares to
offer and at what price. The company gets independent accountants to produce a
due diligence11 report. The company produces a prospectus12 which explains its
financial position, and gives details about the senior managers and the financial
results13 from the previous years. The company makes a flotation or IPO (i.e.
initial public offering). An investment bank underwrites14 the stock issue.

Ordinary and preference shares

If a company has only one type of share these are ordinary shares. Some
companies also have preference shares whose holders receive a fixed dividend
(i.e. 5% of the shares’ nominal value) that must be paid before holders of ordinary
shares receive a dividend. Holders of preference shares have more chance of
getting some of their capital back if a company goes bankrupt – stops trading
because it is unable to pay its debts. If the company goes into liquidation – has to

10
To go public means a change from a private company to a public limited company (PLC) by selling shares to
outside investors for the first time.
11
Due diligence is a detailed examination of a company and its financial situation.
12
Prospectus is a document inviting the public to buy shares, stating the terms of sale and giving information about
the company.
13
Financial results include details about sales, costs, debts, profits, loses.
14
To underwrite a stock issue means to guarantee to buy the shares if there are not enough other buyers.
 61

sell all its assets to repay part of its debts – holders of preference shares are
repaid before other shareholders, but after owners of bonds and other debts. If
shareholders expect a company to grow, however, they generally prefer ordinary
shares to preference shares, because the dividend is likely to increase over time.

Buying and selling shares

After newly issued shares have been sold (usually by investment banks) for
the first time – this is called primary market – they can be repeatedly traded at
the stock exchange on which the company is listed, on what is called the
secondary market. Major stock exchanges have a lot of requirements about
publishing financial information for the shareholders. Most companies use over-
the-counter (OTC) markets such as NASDAQ in New York and the Alternative
Investment Market (AIM) in London which have fewer regulations. The nominal
value of a share – the price written on it – is rarely the same as its market price –
the price it is currently being traded at on the stock exchange. This can change
every minute during the trading hours, because it depends on the supply and
demand – how many sells and buyers there are. Some stock exchanges have
computerized automatic trading systems that match up buyers and sellers. Other
markets have market makers: traders in stocks who quote bid (i.e. buying) and
offer (i.e. selling) prices. The spread or difference between these prices is their
profit or mark-up. Most customers place their buying and selling orders with a
stockbroker(i.e. someone who trades with the market makers).

New share issues

Companies that require further capital can issue new shares. If these are
offered to existing shareholders first this is known as rights issue – because the
current shareholders have the first right to buy them. Companies can also choose
to capitalize part of their profit or retained earnings. This means turning their
profits into capital by issuing new shares to existing shareholders instead of
paying them a dividend. There are various names for this process, including scrip
issue, capitalization issue and bonus issue. Companies with surplus cash can also
choose to buy back some of their shares on the secondary market. These are
often called own shares.
 62

Categories of stocks and shares

Investors tend to classify the stocks and shares available in the equity
markets in different categories:

 Blue chips: stocks in large companies with a reputation for quality,

reliability and profitability. More than two-thirds of all blue chips in
industrialized countries are owned by institutional investors such as
insurance companies and pension funds.
 Growth stocks: Stocks that are expected to regularly rise in value. Most
technology companies are growth stocks, and don’t pay dividends, so the
shareholders’ equity or owners’ equity increases. This causes the stock
price to rise.
 Income stocks: Stocks that have a history of paying consistently high
dividends.
 Defensive stocks: Stocks that provide a regular dividend and stable
earnings, but whose value is not expected to rise or fall very much.
 Value stocks: Stocks that investors believe are currently trading for less
than they are worth – when compared with the companies’ assets.

