Financial Institutions and their Function

Financial institutions have a central role to play in the world of finance. These institutions are vital to creating efficiency in the market It includes denomination divisibility – producing financial claim of different dollar values – The Function Of Financial Institutions Articles currency transform – buying and selling financial claim denominated by one currency versus another currency – maturity flexibility — creating financial claims that have a range of maturities.

Credit Risk Diversification, which diversifies risk better than the individual lenders could. Liquidity which buys direct financial obligations with little liquidity and issues indirect financial obligations with greater liquidity. If all these services are fully functional, then conditions can be created for best forex trading. The money market is a set of interconnected markets, where businesses and commercial banks can change their liquidity position by borrowing short term or lending long-term.

Federal Reserve System conducts money policy through the money-market and US Treasury makes use of this market in order to finance federal government operations. Treasury Bills, commercial paper and negotiable CDs are among the top money markets securities. Where do business firms get funding for their long-term projects? The capital markets. This is where the consumer gets financing to buy long-term assets. Money market securities tend to have less risk and be more long-term than capital markets securities. Capital market securities that are most commonly used include treasury bills, residential mortgages and corporate stocks.

Profit maximization is the goal of financial institutions. They maximize their profit by purchasing funds for lower rates than what they can earn on assets. Financial institutions are subject to numerous risks because of the type and character of financial claims that they own. Risks that are a major concern for financial institutions include interest rate risks, foreign currency risk, and political uncertainties. You should learn to trade as well.