Finance and Accounting

FINANCIAL SYSTEMS AND INSTITUTIONS

You have been asked to write a report on the following three questions from the broader subject areas of the module. Your report should cover the following issues:

(1) Discuss with data and evidence how and why increased volatility in financial markets with respect to the price of financial assets, interest rates, and exchange rates during 1970s, contribute to increased financial risks? Discuss with illustration how financial market volatility and financial risks foster financial innovation?

[35% of the overall mark]

(2) The following appeared in the Federal Reserve Bank of San Francisco’s Economic Letter, January 25, 2002:

“Financial institutions are in the business of risk management and reallocation, and they have developed sophisticated risk management systems to carry out these tasks. The basic components of a risk management system are identifying and defining the risks the firm is exposed to, assessing their magnitude, mitigating them using a variety of procedures, and setting aside capital for potential losses. Over the past twenty years or so, financial institutions have been using economic modeling in earnest to assist them in these tasks. For example, the development of empirical models of financial volatility led to increased modeling of market risk, which is the risk arising from the fluctuations of financial asset prices. In the area of credit risk, models have recently been developed for large-scale credit risk management purposes.”

Yet, not all of the risks faced by financial institutions can be so easily categorized and modeled. For example, the risks of electrical failures or employee fraud do not lend themselves as readily to modeling.

Discuss various financial risks faced by the financial institution with reference to the above statement. Critically discuss how financial institutions manage those risks.

[35% of the overall mark]

(3) “All financial intermediaries provide the same economic functions. Therefore, the same investment strategy should be used in the management of all financial intermediaries.” Discuss with illustrations how financial market liberalization contributes to the convergence of financial firms. Also indicate whether or not you agree or disagree with this statement in the light of changes occurred in the era of financial market deregulation.

[30% of the overall mark]

All books, journals or electronic data systems used in the preparation of your report should be clearly and appropriately referenced. Any quotations made directly from books, journals or other information media should be clearly acknowledged, for example–by the use of footnotes. You are reminded that plagiarism – the deliberate and substantial unacknowledged insertion in your assignment of material derived from the work of another – involves a breach of University assessment regulations.\