PRACTICE

Exercise 1 Match the words given below with their corresponding definitions (a-j):

bankrupt prospectus

going public ordinary shares

flotation preference shares

investors stock exchange

liquidation to underwrite

a. a document describing a company and offering stocks for sale

b. a market on which companies’ stocks are traded
 63

c. buyers of stocks
d. changing from a private company to a public one, quoted on a stock
exchange
e. the first sale of a company’s stocks to the public
f. to guarantee to buy newly issued shares if no one else does
g. shares that pay a guaranteed dividend
h. the most common form of shares
i. insolvent, unable to pay debts
j. the sale of the assets of a failed company

Exercise 2 Are the following True or False? Refer to the above text:

a. New companies can apply to join a stock exchange. →

b. Investment banks sometimes have to buy some of the stocks in an IPO.→
c. The due diligence report is produced by the company’s own accountants.→
d. The dividend paid on preference shares is variable.→
e. If a company goes bankrupt, the first investors to get any money back are
the holders of preference shares. →

Exercise 3 Make word combinations using a word of phrase given below:

offer an issue

go a prospectus

produce shares

underwrite public

Fill in the gaps with the correct forms of the word combinations to complete the
sentences:

After three very profitable years, the company is planning to (1)…………… (2)
…………………… and we’re (3) …………………….. 100,000 (4) …………………… for sale.
We’ve (5)…………………….a very attractive (6)…………………..., and although a leading
 64

investment bank is (7)……………….the (8) ……………………., we don’t think they have

to buy any of the shares.

Exercise 4 Complete the sentences. Please refer to New share issues and
Categories of stocks and shares sections:

a. A stock whose price has suddenly fallen a lot after a company had bad
news, could be a ……………………… as it will probably rise again.
b. The stocks of food, tobacco and oil companies are usually
……………………………….. as demand doesn’t rise or fall very much in periods of
economic expansion or contraction.
c. Pension funds and insurance companies, which cannot take risks, usually
only invest in…………………………. .
d. This stock used to be considered an………………………………., but two years ago
the company started to cut its dividend and reinvest its cash in the
business.
e. The financial director announced a forthcoming ……………………………….. of
new shares to existing shareholders.
f. The company is planning a ……………………………. of one additional share for
every three existing shares.
g. We have bought back 200,000 ordinary shares, which increases the value of
our ……………………. to 623,000 euros.

COURSE NOTES

UNIT THIRTEEN

SHAREHOLDERS
 65

Investors

Stock markets are measured by stock indexes (or indices) such as Dow Jones
Industrial Average (DJIA) in New York, and the FTSE 100 index (often called
“Footsie”) in London. These indexes show changes in the average prices of a
selected group of important stocks. There have been several stock market crashes
when these indexes have fallen considerably on a single day. Financial journalists
use some animal names to describe investors:

 Bulls are those investors who expect prices to rise;

 Bears are those investors who expect them to fall;
 Stags are those investors who buy new share issues hoping that they will
be over-subscribed. This means they hope there will be more demand than
available stocks, so the successful buyers can immediately sell their stocks
at a profit.

A period of time when most of the stocks on a market rise is called a bull
market. A period when most of them fall in value is called a bear market.

Dividends and capital gains

Companies that make a profit either pay a dividend to their stockholders, or

retain their earnings by keeping the profits in the company. This causes the value
of the stocks to rise. Stockholders can then make a capital gain – increase the
amount of money they have by selling their stocks at a higher price than they paid
for them. Some stockholders prefer not to receive dividends because the tax they
pay on capital gains is lower than the income tax they pay on dividends. When an
investor buys shares on the secondary market, they are either cum div (i.e. the
investor will receive the next dividend the company pays), or ex div (i.e. they will
not). Cum div share prices are higher as they include the estimated value of the
coming dividend.

Speculators
 66

Institutional investors generally keep stocks for a long period, but there are
also speculators – people who buy and sell shares rapidly hoping to make a profit.
These include day traders – people who buy stocks and sell them again before the
settlement day. This is the day on which they have to pay for the stocks they
purchased, usually three business days after the trade was made. If day traders
sell at a profit before the settlement day, they never have to pay for their shares.
Day traders usually work with online brokers on the internet who charge low
commissions – fees for buying or selling stocks for customers. Speculators who
expect a price to fall can take a short position which means agreeing to sell stocks
in the future at their current price before they actually own them. They then wait
for the price to fall before buying the selling the stocks. The opposite – a long
position – means actually owing a security or other asset that is buying it and
having it recorded in one’s account.

