PART 1

A huge number of financial institution act as financial intermediaries. The important

profitable function of financial market is to overflow saved incomes of individuals to
those individuals who want finance for their capital investment of their business. It can
be done in two ways –

1. Direct finance – Lenders lend to borrowers directly.

2. Indirect finance – Financial institutions called financial intermediaries are
involved.

Depository institutions –

They are generally called as banks. There are 4 types of banking institutions –

1. Commercial banks –

They raise funds primarily by providing demand and other checkable deposits,
saving account deposits, and time deposits. They use the elevated resources to
produce loans to customers, to businesses. They are heavily regulated, and are
subjected to numerous layers of regulation.

2. Saving and Loan associations –

They also look like commercial banks except some slight differences like the way
they obtain funds and consume these funds to make loans. They also operate
like commercial banks and obtain funds by issuing checkable deposits, saving
account deposits and time deposits. The funds acquired through multifarious
have been used commonly to make mortgage loans i.e. they govern commercial
bank loan portfolios. Saving deposits equipped by saving and loan association
are frequently called shares. They are also put through different layers of
government regulation.

3. Credit Unions –

They are organized as cooperative lending institutions or particular group such

as members of selected branch of armed forces, members of labor union or an
institution. They lack the diversification of the commercial bank and are more
unprotected. They too earn funds by issuing various types of deposits i.e. shares
and create prime consumer loans. Credit Union industry can easily be vulnerable
 if a huge number of people in an organization or industry are unable to make
loan payments. Here, most loans are made to consumers and have much
smaller maturity period than mortgage loans.

4. Mutual Saving Banks –

They are the smallest group among depository institutions and absolutely alike to
saving and loan association. They act as mixture of savings and loan and a credit
union. They make funds by issuing distinct kinds of deposits and mainly make
mortgage loans like saving and loan association.

Contractual Saving Institution –

They obtain funds periodically on a contract agreement and invest them in such a
way that they have financial mechanism maturing when contractual responsibility
has to be met. They do not have to worry about losing funds and can precisely
predict their liabilities unlike depository institutions. They mainly invest in long
term securities such as mortgages, corporate stock and bonds. They are of 3
major types-

1. Life Insurance Company –

They sell life insurance policies that protect the policyholder against financial
hazards followed by death of the insured person. They sell annuities in which
insurance company agreement to make annual income payments upon
his/her retirement to the annuity buyer. They receive funds through payments
by individuals of premiums that pay to keep their policies valid. They usually
buy long term securities such as mortgages and mainly corporate bonds
though funds.

2. Fire and casualty Insurance Company –

They are similar to life insurance companies in the insurance business. They
ascertain policyholders from the risk of uncertain hazards such as fire, flood,
theft or accidents. They too get funds through payment by policyholders of
insurance premiums like life insurance companies. They are subjected to
greater liabilities as there is no way to predict for major disasters.

3. Private Pension Funds and Government Retirement Funds –

Here, employers and/or employees that take part in the program make
periodic payment contribution. Contribution from employees are either
automatically cut from pay or made optional. Its liability is to provide
retirement income to individuals who come under pension plans through
annuities. They invest in long term financial mechanism such as corporate
stocks and bonds as the liabilities are certain with respect to time.

Investment Intermediaries –

They accelerate investment in financial assets by individuals and institutions

by combining resources and invest them according to the specified
objectives. They are of 3 types –

1. Mutual Funds –

They merge the funds raised through the sale of shares by individuals or
institutions to purchase a varied portfolio of stocks, bonds or a
combination of stocks and bonds. As mutual funds are to be directed by
professionals, the individuals engaging in it can expect good returns.
Individuals can redeem or sell their shares at any time as they provide
liquidity who contributes in their funds. The worth of share depends on
utility of mutual funds portfolio i.e. no guarantee that an individual will get
is principal amount back. They are also not insured by federal agency
unlike depository institutions.

2. Money Market Mutual Funds –

They are like typical mutual funds with some included characteristics.
Shareholders here get investment income established on the earnings of
the security holdings of the fund. Their primary assets are money market
instruments.

