Chapter 3

Question 1

Describe financial intermediation

Answer 1

-involves the movement of funds between those who supply capital and those who use it

Question 2

What are the primary sources of capital?

Answer 2

-depositors, lenders, policy holders, and investors

Question 3

What are the 6 major factors that encouraged the growth of other types of financial intermediaries (other than banks and insurance companies)?

Answer 3

1. Demographic influences
2. Proliferation and growth of pension plans
3. Empowerment of individual investors via technology and communications
4. Innovation
5. Declining costs
6. Capital markets liberalization and deregulation

Question 4

What are the two main factors that drove the interest in derivatives by the financial intermediaries?

Answer 4

1. As regulatory environments become more concentrated with the risks they assume, financial intermediaries have used derivatives in their management strategies and processes
2. They use financial derivatives in the creation and management of customized financial products for both their individual and institutional investors

Question 5

What are the 7 types of institutional investors?

Answer 5

• pension plans
• mutual funds
• insurance companies
• endowments
• charitable foundations
• family trusts/estates
• corporate treasuries

Question 6

Insuramce company assets are often managed ________. This preference has led insurers to purchase ______________.

Answer 6

• internally

- external asset management firms

Question 7

What are some of the key facts that have contributed to the growth of mutual funds in the past few decades?

Answer 7

• diversification geographically
• diversification of investor base beyond the traditional individual investor
• pursuit of wholesale

Question 8

What are two similarities between endowment funds and retirement funds?

Answer 8

• long term in nature

- not taxable

Question 9

What are the two regulators that oversee the majority of firms and individuals involved in the creation, management, sale and distribution of financial products and services in Canada?

Answer 9

• OSFI

- provincial and territorial securities regulators

Question 10

What is the OSFI?

Answer 10

• independent agency of the federal gov that reports to the federal minister of finance
• supports the government’s objective of “contributing to public confidence in the Canadian financial system”

Question 11

What is the OSC’s mandate?

Answer 11

-to provide protection to investors from unfair, improper, or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets

Question 12

Describe the organizational structure of an institutional investment fund’s governance

Answer 12

• board of trustees
• investment committee
• investment consultant
• investment manager

Question 13

What is the purpose of an IPS?

Answer 13

to document the investment management process by

1. identifying key roles and responsibilities related to the ongoing mgmt of a funds assets and
2. setting forth an investment structure for a fund’s assets, which included all of its asset classes and acceptable ranges that in aggregate, are expected to produce a sufficient investment return over the long term while prudently managing risk