PRACTICE

Exercise 1 Answer the questions by referring to the information given in the

above text:

a. How do stags make a profit?

b. Why do some investors prefer not to receive dividends?

Exercise 2 Make word combinations using a word or phrase from each column.
Some words can be used twice:

make a capital gain

own a dividend

pay earnings

receive a position

retain a profit
 67

take securities

tax

Exercise 3 Fill in the blanks with the word combinations from Exercise 2:

a. I……………………….. less ………………………..on capital gains than on income. So,

as a shareholder, I prefer not to………………….. a ………………………… . If the
company ……………………. its ………………………, I can ……………………….a
………………………….by selling my shares at a profit instead.
b. Day trading is exciting because if a share price falls, you
can………………………….a…………………..by ………………………a short……………………..
. But it’s risky selling…………………….that you don’t even …………………………. .

COURSE NOTES

UNIT FOURTEEN
 68

ASSET MANAGEMENT

Allocating and diversifying assets

Asset management is managing financial assets for institutions or

individuals. Pension funds and insurance companies manage huge amounts of
money. Private banks specialize in managing portfolios of wealthy individuals.
Unit trusts ( BE) or mutual funds (AE) invest money for small investors in a range
of securities. Asset managers have to decide how to allocate funds they’re
responsible for: how much to invest in shares, mutual funds, bonds, cash, foreign
currencies, precious metals, or other types of investments. Asset allocation
decisions depend on objectives and size of the portfolio. The portfolio’s objectives
determine the returns expected or needed, and the acceptable level of risk. The
best way to reduce exposure to risk is to diversify the portfolio – easier and
cheaper for a large portfolio than a small one.

Types of investor

Investors have different goals or objectives:

 Some want regular income from the investments – less concerned with the
size of their capital.
 Some want to preserve their capital and, thus, avoiding risks. If the goal is
the capital preservation, the asset manager usually allocates more money
to bonds than stocks.
 Others want to accumulate or build up capital by taking more risks. If the
goal is the growth or capital accumulation, the portfolio will probably
include more shares than bonds. Shares have better profit potential than
bonds, but are also more volatile which means that their value can increase
or decrease more in a short period of time.

Active and passive investment

 69

Some asset managers (or their clients) choose an active strategy (i.e.
buying and selling frequently, adapting the portfolio to changing market
circumstances. Others use a passive strategy (i.e. buying and holding securities,
leaving the position unchanged for a long time). Nowadays, there are lots of
index-linked funds(BE) or tracker fund (AE) which simply try to track or follow the
movements of a stock market index. They buy lots of different stocks in the index,
so if the index goes up or down, the value of the fund will, too. They change much
lower fees than actively managed accounts and usually do just as well. Investors
in these funds believe that you can’t regularly outperform the market (i.e. make
more than average returns from the market).

PRACTICE

Exercise 1 Find nouns in Allocating and diversifying assets and Types of investor
sections that can be used to make word combinations with the verbs given below:

accumulate …………………………….
allocate…………………………..

diversify …………………………………
manage…………………………..

Fill in the gaps with the above word combinations:

a. I don’t want to pay a bank to …………………..my……………………….. I can do it

myself.
b. I have lots of different types of securities because I decided
to………………………….my………………….. .
c. As an asset managers, I discuss clients’ needs and objectives and then we
decide how to……………………….their…………………………. .
d. If my clients want to ……………………… …………………………, I take more risks
and buy a lot of stocks.

Exercise 2 Match the investment goals (1-3) with the statements (a-c). Refer to
Types of investor:
 70

1. capital preservation
2. growth
3. income

a. “I want to accumulate wealth, but I know that this means taking risks and
buying securities with volatile prices that could go down as well as up.”
b. “I want a regular return every year because I need that money even if this
means I might have to risk losing some of my capital.”
c. “I definitely don’t want to risk any of my capital even if this means that
some years I get a very low return.”

Exercise 3 Match the two parts of the sentences. Refer to the sections of the
above text:

a. The value of index-linked funds will change frequently.

b. Private banks
c. Asset managers buy more bonds than shares
d. Mutual funds
e. Asset managers buy more shares than bonds

1. if the client wants to avoid risks.

