Financial Market Essay

4393 words - 18 pages



Table of Contents

Introduction 3
Question 1 4
Explain what you understand by the following terms relating to the financial markets. 4
With close reference to your answer in part (a), critically discuss why there is a need to regulate financial markets. How might financial markets’ regulations be implemented? 8
Question 2: Distinguish between spot and forward exchange rates and explain how these rates are determined in foreign exchange markets. Critically examine the relationship ...view middle of the document...

1. Asymmetric information:

Asymmetric information means that one party has more or better information than the other when making decisions and transactions. The imperfect information causes an imbalance of power (Howell, 2010). For example, when you are trying to negotiate your salary, you will not know the maximum your employer is willing to pay and your employer will not know the minimum you will be willing to accept.
Asymmetric information may lead to adverse selection and moral hazard.
Adverse selection is a term used in economics that refers to a process in which undesired results occur when buyers and sellers have access to different/imperfect information. The uneven knowledge causes the price and quantity of goods or services in a market to shift. This results in "bad" products or services being selected (Howell, 2010). For example, if a bank set one price for all of its checking account customers it runs the risk of being adversely affected by its low-balance and high activity customers. The individual price would generate a low profit for the bank.

2. Moral Hazard:

Moral hazards are a result of asymmetric information. A moral hazard is a situation where a party will take risks because the cost that could incur will not be felt by the party taking the risk. A moral hazard can occur when the actions of one party may change to the detriment of another after a financial transaction. In relation to asymmetric information, moral hazard may occur if one party is insulated from risk and has more information about its actions and intentions than the party paying for the negative consequences of the risk (Howell, 2010). For example, moral hazards occur in employment relationships involving employees and management. When a firm cannot observe all of the actions of employees and managers there is the chance that careless and selfish decision making will occur.

Another example for Moral Hazard:
Investors who invested their funds with Bernard Madoff lost most of their $65 billion because Madoff was running a Ponzi scheme rather than investing the money as the investors intended, paying people who were withdrawing their money with money received from new investors. Madoff had not actually invested any of his client's money for years. During the 2008 credit crisis, more money was being withdrawn than was coming in, so the Ponzi scheme finally collapsed—decades after it began (Spaulding, 2014).

People who invested in American International Group (AIG) thought that their money was relatively safe because they were investing in an insurance company that had the highest credit rating given by the credit rating agencies. However, AIG was also selling credit default swaps on mortgage-backed securities (MBSs) that started to default in large numbers in 2008 requiring them to post more collateral than they had. Why did AIG take such risks? Because the traders who sold the credit default swaps (CDSs) were receiving huge bonuses and they...

Other Essays Like Financial Market

Whole Foods Market, Inc. Financial Analysis

5731 words - 23 pages Fall 2014 Accounting 501 Term Paper Whole Foods Market, Inc. Financial Analysis Whole Foods Market, Inc. Based in Texas December 2014 Executive Summary Whole Foods Market, Inc. has been in operation for over 30 years, and has since demonstrated a very successful business model that continues to benefit all stakeholders. When the first Whole Foods Market store opened in 1980, business owners John Mackey and Walter Robb had

Financial Market Essay

589 words - 3 pages . Accuracy: Effective controls generate accurate data and information. Accurate information is essential for effective managerial decisions. Inaccurate controls would divert management efforts and energies on problems that do not exist or have a low priority and would fail to alert managers to serious problems that do require attention. 2. Timeliness: There are many problems that require immediate attention. If information about such problems

Financial Market

2653 words - 11 pages Final market report- Foreign exchange rate Group 4- Team 5 Bui Ai Phuong- s3445871 Nguyen Ha Phuong- s3445955 Nguyen Thi Minh Tam- s3360710 Bui Khac Xuan- s3342375 Table of contents Introduction 3 Market past performance 3 USD/VND exchange rate 3 AUD/USD exchange rate 4 Analysis of historical macro factors 4 GDP 4 Interest rate 6 Inflation rate 7 Government Intervention 8 Commodity Price 9 Market view

Financial Analysis of Huge Group Limited: Jsb Market Research

850 words - 4 pages ratios 6.1.1 Huge Group Limited - Financial ratios: Capital Market Ratios 6.2 Huge Group Limited - Financial Performance and Ratio Charts 6.2.1 Huge Group Limited - Revenue and Operating margin 6.2.2 Huge Group Limited - Asset and Liabilities 6.2.3 Huge Group Limited - Solvency 6.2.4 Huge Group Limited - Valuation 6.3 Huge Group Limited - Key Competitors 7 Appendix 7.1 Methodology 7.2 Huge Group Limited - Ratio Definitions 7.3

What Is the Role of “Hedge Funds” in the Financial Market?

