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    The economic functions financial intermediaries perform

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    After submitting your report, one of the new brokers asks the three questions below and requests a written response:

    1. What are the economic functions financial intermediaries perform?

    2. What is the role of broker in the financial market?

    3. How has that role changed since the inception of on-line investing?

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    What are the economic functions financial intermediaries perform?


    1. Banks
    - Credit risk I (collateralized lending)

    2. Mortgage banks, credit/finance companies
    - Pooling actuarial risks

    3. Insurance companies, pension funds
    - Economies of scale, diversification

    4. Investment funds / mutual funds
    - Liquidity

    5. Dealers, market makers
    - Search costs

    6. Brokers
    - Information costs

    7. Credit rating agencies, newspapers
    - Exchange costs

    8. Clearing / settlement institutions
    (Financial markets, payments system)

    Thus following can be included as the major functions of intermediary
    1. Lowering information costs (specialization, monitoring, screening)
    2. Increased liquidity (diversification)
    3. Price risk management (diversification)
    4. Reduced transaction costs (scale economies)
    5. Maturity transformation (due to better risk management, hedging)

    What is the role of broker in the financial market?

    A broker is a Financial Intermediary. There are many kinds of Brokers (i.e., Mortgage brokers; Online brokers; Real estate brokers; Stock brokers, health Insurance brokers, etc.).

    Broker is an agent (i.e., individual or organization) whose role is to handle the public's orders to buy and sell ...

    Solution Summary

    This solution discusses the role various economic functions performed by financial intermediaries.