2. diversify the money of small investors.
3. if the whole market is volatile.
4. manage the investments of rich investors.
5. if the client hopes to accumulate capital.

Discussion topic

What particular skills and abilities do you think an asset manager needs? Do you
think you have them? Would you like to do this job?

COURSE NOTES
 71

UNIT FIFTEEN

HEDGE FUNDS AND STRUCTURED PRODUCTS

Hedge funds

Hedge funds are private investment funds for wealthy investors, run by
partners who have made big personal investments in the fund. They pool or put
together their money and investors’ money and trade in securities and
derivatives15, and try to get high returns whether markets move up or down. They
are able to make big profits, but also big losses if things go wrong. Despite their
name, hedge funds do not necessarily use hedging techniques – protecting
themselves against future price changes. In fact, they generally specialize in high
risk, short – term speculation on stock options, bonds, currencies and derivatives.
Because they are private, hedge funds do not have to follow as many rules as
mutual funds.

Leverage, short-selling and arbitrage

Most hedge funds use gearing or leverage which means borrowing money
as well as using their own funds to increase the amount of capital available for
investment. In this way, the fund can hold much larger positions or investments.
Hedge funds invest where they see opportunities to make short-term profits,
generally using a wide range of derivative contracts such as options16 or swaps.
They take a long position by buying securities that they believe will increase in
value. At the same time, they sell securities they think will decrease in value, but
which they have not yet purchased. This is called taking a short position. In the
event the price does fall, they can buy them at a lower price, and then sell them
at a profit. Hedge funds also use arbitrage which means simultaneously
purchasing a security or currency in one market and selling it, or a related
15
Derivatives are financial products whose value depend on or is derived from another financial product such as a
stock, a stock market index, or interest rare payments. They can be used to manage the risks associated with
securities in order to protect against fluctuations in value or to speculate. The main kinds of derivatives are
options and swaps.
16
Options are like futures (or standardized contracts) except they give the right or the possibility but not the
obligation to buy or sell an asset in the future (e.g. 1,000 General Electric stocks on March 31 st).
 72

derivative product in another market at a slightly higher price. In this way, the
investors can profit from price differences between the two markets. Because the
price difference is usually very small (and would be zero if markets were perfectly
efficient), a huge volume is required for the arbitrageur to make a significant
profit.

Structured products

Investors who do not have sufficient funds to join a hedge fund can buy
structured products from banks. These are customized (i.e. individualized or non-
standard) over-the-counter financial instruments. They use derivative products
(such as futures, options warrants etc.) in away similar to hedge funds depending
on the customer’s requirements and changes in the markets.

PRACTICE

Exercise 1 Match the verbs given below with their definitions. Refer to Hedge
fund and Leverage, short-selling and arbitrage sections in the above text.

to leverage …………………………………………………

to take a long position…………………………………..

to pool …………………………………………………………

to take a short position………………………………..

a. to put several people’s resources together for shared use;

b. to purchase securities expecting their price to rise;
c. to use borrowed money as well as one’s own money to increase the size of
one’s investments;
d. to sell securities that one has not yet purchased, anticipating that their
price will fall.

Exercise 2 Are the following statements True or False? Refer to the above text:

a. Hedge funds are so named because they protect against loses. →

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b. Hedge funds use their investors’ money as well as borrowed money.→

c. Hedge funds concentrate on making long-term investments.→
d. The fact that investors can make a profit from arbitrage shows that markets
are not perfectly efficient.
e. Structured products are individualized financial instruments offered by
hedge funds.

Exercise 3 Read the advertisement for structured products from the UBS website
and then answer the questions below:

The most widely used structured products can be classified into four broad
categories according to their intended purpose. Derivatives are used in order to
achieve the desired structures, either in combination with the underlying securities
or other derivative securities. The major groupings are:

 Capital Protection – This may be in the form of hedging, utilizing forwards,

futures or swaps contracts, or it could be in the form of insurance using
options.
 Yield Enhancement – This is usually achieved by writing(selling) options
over an underlying asset. The premium from the written option provides the
additional income yield.
 Full Participation – These are products that have similar risk characteristics
as the underlying assets, but which allow the client the convenience of being
able to trade unusual baskets of assets such as foreign stock indices or a
specific market sector index.
 Leverage – These are generally products such as warrants which require a
low initial investment but which allow the buyer to participate in the
purchase or sale of a significantly larger investment at a predetermined price
in the future.
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N.B. These products may carry higher risks than other classes of investment. They
are not suitable and are, therefore, not available to every investor.

