Running head: BUSINESS AND MANAGEMENT 1

Title: Evaluate Financial Markets, Securities, and institutions along with associated

risks.

Your Name

Institution Name (University at Place or Town, State)

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Answer of Q.1

Financial engineering is the application of mathematical tools, techniques, formulas to solve

financial crises and problems. Financial engineering is used for introducing new products,

innovative changes in the existing products, etc. It uses knowledge and information from the

different fields of study like statistics, information technology, economics, etc. A derivative

security is an instrument whose value is totally dependent on the value of another instrument or

asset. Derivatives are such types of security that derive their value from the other assets. Primary

securities are those whose values/prices based on their market value directly.

Real assets in the economy are land, buildings, tools, machine, and equipment, and the

knowledge and technique used in the production of commodities in an economy.

Traditional financial securities like shares, bonds, and mortgages have promoted different and

specific patterns of payment, return, and risk. The pattern of risk and returns shows the potential

profit increases with the rise in risk. Loans like mortgage consist of prepayment choice. Assets

determine the material welfare and well-being of the economy of a country. The benefit can be

gained from the development of new products through financial engineering and the efficient

utilization of financial assets. Financial engineering allows modification in risk and patterns of

traditional securities like shares, bonds, and stocks, etc. It allows redistribution of risk of

securities to those people who are interesting and more inclined to them. Redistribution of risk

and redistribution of returns remunerate and indemnify those sustaining the risk. Redistribution

of risk in the financially engineered assets, which are causing a large pool of underlying assets

worth more than the underlying assets.

Mortgages have a high risk of repayment and there is a high chance of being a defaulter. The

process of pooling mortgages and generating Securities backed by mortgage allows the investors

to sustain and incur all the payment and earn higher profit.
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Answer of Q.2

The capital market is a financial market in which the long term securities are bought and sold.

The conversion of an asset into financial/marketable securities to raise cash by selling them to

different investors is called securitization. Securitization needs attention and access to multiple

investors. To attract potential investors in the Capital market, the financial market should be well

developed and it should consist of the following items.

1. Better system of financial reporting: Financial reporting means disclosure of financial

statements, financial information, and results and required information to the shareholders,

stockholders, management, investors, regulators, and customers about an organization for a

specific period of time usually one year. Examples of financial reporting are the balance sheet,

annual financial report, income statement, cash flow statement, etc.

2. Well developed and efficient Investment banking industry: Advance banking system

should be developed in an economy for the sake of securitization, where the investors, mortgage

lenders, and borrowers easily convert their multiple assets into single assets used for the purpose

of securitization. Secondly, the capital market assures it that the financial intermediaries should

not create any problem in the way of securitization.

3. Well-defined set of rules and regulations for financial transactions: there should be

specific rules and regulations in a market to regulate the transactions. The policy should be

design as per international standard and regulatory bodywork under stock exchange for the

smooth running of this process of securitization.

4. Safe environment, ease system, low taxation and principle of certainty and uniformity in

taxation, proper implementation of business laws, no government intervention in the business,

and economy are required for the proper development of securitization. The provision of a safe

place is an important issue in the process of securitization.

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For the purpose of securitization, the capital market should remove the obstacles and hurdles

which enforce the people to deals through the financial intermediaries. The capital market

provides a properly developed banking system to the investors and borrowers for their financial

activities alternately.

Borrowers and investors deal directly with each other and the capital market should promote

such a mechanism that controls the whole process of securitization and make the whole process

easy and transparent.

To make a speedy change in the field of securitization capital market plays its role to conduct

different sessions on the exploitation of borrower and high lights the important factor due to

which securitization is required.

Answer of Q.3

Financial intermediaries are the organizations or individual that serves and acts as a middleman

or agent between the two groups or parties in a business or financial transactions. Examples of

financial intermediaries are all types of banks, stock exchanges, brokers, etc. Securitization is a

financial process or activity while financial intermediaries play the role of a financial player.

