Question

In: Finance

what role does academia have in informing banks, regulatory agencies, and or individual investors of the...

what role does academia have in informing banks, regulatory agencies, and or individual investors of the risks of new investments like derivatives?

Solutions

Expert Solution

An academia is expected to to do through research with respect to any new investment . Outcomes of his research shall include the following :-

1. Risk of the new investment

2. Beta of the investment

3.Expected return

4.can it be used for Hedging ? what transactions can be hedged by this new investmentd.

5.Academia has to allot the risk class , define the nature and quantum of risk .

6. To regulators the academia has to point out the loop holes where manipulation and speculation in such derivatives can be detrimental to the interest of the security or the security market as a whole .

7. The academia must also understand the risk level which the individual investor is ready to underatke and the nsuggest whether he should invest / trade in new investments of derivatives

8.He shall also mark whther the underlying asset of the derivative is sufficient that the derivative derives its value from it or is there any other facotor to which the value of derivative is directly being effeted .

9. To banks an academia will suggest whether investments in such new investments are within the banks objectives , risk level , goals and interests .


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