Question

Identify the function performed by Financial Market from the following statement: "Holders of assets can readily sell their financial assets through the mechanism of the financial market."

• A. Reduce the cost of transactions
• B. Provide liquidity to assets
• C. Facilitate price discovery
• D. Mobilization of savings

Answer 1

The Correct Option is B

The function performed by the financial market as described in the statement is to "Provide liquidity to assets." In financial terms, liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price. Financial markets enable this process by offering a platform where buyers and sellers can transact financial assets efficiently and promptly. 

Here’s why the provided statement aligns with the option "Provide liquidity to assets":

• Ready Market Access: Financial markets facilitate the buying and selling of financial assets with ease, ensuring that asset holders can exchange their assets for cash or other assets rapidly.
• Price Competitiveness: By having numerous participants willing to trade, financial markets keep the prices competitive, minimizing the loss that one might experience from selling quickly.
• Transaction Speed: The mechanisms of financial markets are designed to match buyers and sellers efficiently, increasing the speed at which transactions take place, hence providing liquidity.

In contrast, options like Reduce the cost of transactions, Facilitate price discovery, and Mobilization of savings describe different functions of financial markets. While they are important, they do not precisely match the described function of enabling asset holders to "readily sell their financial assets."

Answer 2

To identify the function performed by the financial market from the given statement, let's analyze the statement and each option in detail:

Statement Analysis

The statement says, "Holders of assets can readily sell their financial assets through the mechanism of the financial market." This implies that the financial market allows asset holders to easily convert their financial assets into cash or other liquid forms.

Options Analysis

Reduce the cost of transactions (1)

Definition: This function refers to minimizing the costs associated with buying and selling financial assets, such as transaction fees, brokerage costs, and other expenses.

Why Not: While reducing transaction costs is an important function of financial markets, the statement specifically highlights the ease of selling assets, which is more directly related to liquidity.

Provide liquidity to financial assets (2)

Definition: Liquidity refers to the ability to quickly convert an asset into cash without significantly affecting its market price. Financial markets provide a platform where assets can be easily bought and sold, ensuring that holders can readily convert their assets into cash.

Why Correct: The statement directly mentions that holders can "readily sell their financial assets," which is a clear indication of providing liquidity.

Facilitate price discovery (3)

Definition: Price discovery is the process by which the market price of an asset is determined through the interaction of buyers and sellers. Financial markets facilitate this process by providing a platform for trading.

Why Not: While price discovery is an important function of financial markets, the statement focuses on the ease of selling assets, which is more directly related to liquidity.

Mobilisation of savings and channelling them into the most productive uses (4)

Definition: This function involves collecting savings from individuals and institutions and directing them towards investments that are most productive and beneficial for the economy.

Why Not: While this is a crucial function of financial markets, the statement specifically addresses the ease of selling assets, which is more directly related to liquidity.

The correct answer is: (2) Provide liquidity to financial assets

The statement highlights the ability of holders to readily sell their financial assets, which is a direct indication of the financial market's function in providing liquidity.