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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall1
Financial Institutions, Financial
Intermediaries and Asset Management
Firms
Chapter 2
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall2
Services of Financial Institutions
Transforming Financial AssetsExchanging Financial Assets on Behalf of Customers
Exchanging Financial Assets for Own Account
Assisting in the Creation of Financial Assets
Providing Investment AdviceManaging Portfolios
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Role of Financial IntermediariesTransfer of funds from savers to investors
Types of InvestmentsDirect Investment
For example, purchasing a portfolio of stocks and bonds
Indirect InvestmentFor example, purchasing an equity
claim issued by an investment company
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Role of Financial Intermediaries
Providing Maturity Intermediation
Reducing Risk Through Diversification
Reducing Costs of Contracting and Information Processing
Providing a Payments Mechanism
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Role of Financial IntermediariesProviding Maturity Intermediation
Reducing Risk via Diversification
Reducing Costs of Contracting and Information Processing
Providing a Payments Mechanism
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Asset/Liability ManagementSpread and Non-Spread Businesses
Nature of LiabilitiesAmount of cash outlayTiming of cash outlay
Liquidity ConcernsRegulations and Taxation
7
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Nature of Liabilities of Financial Institutions
Liability TypeAmount of Cash
OutlayTiming of Cash
Outlay
Type I Known Known
Type II Known Uncertain
Type III Uncertain Known
Type IV Uncertain Uncertain
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Concerns of Regulators Credit Risk Settlement Risk
Counterparty Risk Liquidity Risk
Market Liquidity Risk Funding Liquidity Risk
Market Risk Operational Risk
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Asset Management Firms
Ranked by assets under management
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Fees and Compensation
Fee structure Fee based on assets under
management Performance-based fee
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Types of Funds Managed
Regulated investment companies
Insurance company funds Separately managed accounts Pension funds Hedge funds
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Hedge Funds
No single definition of hedge fund George Soros President’s Working Group on Financial Markets
U.K. Financial Services Autority
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Hedge Fund Characteristics
“Hedge” is misleading Wide range of trading strategies
Leverage, short selling, arbitrage, risk control
Operate in all financial markets Focus on absolute returns Lastly, funds cater to sophisticated investors
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Types of Hedge Fund
Market directional hedge fund Corporate restructuring hedge fund
Convergence trading hedge fund
Opportunistic hedge fund
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Concerns with Hedge FundHedge funds provide market benefits Liquidity Market pricing efficiency
However, there are concerns System risk Long-Term Capital Management Bear Stearns Market meltdown of 2008
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