Financial Markets and Institutions – BA 543Chapter 2 – Financial IntermediationSlide 3Slide 4Slide 5Slide 6Slide 7Slide 8Financial Markets and Institutions – BA 543Tuesday Bexell 41512:00 noon to 2:50 p.m.6:00 p.m. to 8:50 p.m.Chapter 2 – Financial IntermediationDefinition of Financial IntermediationTransforming acquired financial assets into preferred type of asset (liability) for owner (borrower)Example: Car Loan (Funds from Depositors are packaged in loans for customers buying a car)Example: Swap (Bond swap from fixed to floating rate)Performed by Financial InstitutionsMany of these intermediation functions are completed with large institutionsCompleted in Financial MarketsChapter 2 – Financial IntermediationA closer look at Financial InstitutionsTypesBanks – Commercial, Investment, Savings and Loans, Credit Unions, etc.Investment CompaniesInsurance CompaniesOthers – Pension Funds, Foundations, etc.FunctionsTransforming, Exchanging, and Designing Financial AssetsAdvising and Managing Financial AssetsChapter 2 – Financial IntermediationDirect Investing with IntermediariesCommercial BankDirect Deposit – CD – Promised Payment at the end of the Investment PeriodDollars are loaned to a borrower (to buy a car) with a different payment scheduleIndirect Investing with IntermediariesMutual Fund Company (Investment Company)Buy mutual fund shares at NAV (no load)Company uses funds to buy stocks and bondsChapter 2 – Financial IntermediationFour Functions of IntermediationMaturityBorrow in the long, lend in the shortRisk Reduction (Diversification)Eliminate firm specific risk via a portfolioCost Reduction of Information/ContractingShare information acquired across large set of individualsPayment MechanismsChecks, Credit Cards, Debit Cards, etc.Chapter 2 – Financial IntermediationAsset/Liability Management for Financial InstitutionsNature of Business – Buy and Sell MoneyBuy Low, Sell High – SpreadNature of LiabilitiesTiming and Amount of Outflow of CashTable 2-1 Page 25Liquidity of Claims against Financial Institutions – can obligations be met with current assets of the institution?Chapter 2 – Financial IntermediationGrowth of Financial Intermediaries through Financial InnovationMarket Broadening Instruments – attracts new investorsZero-Coupon Bonds – TGIRS, LYONS, etcRisk Management Instruments Options Arbitrage Instruments – Price StabilityIndex Assets for direct tradeMotivation? Risk Transfer or AbritrageChapter 2 – Financial IntermediationAsset Management FirmsAKA money managers, fund managers, portfolio managers, etc.Manage funds ofIndividualsBusinessesEndowmentsFoundationsNew Type of Fund – Hedge FundPrivate funds, professionally managed and not available to publicNot formally defined…we will skip for this
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