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NYU Bank is a major force in the derivatives market. Does it make more sense for...

NYU Bank is a major force in the derivatives market. Does it make more sense for NYU Bank to function as a dealer or as a broker in such a role? What is the difference between a dealer and a broker in terms of (i) function, (ii) compensation, (iii) exposure to risk? (6 points)

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Answer #1

If the bank was to make decisions for itself it would look to be a dealer rather than broker.

it is operating into the derivatives market and its should always look for making its own decisions so that it could maximize its own profit based upon expertise it has.

Difference between dealers and brokers are as follows-

1. Function-dealers buy security from the market on their own account while broker just act as an intermediary and they provide with their platform to help client trade.

2. Compensation-dealers are compensated in form of monetary appreciation of their asset while broker charge part of the commission.

3.level of risk exposure is high for dealers because they make decisions for themselves while risk exposure for broker is very low in comparison to dealers.

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