20100403 Management of Financial Intermediation Professor.Lee Jang Woo Week 5 review qustions

Review Questions Chapter 2

 

03~FI_chapter_3.ppt

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1. Given below is an excerpt from "A Friendly Conversation". Who do you agree with? Provide a thorough discussion of the theoretical and empirical underpinnings of your opinion.

 My opinion is similar to Appleton. Because, Bank,one of the financial intermediaries, provide liquidity or adapatable financial services such as issue the paychecks or recipts. Without banking system, companies and goverment have troubles in cashflow and balance sheet. In theoritical view, bank provide brokerage service and quility asset transcation. Brokerage services prevent market from lemon maket, exchange to wrong way. This exchange and trading cost is a lot. So, financial intermediaries can save the the cost.

 Second, QAT, Quaility Asset Transformation, serve as profit maker and stabilizer in society. In QAT, Bank the the risk but this merging make a profit. If someone,not F.Is take this risk, It is dangerous for liquid and other things. But banking has more liquid or safe cashflow. Even bank has trouble in balance sheet, ultimate provider such as Bank of Korea or Fedral Reserves Bank the call loan eaily. In conclusion, The society take advantage by Financial Intermediries. Banking system need in view of social benefit.

 

2. Discuss what is meant by brokerage and asset trans formation. What factors determine the value of brokerage services?

 Brokerage means media of trade like dealership in carmarket.So brokerage services encourage exchange or trade. In the text page 44, Brokerage activities of F.Is involve the bringing together of transactors in financial cliams with complementary needs. Quaility asset transformation adjust risk. Bank's QAT goal is stable profit or low volatility for example. There are two kinds of asset home mortage and deposits. Deposit has infinitely divisible, highly liquid and little default risk. In other hand, home mortgages has point that iliquid some default risk, prepayment risk and interest rate risk. F.I's QATs make deposit to home mortgage. After the formation, Bank take both the profit and adversing risk.

 And Cross-Sectional reusability and intertemporal aspect determine the value of brokerage services. Cross-sectional reusability ; the same information can be utilize across a number of different users. Information reusability also has an intertemporal aspect; it can be reused through time.

 

3. List five distinct types of financial intermediaries, explain what they do, and provide a comparison/contrast of the basic intermediation services they provide.

 Hedge Funds and Mutual funds

 Hedge funds are actively managed funds that pursue nontraditional investment strategies. A hedge fund is a private investment pool subject to the terms of an investment agreement between the sponsor of the fund and its investors. Renaissance Techtechnology, One of the famous hedge funds, is based on financial engineering. And Soros Quntum Fund is based on theory of reflecty. Their common goal is high return more than bench mark such as S&P 500, CRB(commodity Research Bearau). but differnces of the hedge fund and mutual fund is not free to running money, commision fee. mutual funds are restricted in their ability to leverage against the value of securities in their portfolio, whereas leveraging and other higher-risk investment strategies are commonplace for hedge funds. In fact, hege funds originally came into existence to invest in equity securies and use leverage and short selling to hedge the exposure of the portfolio to stcok price movements. In my opinion, recent hedge fund's trend is take alpha,take the same risk more returns, not beta,same return and risk as benchmark. So, hedge fund manager use Short-long position and others techicial method on finance.

 

4. Find information on capital-to-total-assets ratios for several nonfinancial firms and compare them to those for financial firms. Why the differences ?

 

 Financial institutions operate with high leverage, so that even a small return on total assets translates into a high return of equity. For example, KB Financial grourp's Return of assets is 3.06% in 2009 and Industrial bank of korea' Return of assets is 0.49% in 2009. Compared to SAMSUNG Electronics's Return of assets is 12.17% in 2009 and POSCO's Return Of Assets,one of the leading company in steel, is 8.82% in 2009. The differences is based on Banking system. Bank's nature is mopping the asset because bank make a deposit and loan not make the products.

 

5. From the information in Table 2.6, what can you conclude about the risk in holding a representative bank's equity compared to that in holding equity in a diversified market portfolio?

 

Table 2.6 shows that commercial banks in different size classes have a ratio of equity capital to tatal assets that averaged a little more than 10 percent and banks in no size group had a capital ratio as high as 15percent in 2004. Such high leverage ratios are seen as facilitating the role played by commercial banks in the payments system.

 

Reference : Comtemporary Financial Intermediation , page 44, 46

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