, ECS3701 Assignment 2 (COMPLETE ANSWERS)
Semester 2 2024 (833935) - DUE 27 September
2024 ; 100% TRUSTED Complete, trusted solutions
and explanations.
2.01 Discuss how collateral and indirect finance are used in
explaining the basic facts about financial structure around the
world. [10]
Discussing the Role of Collateral and Indirect Finance in
Financial Structure Globally
Financial structures vary significantly around the world, but
several common patterns emerge that help explain how
financial systems operate. Two critical concepts in
understanding these structures are collateral and indirect
finance.
1. Collateral in Financial Structure
Collateral refers to assets pledged by a borrower to secure a
loan or credit. It plays a vital role in reducing the lender’s risk
and, consequently, influences the financial structure in several
ways:
Mitigation of Information Asymmetry and Moral Hazard:
Lenders often face information asymmetry, as they may
not have complete knowledge of the borrower's ability to
repay the loan. Collateral helps reduce this risk since the
lender has a claim to the pledged assets if the borrower
Semester 2 2024 (833935) - DUE 27 September
2024 ; 100% TRUSTED Complete, trusted solutions
and explanations.
2.01 Discuss how collateral and indirect finance are used in
explaining the basic facts about financial structure around the
world. [10]
Discussing the Role of Collateral and Indirect Finance in
Financial Structure Globally
Financial structures vary significantly around the world, but
several common patterns emerge that help explain how
financial systems operate. Two critical concepts in
understanding these structures are collateral and indirect
finance.
1. Collateral in Financial Structure
Collateral refers to assets pledged by a borrower to secure a
loan or credit. It plays a vital role in reducing the lender’s risk
and, consequently, influences the financial structure in several
ways:
Mitigation of Information Asymmetry and Moral Hazard:
Lenders often face information asymmetry, as they may
not have complete knowledge of the borrower's ability to
repay the loan. Collateral helps reduce this risk since the
lender has a claim to the pledged assets if the borrower
