Explain the factors responsible for financial innovations.

Advanced Financial Management Block Revision Mock Exams

Factors responsible for financial innovations:
• High level of transaction costs
• Need to reduce agency costs
• Existing opportunities to increase liquidity of assets e.g. factoring of debtors
• Regulatory and legislative changes hence volatility of interest rate and exchange rates
Use of interest rate swaps
• Volatility of securities prices hence the use of futures and options
• Tax asymmetric that can be exploited to produce tax savings for the investors and

Issues of securities.
• Technological advancement and related factors.
• Academic work that results in advance in financial theories or better understanding of the risk – return characteristics of existing securities.

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