Review 1 - BANK 1005(11941 Derivatives and Securities...

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BANK 1005(11941) Derivatives and Securities Markets Page 1 of 4 Review Activities - Topic 1 (The Financial Markets) Questions and Problems You should answer the following Questions and Problems : 2, 3, 4 and 6 in your textbook. Consider this feedback as a guide toward writing a sound explanation, not as the “best answers”. You do need to employ your learning and thinking to craft a ‘good answer’. Good writing skills will also result in high quality discussions and arguments. I have provided some comments to hopefully assist you in thinking deeper. Learning about the financial markets involves using a “package” of resources and thinking, rather than just learning these “answers”. You need to show real understanding of the issues acquired from your learning and thinking in your explanations/arguments. Often, according to the authors of your book (in the preface), the problems and questions have been chosen to “provoke debate rather than a search for the ‘correct answer’.” Take these questions and the suggested feedback in this spirit! 2. Distinguish between direct and intermediated financing. What factors are driving trends in direct versus intermediated financing in the Australian financial system? Direct financing represents the direct transfer of funds from ultimate savers to ultimate borrowers, as would be the case if an individual purchased a share in a company. Only one financial asset is created in this process. Intermediated financing represents the channeling of funds from ultimate savers to ultimate borrowers through an intermediary such as a bank. Two financial assets are created in this process – a deposit and a loan. A distinguishing feature of financial intermediation is the transformation of these assets with respect to risk characteristics – the liquidity, credit risk and maturity of bank loans typically differs from that of bank deposits. The financial intermediary manages these risks, and the return paid to depositors bears little relationship to the performance of loans. Thus when classifying financing as either direct or intermediated, we take the asset transformation perspective. What about the classification of funds under management as either direct or intermediated financing? Funds under management are more akin to direct financing in the sense that there is typically no transformation of assets by the fund with respect to risk, maturity or cash flow characteristics. The fund holds assets on behalf of investors and distributes
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Review 1 - BANK 1005(11941 Derivatives and Securities...

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