Key to  the Exercises 

教学课件：习题解析

II Define briefly the following terms and concepts.

1. In financial markets, one party often does not know enough about the other party to make accurate decisions. This inequality is called asymmetric information. Lack of information creates problems: adverse selection and moral hazard.

2. Adverse selection is the problem created by asymmetric information before the transaction occurs. Adverse selection in financial market occurs when the potential borrowers who are the most likely to produce an undesirable(adverse) outcome—the bad credit risks—are the ones who most actively seek out a loan and are thus most likely to be selected.

3. Moral hazard is the problem created by asymmetric information after the transaction occurs. Moral hazard in financial markets is the risk(hazard) that the borrower might engage in activities that are undesirable(immoral) from the lender’s point of view because they make it less likely that loan will be paid back.

4. Financial institutions create and sell assets with risk characteristics that people are comfortable with, and the institutions then use the funds they acquire by selling these assets to purchase other assets that may have far more risk.

5. Diversification entails investing in a collection(portfolio) of assets whose returns do not always move together, with the result that overall risk is lower than for individual assets(Diversification is just another name for the old adage that“you shouldn’t put all your eggs in one basket.”).

6. By issuing its own financial claims the commercial bank in essence transforms a longer-term asset into a short-term one by giving the borrower a loan for the desired investment horizon.

This function of financial institutions is called maturity intermediation.

III Translate the following sentences into Chinese.

1. 交易成本，即从事金融交易所花费的时间和金钱，是那些有多余资金要贷出的人所面临的主要问题。

2. 在金融市场上，交易的一方通常并不十分了解交易的另一方，以至于无法做出准确决策，这种不对等被称为信息不对称。缺乏信息会导致的问题是：逆向选择和道德风险。

3. 金融市场上的逆向选择是指那些最有可能造成不利（逆向）结果，即造成信贷风险的借款者，常常就是那些寻找贷款最积极、而且最有可能得到贷款的人。

4. 金融市场上的道德风险是指借款人可能从事贷款人不希望从事的那些活动的风险，因为这些活动使得贷款很可能不能归还。

5. 金融机构可分为三种类型：存款型机构、契约储蓄型机构和投资型机构。

6. 多样化是投资于一个资产组合（投资组合），组合中资产的收益并不总是同时发生变动，其结果是投资组合的总风险要低于投资于单一资产的风险。

IV  Translate the following sentences into English.

1. The process of indirect finance using financial intermediation, is the primary route for moving funds from lenders to borrowers.

2. Successful financial intermediaries have higher earning on their investments because they are better equipped than individuals to screen out good from bad credit risks, thereby reducing losses due to adverse selection.

3. The government regulates financial markets for three main reasons: to increase the information available to investors, to ensure the soundness of the financial system, and to improve control of monetary policy.

4. Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a financial panic.

5. A financial intermediary’s low transaction costs mean that it can provide its customers with liquidity services, services that make it easier for customers to conduct transactions.