Question

(a) Identify the institutions that assist deficit and surplus units to arrange direct financing and briefly describe their activities.

(b) Discuss the main implications of the efficient market hypothesis.

Answer 1

a) The institutions which arrange for surplus and deficit units to redistribute funds are financial intermediaries and these units are basically banks and non banking financial companies. These institutions take deposits from firms and general public and lend or provide funds to firms or public requiring these funds. Thus they provide financial intermediation and assist in market making for the firms and personnel.

b) The main implications of efficient market hypothesis is

1) Price of a security reflects all information about the asset underlying that security

2) There is no scope for making arbitrage profits in the market

3) The rate of convergence to the fair value of an asset is instantaneous and thus eliminates the scope of any trader to make any gain from privileged information