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Level 80

Financial Innovation


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Financial Innovation
The creation of new financial instruments, markets, and institutions in the financial services industry; new ways for people to spend, save, and borrow funds; changes in the operation and scope of activity by financial intermediaries
Fungibility
for a given company, all options of the same type with the same expiration and striking price are identical
Disintermediation
The removal of funds from a financial intermediary
Nondeposit Liabilities
Borrowed funds, such as Eurodollar borrowings, fed funds, and repurchase agreements, that are not deposits and are not subject to reserve requirements
Regulation D
A regulation that prescribed reserve requirements on some deposits
Retail Sweep Accounts
A financial innovation that relabels deposit liabilities to nondeposit liabilities by "sweeping" balances out of transaction accounts that are subject to reserve requirements and into other accounts that are not
Deregulate
The dismantling of existing regulations
Derivatives
assets whose value depends on the values of other assets (stocks and bonds)
Forward Agreements
Customized arrangements between two parties to trade a financial asset on a date in the future at a price determined today
Futures Agreements
Standardized contracts where financial instruments are traded at a price determined today on a date in the future
Option Agreements
Standardized agreements that give the buyer the right, but not the obligation, to buy or sell a standardized basked of financial securities at a price determined today on a standardized date in the future
Put Option
selling shares
Call Option
buying shares
Interest Rate Swaps
A financial innovation used to reduce the risk of future interest rate change over a long period of time. Swaps involve two parties trading interest payment streams to guarantee that their respective payment inflows …
Currency Swaps
A financial innovation used to hedge exchange rate risk over a long period of time, whereby one party agrees to trade periodic payments in a given currency with another party who agrees to do…
Credit Derivatives
Contracts that transfer the default risk of a loan or other debt instrument from the holder of the loan (beneficiary) to a guarantor who receives a fee for accepting the risk
Securitization
Unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments (or securities).
Asset-Backed Securities
Securities that result from the process of securitization
Collateralized Mortgage Obligations
Securitizations that redirect the cash flows (principal and interest) of mortgage-related products to various classes of bondholders, thus creating financial instruments with varying prepayment risks and varying returns