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

1. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall1
Financial Institutions,
Financial Intermediaries and
Asset Management Firms
Chapter 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. 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. 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. 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. 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
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. 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. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H9
Asset Management Firms
Ranked by assets under management

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. 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. 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. 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. 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. 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. 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.