3 why do you think government securities dealers make

This preview shows page 2 - 4 out of 8 pages.

3. Why do you think government securities dealers make a market in repos and reverses? Why don’t their repo customers and reverse customers simply get together and cut out the middleman? Repos are a cheap way to fiancé inventory. o Banks and other institutions can raise money quickly by repo-ing the securities they hold. o Apart from the lower transactions costs compared to selling securities, there are more advantages. Banks carry some securities on their books as long term investments, valued at face value – if they sell them they have to revalue them at sales price and take gain or loss. Repoing the securities rather than selling allows banks to avoid this reevaluation and effect son reported earnings and tax liability. Reverses are attractive to dealers and anyone else who wants to take short position in government securities. o Provide dealers with a way of filling orders without holding inventory. (i.e. if one of your customers wants some securities you do not have, you can reverse the securities in to make delivery) o preferred to buying securities outright for example if you were expecting delivery of some of same securities quite soon. So. there is clearly a demand for repos and reverses but there is no market unless someone makes it. The middleman is not cut out because it allows for centralization – people spend less time and effort trying to find people to trade with: lowers transaction costs. also there is credit substitution, allow for people who don’t know each other to trade with each other. if dealers did not exist you would have to find counterparty and determine fair price. dealers do price discovery and liquidity, reducing transaction costs. 4. Why is the Treasury so worried about regulation of the government securities market? The Treasury doesn’t borrow in the secondary market, so why does it care what happens there? Treasury wants less regulation because increased regulation could harm the working of the market and raise its borrowing costs.
Image of page 2

Subscribe to view the full document.

o securities could be less liquid and less transferable, therefore less attractive to potential customers. Customers demand will go down so price must go down and the treasuries cost of borrowing will go up. Regulations create inefficiencies which lead to higher costs. regulations like capital requirements, trading practices for repos and reverses, having to register with SEC, etc. Increased costs ultimately make securities less attractive, demand goes down, price goes down, so rate or cost to treasurer must go up. 6. Is a securities dealer a financial intermediary? In what ways is a securities dealer like a bank? In what ways is it different? Yes, securities dealers borrow money (repos) and relend it out. They are running a book in repos.
Image of page 3
Image of page 4

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes