ECS3701 ASSIGNMENT 2 SEMESTER 2 - 2023
UNIQUE NUMBER: 768112
CLOSING DATE: 22 SEPTEMBER 2023
2.01 Explain how financial intermediaries reduce transaction costs thereby allowing small savers and borrowers to benefit from the existence of financial markets. [10]
2.02 Differentiate betwee...
2.01 Explain how financial intermediaries reduce transaction costs thereby allowing small
savers and borrowers to benefit from the existence of financial markets. [10]
SOLUTION: OPTION 1
Financial intermediaries play a crucial role in reducing transaction costs in financial markets,
which, in turn, allows small savers and borrowers to benefit from these markets.
Transaction costs refer to the expenses and efforts associated with buying, selling, or
managing financial assets. These costs can include brokerage fees, information gathering
costs, paperwork, and time spent on financial transactions.
Financial intermediaries help minimize these costs in several ways:
a. Economies of Scale: Financial intermediaries pool funds from many small savers and
investors into larger portfolios. By managing these aggregated funds, intermediaries
can achieve economies of scale. This means that the cost per unit of managing and
transacting these funds is lower than if each individual saver or borrower had to do it
independently. The cost savings are then passed on to small savers and borrowers in
the form of lower fees or better interest rates.
b. Information and Expertise: Financial intermediaries have the expertise and
resources to conduct thorough financial analysis and due diligence on potential
investments. They can assess the creditworthiness of borrowers and identify
profitable investment opportunities. Small savers often lack the time, knowledge,
and resources to perform these tasks on their own. By relying on intermediaries,
they can access investment opportunities that they might not have been able to
identify or assess individually.
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