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, ECS3701 Assignment 2 (COMPLETE ANSWERS) Semester 2
2024 (833935) - DUE 27 September 2024 ; 100% TRUSTED
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QUESTIONS
2.01 Discuss how collateral and indirect finance are used in explaining the
basic facts about financial structure around the world. [10]
Introduction
The financial structure of an economy refers to the mix of financial institutions,
instruments, and markets that exist within that economy. It plays a pivotal role in
influencing the efficiency of capital allocation, risk management, and overall
economic growth. Two key concepts that help elucidate the basic facts about
financial structures around the world are collateral and indirect finance. Collateral,
often viewed as a form of security for loans, and indirect finance, characterized by
the intermediation of financial institutions, serve as crucial components in
understanding how different economies operate within their unique financial
systems. This discussion delves into how these concepts shape financial structures
globally.
The Role of Collateral in Financial Transactions
Collateral refers to assets that borrowers pledge to lenders as security for a loan. It
plays a significant role in the lending process, particularly in mitigating the risks
associated with defaults. In different economies, the use of collateral varies
significantly, influencing the accessibility and cost of finance.
In developed economies, such as the United States and many European countries,
collateralized loans are prevalent. Borrowers can use various assets, including real
estate, vehicles, and even financial securities, as collateral. The presence of a
robust legal system and clear property rights facilitates this process, ensuring that
lenders can recover their funds in case of default. This legal framework fosters
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