Question

A financial system consists of both financial institutions and financial markets. Financial markets bring the “key players” together and their funds. For this discussion, choose one of the functions of the financial markets and discuss how financial institutions play a role in this process.

Answer 1

The marketplace where different types of monetary instruments are exchanged and traded is referred to as the monetary market. The following three significant functions are performed by the financial markets:-.

1) Price discovery.

2) Liquidity.

3) Reduction of transaction expenses

1) Price discovery:- Price discovery function of monetary markets assists in the determination of the price of the traded financial possessions through a transaction that is carried out in between the purchasers and sellers of financial instruments in a monetary market.

2) Liquidity:- With the help of liquidity function of monetary markets, an opportunity if provided to the financiers to sell a monetary instrument as it symbolizes the measurement of the ability to offer any financial assets at its fair market price at any time.

3) Reduction of transaction expenses:- When some kind of charges are levied to the individuals of a money market and/or bear they pay of trading a financial instrument, it is called as Reduction of transaction costs.

Role of Financial Institutions:- Financial organizations can be defined as special monetary entities which have the function of effective allowance of funds in those scenarios when the prevailing situation in the market is difficult for the investors or lending institutions to deal directly with those who are willing to obtain the funds in financial markets. Banks consist of depository organizations, insurance companies, controlled investment firms, investment banks, pension funds.

Developing more beneficial deal opportunities than it can be recognized by lenders/investors and borrowers dealing directly with each other in the monetary market is the primary function of these organizations.

The major functions of these institutions are:-. Receiving funds from the lenders. Providing these funds to those who want these funds for their usages.