Financial System

Question 1

What is direct finance?

Answer 1

Direct lender to borrower transactions through financial markets

Question 2

How are informational asymmetries overcome by direct finance?

Answer 2

Instruments are traded on centralised exchanges and the exchange operator takes on some of the risk and (potentially) because products are standardised

Question 3

What is OTC direct finance?

Answer 3

Over the counter (Not on formal exchange) exchanges retain information asymmetries. Trust instead comes from reputation/track history

Question 4

What is indirect finance?

Answer 4

Financial intermediaries to borrower/saver transactions through financial markets on behalf of lender/savers

Question 5

Why do financial intermediaries exist?

Answer 5

Asymmetric information, economies of scale, regulation

Question 6

What does financial development mean?

Answer 6

Improvements in: producing information about possible investments and allocating capital, monitoring firms and exerting corporate governance, trading, diversification and management of risk, mobilisation and pooling of savings, easing the exchange of goods and services.