...Explain the main reasons why financial markets and financial intermediaries exist. Why are banks special? A bank is a financial intermediary that offers loans and deposits, and payment services. In the past decade the banks have become a very important part of the economy. Banks are financial intermediaries, financial intermediaries and financial markets main role is to provide a system by which funds are transferred and allocated to their most productive opportunities. Banks need money and they get the money from people who invest in the bank and people who save their money in the bank, but the money does not stay in the bank it has to be allocated to people or companies with deficit funds (borrowers). In doing so they increase the economic efficiency by promoting a better distribution of resources. How can the transfer of wealth from surplus units to deficit units occur? There are two ways that the transfer of wealth can happen its either direct finance or indirect finance. Direct finance is the transfer of funds from surplus units to deficit units via financial markets. Indirect finance on the other hand has a different procedure as the transfer of funds does not occur directly from lender to borrowers as the financial intermediaries step in. Why is there a need for financial markets and why do they exist? Financial Market exists in order to facilitate the relations between providers of capital such as savers and investors and users of capital such as companies and...
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...Financial Intermediation and Credit Policy in Business Cycle Analysis∗ 1 Introduction To motivate interest in a paper on financial factors in business fluctuations it use to be necessary to appeal either to the Great Depression or to the experiences of many emerging market economies. This is no longer necessary. Over the past few years the United States and much of the industrialized world have experienced the worst financial crisis of the post-war. The global recession that has followed also appears to have been the most severe of this era. At the time of this writing there is evidence that the financial sector has stabilized and the real economy has stopped contracting and output growth has resumed. The path to full recovery, however, remains highly uncertain. The timing of recent events, though, poses a challenge for writing a Handbook chapter on credit market frictions and aggregate economic activity. It is true that over the last several decades there has been a robust literature in this area. Bernanke, Gertler and Gilchrist (BGG, 1999) surveyed much of the earlier work a decade ago in the Handbook of Macroeconomics. Since the time of that survey, the literature has continued to grow. While much of this work is relevant to the current situation, this literature obviously did not anticipate all the key empirical phenomena that have played out during the current crisis. A new literature that builds on the earlier work is rapidly cropping up to address...
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...securities, security receipt or any other instruments so declared by the Central Government. What is the function of Securities Market? Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’. Which are the securities one can invest in? Shares Government Securities Derivative products Units of Mutual Funds etc., are some of the securities investors in the securities market can invest in. Regulator Why does Securities Market need Regulators? The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors...
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...cash flow to a firm’s financial claimants are unaffected by these choices; (2) Efficient markets Frictionless and complete markets are clearly sufficient for capital structure irrelevant. MM II Corporation need not be concerned about the market conditions and needs of investors when designing their financial structures Definition – the cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium that is proportional to the market value of debt-equity ratio The process of tailoring or repacking securities is costless and competitive MM III With perfect capital markets, financial transactions neither add nor destroy value, but instead represent a repacking of risk The academic commodity has concluded that thinking about the market condition is unlikely to help understand observed capital structures. Market imperfections are second order effect and that financial intermediaries can more efficiently address security design issues. The implicit assumption is that if investors do demand specially tailored securities, financial intermediaries are better positioned to capture the rents associated with creating them Practitioners tend to talk about whether “market conditions” favor debt vs. equity financing High Yield Debt Market The explanation of the phenomenon because of a coordination failure that can be understood if we view the market as consisting of segmented investor clienteles. High yield debt markets require analysts that...
