Role of Transaction Cost in Intermediation Process Assignment

Role of Transaction Cost in intermediation Process - Assignment ExampleFor instance, when the coin bank acts as intermediary it bring togethers souls with antithetical needs, financial inputs at different point of time. It allows people to save money into various accounts like savings account, time deposits, salary account, tribute investment companys, and so on. After the bank accepts deposits from an unmarried it invests that sum into projects which have returns greater than or equal to the monetary value of investment which is also the banks liability. Now, if any corporate or various(prenominal) approaches the bank for loan, the bank will charge interest on that loan. This interest will increase the transaction cost of the individual or corporate. The interest charged on loans by the bank on the borrower will obviously higher(prenominal) than what the bank has to pay to the depositors. This is because in order to operate in the market and serve the community it has to e conomise a profit margin for all transaction which otherwise would lead to collapse of business. The advantage that an individual or a corporate will get from an intermediation process is that the credit risk is transferred from individual borrower to the bank. This is because when a corporate raises funds from market directly without any intermediation, the credit risk of parties to transaction has to be evaluated personally. This is true in case of over-the-counter markets where the contracts are a good deal customised according to individual requirements and parties to contract preface into agreement with each other without any intermediary. This reduces their transaction cost but also increases the credit risk. When an intermediary is introduced in the same model as in case of exchange traded funds, the transaction cost increases collectible to brokerage charges, maintenance fee, printing and advertising charges, commissions, and so on. The various costs are passed on to the fund raiser and hence decreasing the transaction cost of the individual from intermediation process (Buckle and Thompson, 2004, p.37). From the above discussion, the voice of transaction cost in the intermediation can be summarised as follows. The intermediation process aims to connect the individuals with surplus funds with individuals with deficit funds in order to channel funds properly in the economic system. In the process of intermediation the individuals and corporate is able to reduce search cost of superlative funds, verification cost, monitoring cost, and credit worthiness of the parties involved in transaction. Since the intermediary provides these services, it charges a fee or commission for providing these services which increases the cost of transaction from intermediation process but such cost is much less compared to the benefit from intermediations (Mishkin and Eakins, 1998, p.369). For instance, the banks offer standardised services and products that reduce cost of transaction and the risk of investment. The nonprescription(a) market mainly operates without intermediation and is hence a much more risky option. Role of lopsided Information in Intermediation Process In order to understand the role of asymmetric entropy in the intermediation process, it is important to understand the concept of asymmetric information. Asymmetric information arises from a plaza when one party to transaction has more information compared to the other. This is generally