Module 3 Other FIs and risks Flashcards
How do economic transactions between household savers and corporate users occur in a world without financial intermediaries?
In a world without financial intermediaries, corporate users directly approach household savers for borrowing, which can be costly due to information costs, risk assessment, and monitoring.
What are three economic disincentives that dampen the flow of funds between household savers and corporate users in a world without financial intermediaries?
Economic disincentives include monitoring costs, liquidity costs, and price risk, making direct investment less attractive for household savers.
How do financial intermediaries facilitate the flow of funds between household savers and corporate users?
Financial intermediaries specialize in brokerage functions (providing transaction and advisory services) and asset transformation (issuing attractive securities to savers and investing in corporate securities), smoothing the flow of funds.
What is the significance of financial claims of financial intermediaries being considered secondary securities?
Financial claims of financial intermediaries are considered secondary securities because they indirectly represent investments in primary securities of commercial corporations, reducing risks and costs associated with direct investment.
How do financial intermediaries act as delegated monitors, and what benefits does this process provide to the financial system?
Financial intermediaries act as delegated monitors by efficiently collecting and utilizing information to monitor borrowers on behalf of savers, reducing information asymmetry and improving market efficiency.
What are two important payment services provided by financial intermediaries, and how do they benefit the economy?
Payment clearing and fund transmission services provided by financial intermediaries ensure efficient financial transactions, preventing gridlock in the payment system and supporting economic activity.
What is denomination intermediation, and how do financial intermediaries assist in this process?
Denomination intermediation allows small investors to access assets sold in large denominations. Financial intermediaries pool small investments to purchase large assets, enabling small investors to benefit from returns and diversification.
How do direct and indirect financial markets differ, and what role do financial intermediaries play in indirect financing?
Direct financing involves direct exchange of money and claims, while indirect financing involves financial intermediaries transforming direct claims to make them more attractive to investors. Financial intermediaries play a crucial role in indirect financing by facilitating the transformation process.
The primary function of insurance companies is to:
A. generate fees for the banks that sell insurance products
B. sell a variety of consumer investment products
C. protect policyholders from adverse events
D. assist in the transfer of wealth into the future
C. protect policyholders from adverse events
Which of the following statements is true?
A. Australian governments have encouraged national savings through
superannuation.
B. The government has provided taxation incentives aimed at increasing
voluntary contributions to superannuation by both employers and employees.
C. The government has introduced legislative requirements forcing employers to
contribute to superannuation on behalf of their employees.
D. All of the listed options are correct.
D. All of the listed options are correct.
Which of the following statements is true?
A. Money market corporations are primarily concerned with wholesale
deposit raising and lending
B. Money market corporations are primarily concerned with retail
deposit raising and lending
C. Money market corporations are financial intermediaries that cover a
large number of activities
D. Money market corporations are financial intermediaries that cover a
large number of activities and are primarily concerned with wholesale
deposit raising and lending
D. Money market corporations are financial intermediaries that cover a
large number of activities and are primarily concerned with wholesale
deposit raising and lending
The market risk of an FI increases with:
A. increasing volatility of asset prices
B. increasingly large unhedged short positions in bonds, equities and
other commodities
C. increasingly large unhedged long positions in bonds, equities and
other commodities
D. All of the listed options are correct.
D. All of the listed options are correct.
Why are depository institutions and life insurance companies more
exposed to credit risk than, for instance, money market managed
funds and general insurance companies?
A. Because the average maturities of their assets are longer than those
of money market managed funds/general insurance companies.
B. Because the average maturities of their assets are shorter than those
of money market managed funds/general insurance companies.
C. They are not exposed to more risk.
D. Because they are not specialised in credit risk management.
A. Because the average maturities of their assets are longer than those
Which of the following is an effective measure for claimholders if a
foreign government prohibits repayment of debt obligations to an
international lender?
A. The claimholder can recover its outstanding debt through local courts.
B. The claimholder can recover its outstanding debt through
international courts
C. The claimholder cannot do anything.
D. The claimholder has limited recourse through normal legal channels
but may exert leverage if it has control over future loans or supply of
funds.
D. The claimholder has limited recourse through normal legal channels
but may exert leverage if it has control over future loans or supply of
funds.
Matching the foreign currency book protects the FI from:
A. sovereign country risk
B. interest rate risk
C. liquidity risk
D. foreign exchange risk
D. foreign exchange risk