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...is financial intermediation? 2 a) The brokerage function: 2 b) The asset transformation function 2 c) The Risk evaluation and management function 3 Why are financial intermediaries important? 3 THEORIES OF FINCANCIAL INTERMEDIATION 3 Informational Asymmetries 3 Transaction Costs Theory 4 Regulation 4 HISTORICAL DEVELOPMENT 5 Origin of Financial Intermediation 5 EVOLUTION OF FINANCIAL INTERMEDIATION 6 THE FUTURE OF FINANCIAL INTERMEDIATION 7 TRENDS IN FUTURE FINANCIAL INTERMEDIATION 8 Regulation (Deregulation) 8 Revised regulatory framework 8 Revised reporting standards and accounting 8 International Monitoring and Oversight 9 Effects on Insurance 9 Technology 9 New financial innovations 9 Globalization 9 Presence 9 Scale 10 Increased Government involvement 10 IMPLICATIONS 11 CONCLUSION 11 BIBLIOGRAPHY 12 FINANCIAL INTERMEDIATION INTRODUCTION Financial Intermediation is a crucial and pervasive feature of all world economies. But as Franklin Allen (2001) observed in his AFA presidential Address, there is a widespread view that financial intermediaries can be ignored because they have no real effect. But this cannot be true, in my opinion, savings-investment process, corporate finance decisions, and consumer portfolio choices cannot be understood without studying financial intermediation. So what is financial intermediation? When talking about financial markets we generally are talking about two kinds of markets, capital...
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...Lecture 1 Capital Market and Long Term Finance * Capital Formation (Raise capital to increase their assets and fund working capital) * Markets * Common Stock (long-term security) * Bonds (long-term security) * Derivatives (long-term security) Financial Markets * Exchanges * Specialists (NYSE has SPECIALISTS maintain an orderly market in a stock at a trading station) * Intermediary Firms (NASDAQ has INTERMEDIARY FIRMS maintain a market for a given share * Publicly Traded (Security, corporations register through the FCC) Forms of Ownership * Partnership * Corporation (Shareholders have limited liability of their own share) * Privately Held * Publicly Trade Common Stock: Is a share in the ownership of the firm Issuer Advantages (the company): 1. Beyond the public offering there are no fixed charges. 2. There is not fixed maturity. 3. Common stock increases the credit worthiness of a firm. 4. Common stock can at times be sold more easily than debt. Issuer Disadvantages (the company): 1. Extends voting rights or control to additional stockholders 2. Gives more owners the right to share income. 3. Initial costs of “underwriting” and distribution are higher than bonds. 4. Changes the debt/equity mix of the firm. 5. Dividends are not deductible form taxable income. (why isn’t dividends a deductible for companies) Investor Advantages (the individual): 1. Participate in growth of firms...
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...Methodology 7 2.1 Theory of international financial center 7 2.2 Theory of bank management mode 8 Part 3 Analysis 10 3.1 Management mode of China Merchants Bank 10 3.21 Industrial structures 10 3.22 Services provide to customers 11 3.23 Source of profit 12 3.24 Financial products 12 3.3 The advantages of China Merchants Bank under the construction of international financial center 13 3.31 History and location 13 3.43 Headquarters circle 15 3.5 The challenges of China Merchants Bank under the construction of international financial center 16 3.52 Competitions from the non-bank financial institutions 17 3.53 Weakness in leading of Shanghai 17 Part4 Evaluation 19 4.1 The transformation of China Merchants Bank 19 4.11 Introduce financial talents 19 4.12Enhance the service satisfaction 21 4.13Adjust the industrial structure 22 4.14 Promote efficiency 22 4.15 Innovative financial products 23 4.2 GFIC analysis and People Factor 24 5. Suggestions 28 5.1 Diversified financial services 28 5.2 Financial personnel policy after the subprime crisis 29 5.3 Make reasonable risk early warning mechanism 30 6. Conclusion 31 7. Bibliography 32 Student statement 33 I hereby declare that the contents of my thesis on 33 Part 1 Introduction and Problem Statement 1.1Introduction In the development of financial globalization, Shanghai is under construction to become one of the international financial centre. In recent years, with the development...
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...OTC market is an important part of multi-layered capital markets, and reflects investment and financing needs of the general concerns of SME. In addition to the main board, OTC market provides more diversification, more flexible transaction methods, and more complicated and customized securitization product. Mostly, the enterprises listed in OTC market are SMEs in the early growth stage, with underperformed corporate governance, management and unpredictable profitability. As a result, the risk of OTC securities, particularly the market risk turns out to be relatively high. With the expansion of GEM and the growth of regional OTC markets, transaction explodes in volume. Therefore, it has become an important issue for the domestic and abroad securities legislation research and practice how to ensure the OTC market sustainable development and protect the investors’ interest. In recent years, although Chinese scholars had conducted in-depth research on the OTC market's regulatory system and learned a lot from foreign market about OTC market construction, there are still problems to further clarify. On our securities practitioners opinion, we comprehensively use the knowledge ranged from civil law, economics sociology to practical experience, study and analysis the OTC market regulation. We will discuss the problem through six thorough sections. The first part analyzes the fundamentals of OTC market establishment, and we particularly contemplate the OTC legislate characteristics. ...