Securitization can be defined as the transformation of non-security securities/assets into

securities. Funding for loans through securitization caused important, vital, and significant

changes in the bank methodology in the past. Securitization leads to the promotion and

development of securities with rapid and better liquidity. An increase in the liquidity of securities

enables the market to perform efficiently and effectively. Financial intermediaries collect funds

from the investors and used those funds to provide loans to the borrowers. They use the money

of investors and provide them profit. Financial intermediaries use that money for the purpose of

lending to the borrowers and charges higher interest rates from them. Simply we can say that

financial intermediaries are obtaining profit from the capital of investors. Investors and
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borrowers both cannot directly with each other in such cases. Securitization causes

disintermediation and provides a platform and sources for the investors and participants of the

market to bypass the involvement of financial intermediaries like banks, brokers, etc. The

investors directly deal with the participant through their own approach without using the banking

channel. Securitization is a technological and innovation in the financial market that’s keeps the

financial intermediaries away from some financial activity. Securitization causes an increase in

liquid assets through the development of the capital market. One of the main and primary

purposes of securitization is to decrease the cost and expense of funding and investment.

Government agencies also support securitization because it reduces the chance of exploitation of

both the investors and the borrowers. A digital application of financial intermediaries leads to

securitization. Due to technology nowadays borrowers and investors contact each other directly

through the internet without the help of any financial sources like banks etc. In the process of

securitization, the investor makes documentation, analyzes the financial condition of the

borrower, interest rate, collateral or security, time period of the loan and if the borrower fails to

pay the amount along with interest and markup, the investor initiates legal proceeding against

him.

Financial intermediaries play a vital role in securitization. The business of financial

intermediaries disturbs securitization but their role cannot be decreased. Here the major role of

financial intermediaries is to bring borrowers and lenders in one place or platform where they

make deals with each other. Investment bank collects saving from the public and that amount has

been lend to the borrower. The development of securitization also improves the banking sector

and creates healthy completion in the economy. Healthy competition is very good for the whole

sector, in the end; the utility will be gain by the public.

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Answer of Q.4

The important innovation that takes place in the 1980s is the securitization of a large variety of

different financial products major changes occur in interest rate, inflation rate, change in

information technology, technological progress, and regulation system. Due to the progress and

process of securitization businesses of financial intermediaries are going to declines with the

passage of time. To keep themselves in the market with securitization financial should increase

short-term lending to the people. Financial intermediaries should involve themselves in such

activities in which the progress of securitization is not too easy. Businesses of financial

intermediaries decrease but the importance of the financial institutions and financial

intermediaries will not be down. Without financial intermediaries process of securitization is

complete because financial intermediaries are required for the conversion of multiple assets to

single assets and for the replacement and exchange of current assets. The duration of short-term

loans is one year or less than one year and during this period it's not possible to promote

securitization. Such type of loans also increases the liquidity of the bank and current assets also

and these types of loans will not be stuck up and the borrower tries to pay it regularly and closed

it before or exact time. Securitization is a process in which all the assets have been converted to

a single form of security. Conversion of an asset means withdrawal of the deposits in multiple

banks, sale of various properties, etc. such conversion into a single asset leads to less

participation in the banking activity and less dependency on financial intermediaries. There are

three important roles of financial intermediaries which are mobilization of saving, disbursement

of credit, and management of financial assets. We can say that financial intermediaries involve

three different types of activities and each type of activity earns differently. so in securitization, a

person sums up all the three things into one and only assets and that can be easily managed with

the role of any financial institution.

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References

1. Brennan, M. J., & Cao, H. H. (1996). Information, trade, and derivative securities. The

Review of Financial Studies, 9(1), 163-208.

2. Wæver, O. (1993). Securitization and de securitization (p. 48). Copenhagen: Centre for

Peace and Conflict Research.

3. Wainwright, T. (2015). Circulating financial innovation: New knowledge and

securitization in Europe. Environment and Planning A: Economy and Space, 47(8), 1643-

1660.