...sFinancial Markets. Homework. Suslova Maria 1) Financial system helps to provide a steady flow of funds from surplus to deficit units as efficiently as possible. Surplus units( individuals,companies etc) wish to invest funds, while deficit units need to borrow them and as there exist enormous amount of heterogeneity between these agents, there appears a need in financial system. Surplus units usually want to make a short terms investment, also they need a compensation for risk and prefer to have an ability to access funds (high liquidity), however deficit units wish to borrow for long term and do not wish to pay too high percents for the loan. For these reasons financial intermediaries appeared in the world. They take short term investments from surplus agents and give long term loans to deficit agents. Due to the law of large numbers they are able to do so and to hold not much liquidity. However there is always an ability of financial crisis and bank run, because of such functions of financial system. 2) There are 5 types of product innovations : Market broading innovations – these work to increase the liquidity of markets by attracting new investors and providing new opportunities for borrowers. Risk-managment innovations – these have the effect of redistributing financial risk exposure from agents that are risk-averse to agents that are willing to undertake the risk. Arbitraging innovations – in these agents exploit arbitrage opportunities...
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