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...Ismail & Sanusi —An Empirical Analysis of Cash Flow and Investment Fluctuations ... Gadjah Mada International Journal of Business January-April 2005, Vol. 7, No. 1, pp. 95—107 AN EMPIRICAL ANALYSIS OF CASH FLOW AND INVESTMENT FLUCTUATIONS USING FIRM-LEVEL PANEL DATA* Abd. Ghafar Ismail Nur Azura Sanusi Since the pioneering work of Gurley and Shaw (1955), the attempt has been done to justify money as a primary focal point of macroeconomic theorizing. However, other researchers argue that variables such as financial development and indicators are also important to be linked with macroeconomic performance. Here, if money can be thought as means of production and consumer goods as the ultimate end toward which production is directed, and then capital also occupies a position that is both logically and temporarily intermediate between original means and ultimate ends. This temporarily intermediate status of capital is not in serious dispute, but its significance for macroeconomic theorizing is rarely recognized. The firms’ decision to acquire funds through debt and equity financings affects the capital structure, and, in the firm’s balance sheet, the impact of capital appears to influence the inventory investment. Hence, the significance of capital structure –induced inventory distortions in the context of firm-level is the basis for our article. The sample for our analysis is compiled from the balance sheets of listed syaria firms in the Kuala Lumpur Stock Exchange for the period...
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...Question 1 – Enron Case: A. Fixed volume at fixed price. – Production companies who use the natural gas as a material in producing their final product. By fixing the price, they insure themselves from increasing prices and can forecast and meet their budgeted costs as well as budgeted profit margins. B. Fixed volume at price tied to a natural gas index. – Speculators who will engage in risky financial transactions in an attempt to profit from fluctuations in the market value of a tradable good. They focus purely on price movements. C. Fixed volume at price tied to a natural gas index and capped at a determined level - Utility companies, who know the required volume and will prefer to purchase contract where prices are tied to a natural gas index, if the prices go down they will not lose money however, at the same time by capping at a determined level they are insuring themselves from increasing prices. Question 2 - Tennessee Valley Authority Case: A. Tennessee Valley Authority (TVA) could add capacity to provide power to its customers without actually building physical plants by purchasing call options. These options would allow TVA the right to exercise the option in order to meet demand. Should there be no demand at that particular time TVA simply would not execute their call options. Main Constraint –since TVA is purchasing physical settlement, the credit rating of suppliers is very important, which means TVA can have option purchase...
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...dissatisfaction on distribution. According to Oxford Dictionary,’ distribution is the transport and supply of goods to various people or places’. Therefore distribution is a marketing activity aimed at taking manufactured goods close to customers. There is direct and indirect distribution. Delta Beverages uses indirect distribution. According to htt.www.com distribution (or place) is the fourth traditional element of the marketing mix. The other three are Product, Price and Promotion. Most businesses use third parties or intermediaries to bring their products to the market. They try to forge a “distribution channel” which can be defined as “all the organizations through which a product must pass between its point of production and consumption” Delta Beverages is no exception as it also heavily relies on stockists and retailers for its products to rich the consumer at a place convenient to him/her. Giving the job of selling products to intermediaries reduces the costs of distribution. Also these distribution channels are specialists in selling. They have the contacts, experience and scale of operation which means that greater sales can be achieved than if the producing business tried to run a sales operation itself. This also brings efficiency and reduced distribution costs. In distribution a number of alternate channels of distribution may be available: we have distributor who sells to retailers, retailer also called dealer or reseller...
