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The Role of Financial Institutions in Financial Markets

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? Write a paper, describing at least three major financial institutions.
? Describe possible markets those institutions, such as those in the following list, are involved with and explain interactions among them. Cite at least two sources.

o Commercial banks
o Insurance organizations
o Investment banks
o Pension funds
o Mutual funds
o Underwriting stock or bond insurance
o Insurance products

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The Role of Financial Institutions in Financial Markets

Insurance Organizations
Insurance organizations are one of the most important inventions of the 18th century. Without vehicles for mitigating risks, financial investment and management would be as they are today. Insurance is a form of risk management wherein in a party hedges against a risk by paying premiums to the insurance companies.
Without insurance organizations, it would be difficult for investors including investment banks and commercial banks to find a third party which is willing to take on a long position on their insurable risks. With insurance companies, investors are more willing to take in more risks and hence invest more since they can always perform hedging activities at a very affordable cost.

Investment Banks
These financial institutions specialize in the sale of new securities to the public (Chartered Financial Analyst (CFA©) Institute, 2008, p. G-26). This activity is called underwriting stocks or bonds, which is a highly specialized activity. In underwriting new securities, investment banks perform an important role. This role includes verifying whether the issue price identified by the issuer creates enough demand for the security. This means that at that ...

Solution Summary

The role of financial institutions in financial markets are examined.