Question

List the four types of businesses that investment banks traditionally engage in to sustain their operations. Describe the basic characteristics of each type by noting how the business might generate a profit. Then describe some of the basic risks within that line of business

Answer 1

Four types of traditional business activities of Investment Banks are:

1.Advisory: Investment banks advises as well as assists the corporate in carrying out the financial transactions. It provides advisory services in capital structure of the firm and ways of attracting capital.

2. Financing: In Equity Capital Markets, planning of initial public offering, follow-on offerings, equity-linked issuance and share repurchases; In Debt Capital Markets, Underwriting of Fixed Income Securities including bonds, asset backed securities, commercial paper and hybrid capital; In leveraged Finance, Arranging and underwriting of debt capital in the international leveraged finance and high yield markets; In loans, providing coverage of a variety of specialist industry sectors, project finance, export finance and financial institutions are parts of this function.

3. Distribution: Investment bank distributes securities to the investors.

4. Securitization: Investment bank also works in the structuring, global distribution, trading, and research of asset backed products in the Asset Backed Securities and Asset Backed Commercial Paper markets.

In this line of business, there are three types of risks:

1.Market Risk: This kind of risk arises from economic and political change.

2. Credit Risk: This type of risk arises from counterparty risk.

3. Operational Risk: This kind of risk arises from operational fault.