Financial Intermediation and Risk Coursework Example | Topics and Well Written Essays - 1000 words

Financial Intermediation and Risk - Coursework Example The author of the work does some research of financial intermediation. It is a core function of commercial banking. Banks facilitate customers and corporations in such a way that they absorb the surplus liquidity in the market and pass it onto the entities which require these funds to meet their requirements. Customers can gain, firstly, by placing surplus funds which give no profit at home into the bank and earn some interest. Secondly, entities which require funds to manage their financial situation can obtain convenient loans from commercial banks. The work outlines the basic outlook and mechanism of a bank’s balance sheet. Any and all funds which have been placed with the bank come under the liability section of the balance sheet of the bank, whereas any and all fund placements by the bank come under the asset section of the balance sheet of the bank. Huge volumes of funds are flowing in and out of the bank which define various forms of bank’s participation in financial markets. The work describes how banks cope with interest rate risks. The tenure of the transaction is the first major factor which needs to be considered. For longer tenures, the risk is higher owing to the opportunity cost of entering into a less liquid transaction. The second risk which needs to be accounted for is the inverse relationship between yields and prices of securities. In an economy where the interest rate climate is on the rise, increased yields will drive the price of the security down.