This the the 2nd part of my article Financial Management: The System. If you have not read it yet, I suggests you take time to do so. But, if you are that lazy to read it, it's fine, since this article will tackle another topic — The Intermediaries.
Again, I am sharing here my answers to the instructions and questions given to us by our professor. This is about Basic Finance, which is one of my major subjects this semester. So, let's get it out!
Question 1: What are market specialists? How are they different from investment or merchant banks?
Marketing specialists work on studying what to sell. In other words, they are behind every company’s decision of what to produce or sell. They study what are the demands of consumers and how much they can spend on a specific product. They work on learning about a nation’s market where they could provide data of the products people on that area demands. They are different from investment since investment is about giving or sharing a capital which will soon benefit the investor. And market specialists are also different from banks in ways that banks are focused on finance and banking while market specialists are in general study of markets with no particular product or service concern.
Question 2: What is securitization? How do financial intermediaries perform it? Explain.
Securitization is the procedure where an issuer designs a marketable financial instrument by merging or pooling various financial assets into one group. The issuer then sells this group of repackaged assets to investors. Securitization offers opportunities for investors and frees up capital for originators, both of which promote liquidity in the marketplace.
Question 3: What are the basic risks faced by financial intermediaries? Discuss each thoroughly.
There are ten basic risks faced by financial intermediaries. First is the Interest Rate/Market Value Risk, which will affect it when the market value of assets will decline resulting to a capital loss when sold. Second is Default/Credit Risk, which is when a borrower will not be able to pay their loans even its principal on a loan. Third is the Reinvestment Risk, which is when assets need to be reinvested to another asset because the interest rate has fallen. Fourth, the Inflation/Purchasing Power Risk which concerns the price of goods increasing that causes the reducing purchasing power of the currency. Fifth is the Political Risk, that is about the laws and regulations updated by the government that affects the investors. The sixth basic risk is Off-balance Sheet Risk which can be basically understood since it is about a contingent liability not present on the balance sheet but is causing loss. Next basic risk is Technology/Operation Risk which is about the innovations of technology that means the processes in the production should go with the flow of this modernization and innovation in able to get along with the current trends. While the risk in possible loss because of decline in value of currency is called Currency or Foreign Exchange Risk. On the other hand, there is a risk being faced called Country or Sovereign Risk which is about the changes in rules from the foreign country that will affect the investments in the said country. Lastly, the Liquidity Risk which is the result of withdrawals of funds simultaneously by investors.
Question 4: What is risk? Discuss and give examples.
Risk gives us the possibility of failure or loss. This possibility is what makes us wiser and smarter by thinking how are we supposed to overcome it. When in comes to management, they tend to see and understand the risks in the firm they are managing. Some of the risk managers could deal with are the risks in sales, assets, and gross profits. In terms of sales, there are risks to face like competitors and the quality of the services and products the firm is offering. While in assets, this is where the investors and owners take the risk of giving their money as a capital of the firm because it is the foundation of it. Profit is the benefit every investor wants to achieve in the end. And in able to achieve it, the firm might have faced too much risk like loss of sales because of the competitors, lesser number of sales because the consumers cannot afford it, and other risks.
Question 5: What are off-balance sheet transactions? What is a contingent asset? What is a contingent liability?' How does off-balance sheet become beneficial to financial intermediaries? How is it disadvantageous?
Off-balance sheet transactions are those that cannot be seen in the balance sheet of the company. This transaction happens when it is not owned or not an obligation of the company. While contingent asset is only a potential asset that could be acquired through future events on the company without their control. It could also benefit in the economic value and contingent liability occurs when there is an unexpected change in the future. Contingent asset and contingent liability do not appear in the balance sheet.
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References!!!
Lead Image: https://pixabay.com/photos/skyscraper-singapore-sky-blue-3184798/
Image 1: https://pixabay.com/photos/coins-banknotes-money-currency-1726618/
Image 2: https://pixabay.com/illustrations/money-transfer-mobile-banking-3588301/
Image 3: https://pixabay.com/photos/money-euro-currency-europe-1439125/
Image 4: https://pixabay.com/illustrations/money-transfer-ecommerce-e-wallet-5059442/
Image 5: https://pixabay.com/illustrations/accounting-statistics-excel-finance-1928237/
Image 6: https://pixabay.com/photos/analytics-graph-chart-data-3291738/
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Thank you so much for having time reading my article and I hope you at least learned something from it. If you have some suggestions, comments, or opinion about my article, you can freely write it below in the comment section.