3. Finance Companies –

They obtain funds by providing short term corporate debt instruments,

stocks and bonds. They utilize these funds to provide loans to small
businesses for multifarious purposes, to consumers for purchasing
durable goods or upgrading their homes. Example Ford Motor credit
Company.
 https://www.referenceforbusiness.com/encyclopedia/Fa-For/Financial-
Institutions.html

PART 3

Efficient Market Hypothesis also known as Efficient Market Theory proposes that all the
available information is reflected by the asset prices. Theoretically, neither fundamental
nor technical analysis can generate a harmonious risk – adjusted excess returns and
the information can only result within the outsized risk – adjusted returns. This
hypothesis depicts that stocks are always dealing on trading at their fair value, providing
investors with the chance to either purchase undervalued stocks or sell stocks for
escalated prices. Therefore, even investors can’t outperform the overall market with the
support of expert stock selection and market timing; they can only produce higher return
by purchasing riskier investments.

Due to uncertainty of the market, investors may do well by investing in a passive, low
cost portfolio according to the assumption of Efficient Market Theory.

The Efficient Market Hypothesis does not impose that investors can’t surpass the
market, it suspect that there are always outliers thrashing the averages of the market,
jointly with those who significantly drop behind the market. Nevertheless, most of them
are near to the median.

There are 3 different types of Efficient Market Hypothesis –

1. Weak EMH –

It predicts that all the prices of stocks are already reflected in the information of
the past. Moreover, it assumes that past information related volume, price and
returns is not dependent on future prices. If there is no correlation between past
and current prices, then the market is considered to be weak form efficient.
Therefore, it means that traders could support from fundamental analysis to
collect information and generate above average returns but there is no pattern
that exists with price table. Hence, for entering and exiting weak form efficient
markets, technical analysis is an incompetent process.
2. Semi Strong EMH –

This theory discharges the utility of both technical and fundamental analysis and
suggests that new information is priced into stocks and no investor can get any
advantage like gaining higher returns from the market from it unless it is privately
held. It also depicts that all publicly accessible information is divided into the
market price. Research of information including past share price and company
balance sheet could not get massive results.

3. Strong Form EMH –

Strong Form EMH proposes that both the public and private accessible
information is priced into the price of security. This could portray that not many
individuals might produce abnormal returns on instance and none of the investor
would harmoniously be able to hammer the market collectively.

This theory concludes that exclusively an individual can generate an extravagant

return by utilizing insider information and the market is ideal. Both fundamental
and technical analysis could not deliver information with an advantage and would
be displayed arguable.

https://capital.com/efficient-market-hypothesis-definition
https://www.ig.com/en/trading-strategies/what-is-the-efficient-market-hypothesis--
emh---191217

Part 4

The exchange rate is the worth of a single currency collated with other or the
amount you spend in your neighborhood currency to purchase a fixed amount in
addition. Nowadays, most of the developed countries are no longer using
currencies controlled by a fixed exchange rate system. Today, floating exchange
rate system is mostly used worldwide. There are 2 types of exchange rate regime
–

A. Fixed (or pegged) Exchange Rate –

A fixed exchange rate indicates a formal exchange rate that is set securely by the
monetary authority like central banks to a foreign currency. It minimizes the
transaction cost implicated by exchange rate unpredictability which could
demoralize international trade and investment and supply a credible presenter for
low inflationary monetary strategy.

They were very common in developed countries between 1940s and 1970s.

B. Floating (or flexible) Exchange Rate –

A Floating Exchange Rate is regulated in foreign exchange markets calculated

on demand and supply and it mainly varies all the time. There is no particular
exchange rate target. The main global currencies are according to this prototype.
In correspondence to market movements, the exchange rates of the US dollar
(USD), the euro (EUR) and the Japanese Yen (JPY) fluctuate without constraint.

But there are also different floating regimes like the “managed floating regime”
embraced by China. Here, the Central bank regularly intervenes by meeting and
speaking its desired exchange rate in accordance to specialized foreign
exchange market operator. Ensuing mandatory steps are taken into
consideration, in achieving this rate. By managing market developments, with the
aim of sustaining the currency fare at a particular target value, this module works.
Central bank tends to run from time to time mainly in the time of catastrophe to
circumvent the undervaluation or overvaluation of the regional currency and to
address the economic concern caused by this sort of developments.

For example, the system of China regarding floating regime exchange rate has
been in dispute for a number of years. For a portion of engaging countries and
currency areas, China’s central bank – People’s Bank of China which adopted
interventionist monetary policy is regarded unfair as they favor Chinese exports
because it maintains the price of Yuan (CNY) at an underrated rate.