Private Financial Intermediaries and World's Central Banks Financial intermediaries are charged with the aim of facilitating transfer of risk and also offering solution to the intertemporal cash flow dilemma. Financial intermediaries solve the problem of intertemporal cash flow by matching the client with the surplus and the ones with deficit (CALUNIVERSITY, 2007). Although the financial intermediaries, usually offers advice to their client there is need to solve the problem of moral hazard that arise after does not utilize the funds for the intended invest but venture into a more risky invest.
Therefore, the concept of interest in case is risk return trade off of interest in consideration of the most feasible investment. This paper will discuss the concept of risk return trade off paying special consideration to the application of concepts. In this case an individual will measure the risk of investment by calculating the variation in the returns of the investment.
In this case the individual uses the standard deviation. The returns of the assets in this case are the expected returns. An individual faced with an asset offering the same returns but asset A has high risk rate than asset B. The individual will choose asset B, if the asset faced the same risks but A had higher return than B, the investor would choose asset B.
Investors in the business world usually use the level of risk associated with certain project and the returns of such project in determining the most feasible project to invest in. In investing an investor is certain of a return that the market is offering, this referred to as the risk free return, and in addition to these the project has uncertain future returns.
It also asserted that under this concept an individual usually holds risk free asset and the risky asset. In order to arrive at the optimal portfolio an individual select the portfolio that lies along the efficient frontier. Chapter 2: The World’s Central Banks and Regulatory Authorities Every country has a regulatory body to regulate its financial markets, in most countries the body assigned this role is the central bank (public financial institutions).
Central bank has many policies and tools which they use to stabilize the economy of the concerned state. In the book finance and private financial intermediaries, the author discusses in deep several central banks and their regulatory roles, of interest in this case is one of the tools used by the central bank, the monetary policy (CALUNIVERSITY, 2007). Monetary policy tools are used so to stabilize economies from macroeconomics phenomenon such as inflation, currency depreciation and under investment.
Some of the monetary policy tools that have been utilized by these banks include the open market operation. In this case the government buys and sells security, for example in times of inflation the central bank sell securities to the members of the public so as to mop the excess money in circulation the vice versa happens in times deflation.
The second tool is where the central banks raise or lowers reserve requirement this action will be to reduce increase the money in possession of the commercial banks. The central bank can also increase or decrease the lending rate to the commercial banks and this has a positive momentum with the lending rate the commercial banks extend credits to their customers (Walsh, 2003). In conclusion the monetary policy tools are vital as the central banks of most part of the world the tools as measure to stabilize the economy to a sustainable level this can be show cased by way the monetary policy has helped in resolving major financial crisis such as the Asian financial crisis.
Works Cited CALUNIVERSITY. (2007). FIN 540 Capital Markets. California: California InterContinental University. Walsh, C. (2003). Monetary theory and policy. Massachusetts: MIT Press.