Which group of structured products would you use if:

1. you wanted the chance of big returns with only a small investment now?
2. you didn’t want to lose any of your money?
3. you wanted to trade in a particular combination of assets?
4. you wanted the highest return?

Discussion topic

If you had a lot of money to invest, would you take the risk of joining a hedge
fund? If not, why not?

COURSE NOTES

UNIT SIXTEEN

MULTIPLE CHOICE TESTS

 75

Choose one right answer:

1. Traditionally, the main types of banking are ……………….. and

…………………….. .
a. central/merchant
b. central/commercial
c. central/private

2. In ……………………………..banking, business involves …………………… money to

……………………… companies and sometimes even governments.
a. commercial/lending/individuals
b. private/borrowing/legal persons
c. commercial/granting/legal persons

3. Money in notes and coins is called……………………..

a. cash.
b. capital.
c. reserves.

4. Money borrowed from a bank is a ……………………… .

a. deposit.
b. loan.
c. income.
d. credit.

5. Checking accounts are also called……………………………. .

a. current accounts
b. deposit accounts
c. sight accounts

6. When a bill is ………………………………, it is dishonoured and the drawer can

take legal action against the…………………………….. .
a. unpaid/payee
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b. unpayed/drawee
c. unpaied/payee
d. unpaid/drawee

7. The card…………………………….. determines the minimum payment which

must be…………………….every month.
a. Borrower/done
b. issuer/made
c. owner/made
d. issuer/done

8. Anyone may open a checking account by providing a ………………………..of

identity and specimen ……………………….. .
a. prove/signature
b. proof/signature
c. proove/signing
d. evidence/sign

9. The abbreviation for ATM is……………………… .

a. Automated Transfer Machine
b. Automatic Teller Machine
c. Automation Telling Machine
d. Automatic Time Machine

10.Mark Roberts, who is British, considers getting a life……………………….. .

a. Insurance
b. assurance
c. assurance
d. ensurance

11.Through the stock …………………………………, people buy …………………………

from companies.
a. exchanging/dividends
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b. exchanges/sharing
c. exchange/dividents
d. exchange/shares

12.Banks also help people to ……………………………. money.

a. transform
b. translate
c. transfer
d. transgress

13.Banks can grant ………………………… to their customers.

a. loans
b. laws
c. deposits
d. accounts

14.Traditionally, the main types of banking are the ………………………………… and

the central ones.
a. commercially
b. commercial
c. commerce
d. commerciall

15.You can fill in a …………………………… as we accept such means of payment.

a. chec
b. cec
c. cheque
d. tchech

16.The Board of Directors is ………………………. for making policy decisions in the

banking system.
a. responsabil
b. responsible
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c. agreed

17.Pension funds …………………………….. income to live on after……………………… .

a. are/office hours
b. furnish/retirement
c. provide/retirement

18.An “overdraft” is………………………………… .

a. an amount by which the balance in a current account exceeds the value
of a cheque drawn from it.
b. an amount by which the value of a cheque exceeds the balance in the
current account.
c. an excessive balance in a current account.