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...Midterm 1 WQ08 Midterm 1 WQ08 KEY |1. |Financial intermediaries specialize in the production of money. | FALSE |2. |The brokerage function of an FI reduces transaction and information costs between a corporation and individual which encourages a lower rate of savings | | |than would otherwise exist. | FALSE |3. |Privately placed bonds and equity can be traded on the secondary market because of amendments to Regulation 144A. | TRUE |4. |Negotiable certificates of deposits are distinguished from fixed time deposits by their negotiability and active trading in the secondary markets. | TRUE |5. |The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets. | TRUE |6. |In recent years, the number of commercial banks in the U.S. has been increasing. | FALSE |7. |The credit union industry avoided much of the financial distress of the 1980s because of the short maturity and relatively less credit risk of their | | |assets. ...
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...* Stock Market In Germany operate 8 different types of markets. The most important one is the Frankfort one which represents half of the total volume of market operations in Germany. It is defined as secondary official market , with the aim of the negotiation in exclusivity of convertible stock shares. Its index reference is DAX. The German Stock Market System is called XETRA. It is characterized for its transparency, flexibility and liquidity. More than 16000 securities are dealt through this sock market. The German Stock Market is made up of 8 different markets which are as follow the most important ones; Frankfurt, Berlin, Hamburg, Hannover, Dusseldorf, Munich, Bremen and Stuttgart. There are two additional markets, the telephone market and the extra stock, compound of mainly bonds. Besides the official market, another specialized in trading shares of foreign companies. In Frankfurt operates approximately half of the total volume, although its percentages are lower in the case of securities traded in outside markets. There is no difference between the commercial banking and investment banking, and because of it, entities such as Deutsche Bank perform both functions (taking deposits, made loans and operating in the stock market). * Financial Intermediaries Deutsche Bank. It is a global investment bank the perfect home financial services not only in Germany but worldwide. It is the largest financial institution in Germany, and one of the largest investment...
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...1.Capital structure A capital structure refers to the way a corporation finances its assets through the mix of equity, debt or hybrid securities. The optimal capital structure is the one in which, the market value of the firm is maximized when its cost of capital is minimized. The firm should adopt the EPS- EBIT approach to the capital structure. This approach involves selecting the capital structure that maximizes EPS (Earnings per share) over the expected range of EBIT (Earnings before interest and tax). In this approach, the main emphasis is laid upon the owner’s return that is the earning’s per share. A big disadvantage of this approach is the fact that the earnings are only one of the determinants of shareholder wealth maximization. This method also ignores the impact of risk. Another shortcoming is that it doesn’t maximize the shareholder’s wealth because it fails to consider the risk. 2. Modigliani Miller (MM) Proposition 1 The Modigliani Miller (MM) Proposition 1: The proposition indicates that a change in the business capital structure does not necessarily change the total value of the business. In other words, a business can make a choice to finance its operations either by debt or by distribution of shares. The value of a firm is independent of the capital structure of the firm under certain assumptions. The assumptions are as under- The capital structure does not matter if the investment opportunities are given and there are homogeneous...
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...in Financial Intermediation Ondabu Ibrahim Tirimba Finance and Economics Department, PhD Candidate Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya Abstract This paper aimed at discussing the various roles that pensions play in financial intermediat ion. Descriptive research design was adopted with the population being all the available literature on the online web as pertaining pension funds and also financial intermed iation. Using key word characters, the search in itially identified 50 journals and after a tentative scrutiny, 37 journals were selected in a random sampling manner in o rder to give the birth of this discussion paper. The key objective of this article was to discuss the role of pension funds in financial intermed iation. A mong the roles identified in this paper were; provision of a mechanis m for pooling of funds and subdivision of shares, provision of ways to transfer economic resources, provision of ways to manage uncertainty and control risk, provision of ways to manage uncertainty and control risk, provision of pricing informat ion and the provision of ways to deal with incentive problems. This paper provides practical insights into the roles of pension in financial intermed iation and thus highlighting the key importance of such pension funds into the success of any economy. This paper is one of the very first to recognize the key roles that pension funds play in the 21st century. Keywords Intermediary, Financial Intermediary, Roles...
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