Question

Briefly discuss the purpose and role that each type of financial institutions (depositary, contractual, and investment) play in the U.S. economy. How do each of these institutions intersect with the various types of markets, i.e., capital, money, spot (cash), derivatives, Forex and Interbank, primary, and secondary (inclusive of OTC)?

Answer 1

The key role of the three institutes in the U.S. economy would be: -

· Depositary institutes would be categorized as bank which would function as collecting money from its customers and providing the loans to the borrowers. The important services provided by this category of institutes are liquidity services in the economy, opportunity of investing in the security, deposits safekeeping and assuring the customers safety regarding their money and investments.

· Contractual saving institutions would consist of making the funds for pension and the companies saving insurance. The funds collected for the pension help a person to save the money for their retirement while the companies in insurance provide the protection in the financials to the buyers.

· Investment institution consist of mutual funds, investment bank and the firms of brokerage which helps a person in investing the funds. These companies helps the person in investing their hard earned money and earning a feasible return.

These institutions interact with the varied market during their course of operation. The capital market is the one where the people, investors and the institution would trade their securities of financial like the stocks, commercial paper etc. Further, the pension fund also invest in the various stocks existing in the market.

In the similar way the forex market is the one where trading of securities take place. Further, the institutes of depositories with the help of central bank helps in regulating the trading of foreign exchange in the market.