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Answer: Dealer banks often engage in the intermediation of large equity block trades and trades in municipal and corporate bonds.
**A is correct.** Dealer banks often intermediate large equity block trades as opposed to equity exchanges, and also play a large role in the intermediation of OTC market trades for such securities as corporate and municipal bonds, as well as some sovereign bonds. **B is incorrect.** Dealer banks will fund their own trading positions through repurchase agreements and also provide repo financing for the purchase of securities by investors. **C is incorrect.** Dealer banks will frequently support internally managed hedge funds during times of extreme need, such as financial market stress environments. The text provides several examples of large dealer banks injecting scarce capital into their internally managed hedge funds to ensure a strong reputation for the bank with the investors in these funds. Investors in these internally managed hedge funds often prefer them over external hedge funds as they have greater confidence in the bank's ability to support the funds during times of stress. **D is incorrect.** Dealer banks often operate asset-management activities for institutional and wealthy clients.
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A manager in the treasury department of a bank is presenting to a group of newly hired treasury analysts about the activities of dealer banks. During the presentation, the manager compares the major lines of business in which the dealer banks operate and explains the risks the dealer banks face in each line of business. Which of the following would be a correct statement for the manager to make?
A
Dealer banks often engage in the intermediation of large equity block trades and trades in municipal and corporate bonds.
B
Dealer banks fund their own trading positions through repurchase agreements but typically refrain from providing repo financing to fund investors' purchases of securities.
C
Dealer banks usually prefer to support external hedge fund counterparties above internally managed hedge funds during times of financial stress.
D
Dealer banks are prohibited by regulators from operating asset-management activities for institutional and wealthy clients.