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Chapter 2 Financial Institutions, Financial Intermediaries and Asset Management Firms

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Chapter 2 Financial Institutions, Financial Intermediaries and Asset Management Firms
Foundations of Financial Markets and Institutions 4th edition 2009
Frank J. Fabozzi
Franco Modigliani
Frank J. Jones

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Chapter 2 Financial Institutions, Financial Intermediaries and Asset Management Firms

  1. 1. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall1 Financial Institutions, Financial Intermediaries and Asset Management Firms Chapter 2
  2. 2. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H2 Services of Financial Institutions Transforming Financial Assets Exchanging Financial Assets on Behalf of Customers Exchanging Financial Assets for Own Account Assisting in the Creation of Financial Assets Providing Investment Advice Managing Portfolios
  3. 3. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H3 Role of Financial Intermediaries Transfer of funds from savers to investors Types of Investments Direct Investment For example, purchasing a portfolio of stocks and bonds Indirect Investment For example, purchasing an equity claim issued by an investment company
  4. 4. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H4 Role of Financial Intermediaries Providing Maturity Intermediation Reducing Risk Through Diversification Reducing Costs of Contracting and Information Processing Providing a Payments Mechanism
  5. 5. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H5 Role of Financial Intermediaries Providing Maturity Intermediation Reducing Risk via Diversification Reducing Costs of Contracting and Information Processing Providing a Payments Mechanism
  6. 6. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H6 Asset/Liability Management Spread and Non-Spread Businesses Nature of Liabilities Amount of cash outlay Timing of cash outlay Liquidity Concerns Regulations and Taxation
  7. 7. 7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 7 Nature of Liabilities of Financial Institutions Liability Type Amount of Cash Outlay Timing of Cash Outlay Type I Known Known Type II Known Uncertain Type III Uncertain Known Type IV Uncertain Uncertain
  8. 8. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H8 Concerns of Regulators Credit Risk Settlement Risk Counterparty Risk Liquidity Risk Market Liquidity Risk Funding Liquidity Risk Market Risk Operational Risk
  9. 9. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H9 Asset Management Firms Ranked by assets under management
  10. 10. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H10 Fees and Compensation Fee structure Fee based on assets under management Performance-based fee
  11. 11. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H11 Types of Funds Managed Regulated investment companies Insurance company funds Separately managed accounts Pension funds Hedge funds
  12. 12. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H12 Hedge Funds No single definition of hedge fund George Soros President’s Working Group on Financial Markets U.K. Financial Services Autority
  13. 13. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H13 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
  14. 14. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H14 Types of Hedge Fund Market directional hedge fund Corporate restructuring hedge fund Convergence trading hedge fund Opportunistic hedge fund
  15. 15. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H15 Concerns with Hedge Fund Hedge funds provide market benefits Liquidity Market pricing efficiency However, there are concerns System risk Long-Term Capital Management Bear Stearns Market meltdown of 2008
  16. 16. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H16 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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Chapter 2 Financial Institutions, Financial Intermediaries and Asset Management Firms Foundations of Financial Markets and Institutions 4th edition 2009 Frank J. Fabozzi Franco Modigliani Frank J. Jones

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