19.Borrowed money that has to be paid back

constitutes…………………………………. .
a. debt
b. fund
c. subsidy

20.A person’s money in a business is known as his or her……………………. .

a. deposit
b. fund
c. stake

21.A synonym for a lender is a ……………………… .

a. payer
b. creditor
c. debtor
d. owner

22.The income received by someone who lends money is

called…………………….. .
 79

a. dividend
b. credit
c. interest
d. share

23.A bank account held in the names of two or more people is

called……………………… .
a. a common account
b. a joint account
c. an union account

24.If you don’t have enough cash to pay the whole price on the spot, you can
pay by…………………………. .
a. monthly instalments
b. weakly installments
c. monthly installments

25.My salary is paid directly into a low-interest……………………………... .

a. current account
b. deposit account
c. curent account

26.We have a strict ……………………….: all accounts to be paid in 28 days.

a. police
b. politics
c. policy

LANGUAGE REFERENCE

BRITISH AND AMERICAN VOCABULARY

 80

BRITISH ENGLISH AMERICAN ENGLISH

Annual General Meeting (AGM) Annual Meeting of Stockholders
Balance sheet Balance sheet/statement of financial
position
Base rate Prime rate
Building society Savings and loans association
Cash dispenser ATM (Automatic Teller Machine)
Chairman President
Cheque Check
Convertible share Convertible bond
Corporation tax Income tax
Cost centre Cost center
Creditors Accounts payable
Current account Checking account
Debtors Accounts receivable
Depreciation Depreciation/amortization
Extraordinary General Meeting (EGM) Special Meeting
Financial year Fiscal year
Fixed assets Property
Flotation Initial public offering (IPO)
Gearing Leverage
Labour Labor
Managing director Chief Executive Officer (CEO)
Merchant bank Investment bank
Net profit Net income
Note or banknote Bill
Ordinary shares Common stock
Overheads Overhead
Own shares Treasury stock
Petrol Gasoline/gas
PLC Listed company
Preference shares Preferred stock
Profit and loss account Income statement
Shareholder Stockholder
Shares Stocks
Shopping centre Shopping mall/mall
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Social security Welfare

Stock Inventory
Traveller’s cheque Traveler’s cheque

TEMA PE PARCURS (se va preda în ziua colocviului pe foaie în format

A4)

1. Read the text by Peter Drucker summarizing the different functions of

management:
 82

Management is important. The success and failure of companies, public sector

institutions and services, not-for-profit organizations, sports teams, and so on
often depends on the quality of their managers. But what do managers do? One
well-known classification of the tasks of a manager comes from Peter Drucker.
Drucker was an American business professor and consultant who is often called
things like ”The Father of Modern Management.”

Drucker suggested that the work of a manager can be divided into five tasks:
planning (setting objectives), organizing, integrating (motivating and
communicating), measuring performance, and developing people.

First of all, senior managers and directors set objectives, and decide how their
organization can achieve or accomplish them. This involves developing strategies,
plans and precise tactics, and allocating resources of people and money.

Secondly, managers organize. They analyze and classify the activities of the
organization and the relations among them. They divide the work into
manageable activities and then into individual tasks. They select people to
perform these tasks.

Thirdly, managers practise the social skills of motivation and communication.

They also have to communicate objectives to the people responsible for attaining
them. They have to make the people who are responsible for performing
individual tasks form teams. They make decisions about pay and promotion. As
well as organizing and supervising the work of their subordinates, they have to
work with people in other areas and functions.

Fourthly, managers have to measure the performance of their staff to see

whether the objectives or targets set for the organizationas as a whole and for
each individual member of it are being achieved.

Lastly, managers develop people – both their subordinates and themselves. A

company’s top managers also have to consider the future, and modify or change
the organization’s objectives when necessary, and introduce the innovations that
will allow the business to continue. Top managers also have to manage a
business’ relations with customers, suppliers, distributors, bankers, investors,
 83

neighbouring communities, public authorities, and so on, as well as deal with any
crisis that arises.

Although the tasks of a manager can be analysed and classified in this fashion,
management is not entirely scientific. There are management skills that have to
be learnt, but management is also a human skill. Some people are good at it, and
some others are not. Soem people will be unable to put management techniques
into practice. Others will have lots of technique, but few good ideas. Excellent
managers are quite rare.

