Which of the following pairs of a function of a financial market and its description is correctly matched?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Mobilisation of savings – Surplus funds are channelised into the most productive use
Option (1) Facilitating price discovery – Financial assets can be easily converted into cash whenever required — Incorrect. Easy conversion into cash is providing liquidity.
Option (2) Mobilisation of savings – Surplus funds are channelised into the most productive use — Correct. The market moves savings from savers to investors. By giving savers a choice of investments, it channelises surplus funds into the most productive use.
Option (3) Providing liquidity to financial assets – Buyers and sellers save the time, effort and money of finding each other — Incorrect. Saving the time, effort and money of finding each other is reducing the cost of transactions.
Option (4) Reducing the cost of transactions – Households and business firms interact to set the value of a financial asset — Incorrect. The interaction that sets the price of an asset is price discovery.
NCERT (Pre-rationalised Edition): “1. Mobilisation of Savings and Channeling them into the most Productive Uses: A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channelise surplus funds into the most productive use.” “2. Facilitating Price Discovery: You all know that the forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.” “3. Providing Liquidity to Financial Assets: Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide liquidity to financial assets, so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.” “4.Reducing the Cost of Transactions: Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. …” |