The following is an excerpt taken from a november 30 2007, Ask an Expert

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The following is an excerpt taken from a November 30, 2007, speech entitled "Innovation, Information, and Regulation in Financial Markets" by Federal Reserve Governor Randall S. Kroszner (www. federalreserve.gov/newsevents/speech/kroszner20071130a.htm):

Innovations in financial markets have created a wide range of investment opportunities that allow capital to be allocated to its most productive uses and risks to be dispersed across a wide range of market participants. Yet, as we are now seeing, innovation can also create challenges if market participants face difficulties in valuing a new instrument because they realize that they do not have the information they need or if they are uncertain about the information they do have. In such situations, price discovery and liquidity in the market for those innovative products can become impaired.

Answer the questions pertaining to the statement

a. What are the information costs associated with financial assets?

b. What is meant by "liquidity"?

c. Why do you think that for innovative financial products price discovery and liquidity could become impaired?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92068093

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