Exam (elaborations)
ECS3701 Assignment 2
- Course
- Monetary Economics
- Institution
- University Of South Africa
ECS3701 Assignment 2
[Show more]
Content preview
ECS3701Assignment 2
(ANSWERS)
Semester 2
2023
ADMIN
[COMPANY NAME]
, 2.01 Explain how financial intermediaries reduce transaction costs thereby
allowing small savers and borrowers to benefit from the existence of financial
markets. [10]
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
associated with buying or selling financial assets or obtaining loans. Here's
how financial intermediaries help in this regard:
1. Economies of Scale: Financial intermediaries, such as banks and mutual
funds, pool together funds from numerous small savers. By aggregating
these funds, they can achieve economies of scale in various activities,
including investment, lending, and transaction processing. This means that
the per-unit transaction costs are lower when dealing with large sums of
money. Small savers who individually couldn't access these economies of
scale can benefit from lower transaction costs when their funds are managed
collectively.
2. Expertise and Information: Financial intermediaries have access to financial
experts and information resources that small savers might not possess.
These experts can analyze investment opportunities, assess credit risks, and
make informed decisions on behalf of their clients. By relying on the
expertise of intermediaries, small savers can reduce the costs associated
with conducting extensive research and analysis themselves.
3. Diversification: Financial intermediaries often create diversified portfolios of
assets, spreading risk across a range of investments. This diversification can
help mitigate risk for small savers. Without intermediaries, small savers
might be limited in their ability to diversify, as they might not have enough
capital to invest in a broad range of assets. Reducing risk through
diversification can indirectly lower transaction costs by decreasing the
likelihood of large losses.
4. Liquidity Provision: Financial intermediaries offer liquidity by providing
secondary markets for various financial assets. This liquidity ensures that
small savers can easily buy or sell their investments without incurring
significant transaction costs. Without these intermediaries, small investors
might face illiquidity, which can lead to higher transaction costs when trying
to exit investments quickly.
5. Risk Management: Financial intermediaries can also provide risk
management services, such as insurance and hedging products. Small
borrowers can benefit from these services by protecting themselves against
unforeseen events, such as interest rate fluctuations or natural disasters.
These risk management tools can reduce the overall cost of borrowing for
small businesses and individuals.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller MasterVincent. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R44,88. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
72964 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now