c) Search the web or other periodical for an article that reflects unethical (or

Question

c) Search the web or other periodical for an article that reflects unethical (or unlawful) behavior in the financial realm. Shortly describe the ethical issue and the resolution of the situation. Provide a link to the article in your response. 2. a) Identify two financial intermediaries. What are their respective functions? What are their major roles in the economy? b) Name a financial intermediary that you (or someone with whom you are familiar) has utilized. What was the reason for using the intermediary? c) If an asset is called a derivative, what does that mean? Explain your answer and provide an example of a derivative. What market does the derivative trade on?

Explanation / Answer

2a. Two financial intermediaries that I have identified are banks and insurance companies. Function of bank, as a financial intermediary, is to consolidate deposits and make use of the funds collected through deposits and transform them into loans. Thus banks help in connecting borrowers and savers. Function of an insurance company is to spread the risk to which an individual or an entity is exposed to by pooling together the resources of a large number of people who are exposed to a similar risk. The major role of financial intermediaries in the economy is to facilitate economic growth by improving liquidity and confidence in the market and by spreading the risk.

b. A financial intermediary that I have utilized is a ‘bank’. The reason for utilizing the intermediary was to take a loan to finance my business. I had started a new venture in the area of organic farming and needed loan to buy some capital equipments. I approached my bank for a loan and they financed my purchase of capital equipments on the back of collateral that I had to provide.

c. If an asset is called a derivative it means that its value is derived from an underlying asset or entity. In other words the value of a derivative asset is reliant on the performance of an underlying entity and the entity can be an asset or an index or interest rate. An example of a derivative is a ‘futures contract’. In a futures contract two parties enter into an agreement for the sale of an asset at an agreed upon price. Derivatives are traded over the counter (OTC) or on an exchange.

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