2. Match up the following words and definitions:

a. Consultant
b. Crisis
c. Innovation
d. Objective
e. Promotion
f. Public sector
g. Strategy
h. Subordinate

1. a plan for achieving success

2. a new idea or method
3. a person with a less important position in an organization
4. a person who provides expert advice to a company
5. a situation of danger or difficulty
6. something you plan to do or to achieve
7. the section of the economy under government control
8. when someone is raised to a higher or more important position

3. The above text contains a number of common word-combinations. Use

them to fill in the gaps in the sentences given below:

allocate resources/ deal with crises/ make decisions/ perform taks/

measure performance/ set objectives/ supervise subordinates
 84

a. After an organization has............................................., it has to make sure

that it achieves them.
b. Managers have to find the best way to....................................... all the
human, physical and capital .................................... available to them.
c. Some people .......................... ................................ better on their own
while others work better in teams.
d. Managers ............................. the work of their .......................... and try to
develop their abilities.
e. Managers .................................. the............................ of their staff to see
whether they are reaching their targets.
f. Top managers have to be prepared
to................ ..................... ...................... – if they occur and then have
to ................................. quick ................................ .

4. Change each word given at the end of each sentence or phrase to a related
word in order to fill the gap in the sentence correctly:
Example: We sell a very large range of goods, including fast moving
consumer goods such as canned foods and cleaning materials.
consume

a. It is not only food......................................... which have a very short shelf

life. Fashion items quickly become out of date.
produce
b. If you are not completely satisfied with any product..............................in
this store, you may return it and receive a complete refund or exchange it
for a different one. Purchaser
c. Sometimes all these ........................turn out to be rather boring. Formal
d. On the 4th of July .............................. people watched the fireworks.
Count
e. This world ............................. hasn’t been very efficient so far. Organise
f. The .......................... use of any fuel will save your money. Economy
g. We are interested in the ....................... of this relationship. Develop
 85

h. He boasted about his ........................ of several estates. Owner

i. I am positive that their house is not for........................ . Sell
j. A .......................... reform is the only solution to this inflation.
Money

5. Finish each of the follwing sentences in such a way that it means exactly
the same as the sentence printed before it:
a. Perhaps she gave in too soon.
She..........................................................................................
b. He didn’t find a taxi so he missed the train.
If..............................................................................................
c. I will give you a rise provided you work on Saturdays, too.
Unless.....................................................................................
d. We came to the station in a taxi.
A taxi......................................................................................
e. Jogging early in the morning gives him pleasure.
He .........................................................................................
f. I’ll talk to her first, then I’ll think about it.
I’ll think about it...................................................................
g. Paying cash isn’t necessary.
One.......................................................................................
h. He didn’t know how to make the engine run again.
He wasn’t.............................................................................
i. It is several years since I last met him.
I............................................................................................
 86

References

Barker, C., Boost Your Vocabulary (4), Pearson Education Ltd., 2002

Emerson, P., Business Vocabulary Builder, Macmillan, 2009

Flinders, S., Professional English. Business: Intermediate, Penguin English,

Pearson Education Limited, 2002
 87

Flower, J., Build Your Vocabulary (1), Language Teaching Publications, 1989

Greenall, S., Pye, D., Reading 1, Cambridge University Press, 1991

Harmer, J., Just. Reading & Writing (Intermediate), Marshall Cavendish Ltd., 2004

Hollinger, A., Test Your Business English Vocabulary, Teora, București, 2000

Ionescu, L., English for Banking. Advanced level, Editura Economică, București,
1999

Mann, M., Taylore-Knowles, S., Use of English for Advanced, Macmillan, 2009

Marcheteau, M., Berman, J.P., Savio, M., Daube, J.P., Delbard, O., Demazet, B.,
Engleza pentru Economie. Business and Economics, Editura Teora, 2005

Mascull, B., Business Vocabulary in Use, Cambridge University Press, 2002

Misztal, M., Test Your Vocabulary, Editura Teora, 1994

Radice, F., English for Banking, MacMillan Publishers Ltd., 1995

Redman, S., English Vocabulary in Use: Pre-Intermediate and Intermediate,

Cambridge University Press, 2010

*** Test your Professional English. Business, Penguin Engish Guides, Pearson
Education Ltd., England, 2002

Watcyn – Jones, P., Test Your Vocabulary (2), Penguin English, 1979

Watcyn – Jones, P., Johnston, O., Test Your Vocabulary (3), Penguin English,
Pearson Education Ltd., 2002
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