1. Why are financial instruments important to operations in the economy?

- What are financial instruments? These are assets that have been legally recorded and
may be exchanged. The basic word for a financial asset can also be used to describe
them. The lawful owner may be entitled to payment of an interest or a portion of an
entity, depending on the financial resources (this is usually a corporation). Stocks are
often used to refer to a portion of a business, whereas bonds are sometimes used to refer
to interest payments. Savings accounts, loans, and accounts receivable are other
financial tools. Due to their ability to lower exposure to specific business risks,
financial instruments are crucial to our economy. Changes in interest rates, currency
rates, and of course prices are all excellent instances of rates changing.
2. What is the most important financial instrument?
- I will consider money or cash as the most important financial instrument because
money is generally accepted as payment for goods and services. Money or Cash is
the most liquidity because it is easy to convert as a payment of an asset.
3. How is Market risk connected to financial instruments?
- Economic concerns, which may affect the performance of many businesses, not just
one, are a major contributor to market risk. These sources of risk include changes in
the prices of assets, liabilities, and derivatives.
4. How do financial intermediaries’ function in the economy?
- Financial intermediaries transfer money from those with extra capital to others that
need it. The method minimizes the cost of doing business and produces effective
marketplaces. An investment in insurance, stocks, bonds, real estate, and other assets,
for instance, might help a financial adviser establish a connection with a client. By
supplying cash from other financial institutions including the Federal Reserve, banks
link borrowers and lenders. Insurance businesses take premium payments, offer
insurance benefits, and issue policies. On behalf of its members, a pension fund raises
money and disburses benefits to retirees.
5. How do financial intermediaries reduce risk?
- - There is a higher amount of risk involved when lending to a single person. Institutions
can lend to a variety of vetted borrowers by depositing excess cash with a financial
intermediary. Due to default, the danger of loss is decreased. The insurance industry is
subject to the same risk reduction approach. Customers pay premiums, and they receive
policy benefits in the case that customers are impacted by unforeseen circumstances
like accidents, decease, or illness.