Question

Money is just one of the many financial instruments we can hold as part of our investment portfolios.

The interesting point to think about would be why we tend to save our wealth in the form of money and not as alternative investments.  

Discuss the three factors related to ALTERNATIVE INVESTMENTS that shape the Portfolio Demand for Money. Show whether there is a positive/negative relationship between each factor and the portfolio demand for money and justify why. (1.5 points)

Suppose that as part of the Year of Tolerance Social Program, the UAE Central Bank has recently sent out an email to all commercial banks in the country saying they have LOWERED the interest rate.

Explain whether this would have any impact on the Transactional Demand for money and/or Portfolio Demand for money in the United Arab Emirates. If no, why not? If yes, how? (1 point)

Describe the current economic situation in Venezuela. Discuss why some Venezuelans have returned to the bartering system.

This is despite the fact that we now live in the 21st century where financial innovation is more profound than ever before. (1 point)  

Outline the main differences between the traditional cheques and the managerial cheques.

If you were selling your car, would you prefer to be paid with the traditional cheque or the managerial cheque? Why?

If you were to buy a car, would you prefer to pay the car seller using the traditional cheque or the managerial cheque? Why?   

Answer 1

Depsite alternate investments have lower correlation with other traditional asset classes hence enjoying diversification benefit;here are the 3 factors one may select money over alternate investments-

(1)ILLIQUIDITY-alternate investments are highly illiquid and non marketable whereas money is in ready to use form.in distress times it may be hard to find a buyer for real estate and recieve cash while money faces no problems like these.

(2)HIGH TRANSACTION COSTS-alternate investments have high transaction costs(lawyers,lease etc) and low transparency thus one may find keeping money in the portfolio rather than alternate investments as it requires high managerial incentives making it costly.

(3)DEPRECIATION-alternate investments also may encounter depreciation like depreciation of real estate and property while money doesnt depreciate,so money over alternate investment in a portfolio.