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The presence of asymmetric information in financial markets explains, in part, why financial intermediaries and indirect finance play such an important role in financial markets.

"The presence of asymmetric information in financial markets explains, in part, why financial intermediaries and indirect finance play such an important role in financial markets".

Explain with examples the terms adverse selection and moral hazard. Describe how financial intermediaries can reduce losses due to adverse selection and moral hazard. (10 marks)

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