1067 words - 5 pages What is the role of “hedge funds” in the financial market? “Hedge fund” is a term used to describe a diverse group of financial institutions, which play an important role in our financial system. There is a wide variety of definitions given for a hedge fund. Money Central Investor defines it as “a risky investment pool…that seeks very high returns by taking very great risks”, and Goldman Sachs & Co. adds that they “use of investment and

To What Extent Was Market Maturity the Cause of Caterpillar Restructuring? Critically Examine the Extent the New Strategy Transformed Market, Productive and Financial Performance

2481 words - 10 pages To what extent was market maturity the cause of Caterpillar’s restructuring? Critically examine the extent the new strategy transformed market, productive and financial performance. During the late 1980s and the early 1990s Caterpillar Inc. (CAT), a $30 billion colossal in the earth-moving equipment (EME), engines and power systems, underwent a significant restructure. This was because in 1982 CAT posted its first annual lost of its 50-years

Use an Example of Your Choice to Discuss How ‘Corporate Restructuring’ Transformed Market, Productive and Financial Performance

2143 words - 9 pages Use an example of your choice to discuss how ‘corporate restructuring’ transformed market, productive and financial performance. Companies quite often have a need to contract and downsize their operations, or redesign one of the aspects, which might be due to different reasons, such as external factors, increase level of competitiveness or to change company’s direction. All the changes that the company might implement are called corporate

Business Case Rubric

574 words - 3 pages BUS800 Case Study Evaluation Rubric A range - The submission conforms to the writing guideline. The final document includes correct grammar and spelling. - Selects three key issues, explains why they exist, and includes extensive use of financial and market data with the explanation. - The summation following each of the appendix areas of study are complete and provide value to the reader. - An explanation

Intrusion prevention systems forecast, share and size – JSB Market Research

1737 words - 7 pages included an exhaustive search of relevant publications like company annual reports, financial reports, and proprietary databases. Table of Contents 1. Research Methodology 2. Analyst View 3. IDS/IPS: Product Definition 4. Global IDS/IPS Market Outlook 4.1. Market Size & Forecast 4.1.1. By Value 4.2. Market Share & Forecast 4.2.1. By Type 4.2.2. By End-User 4.2.3. By Region 4.2.4. By Company 5. North America IDS/IPS Market

Jsb Market Research : Russia Tyre Market Forecast and Opportunities, 2019

1429 words - 6 pages The information contained in this report is based on both primary and secondary sources. Primary research included interviews with tyre manufacturers and channel partners. Secondary research included an exhaustive search of relevant publications like company annual reports, financial reports and proprietary databases. Table of Contents 1. Research Methodology 2. Analyst View 3. Russia Tyre Market Outlook 3.1. Production 3.2. Market

Indian Financial Systems

2224 words - 9 pages specialized financial institution • Organized &unorganized financial markets and • Financial instruments & services which facilitate transfer of funds. Procedure & practices adopted in the markets, and financial inter relationships are also the parts of the system. These parts are not alwaysmutually exclusive. For example, the financial institution operates infinancial market and are, therefore a part of such market. The word system in the

Related Papers

Financial Market Essay

5560 words - 23 pages correction coefficient indicates that 7.8 percent deviation of stock returns are corrected in the short run. Finally, Granger causality analysis suggests the existence of a unidirectional causality from market index to exchange rate and from interest rate to market index. Keywords: Cointegration, Granger Causality. Exchange rate, Interest rate, DGEN index 1. INTRODUCTION A well functioning financial system boosts economic growth through proper and

Testbank Chapter1 Financial Market Essay

5931 words - 24 pages interactions of buyers and sellers in a financial market determine the price of the traded asset. B) Financial markets provide a mechanism for an investor to sell a financial asset. C) Financial markets increases the cost of transacting. D) The interactions of buyers and sellers in a financial market determine the required return on a financial asset. Answer: C Comment: Financial markets provide three economic functions. First, the

Financial Derivatives: Option's Market Essay

785 words - 4 pages 1) Explain what options are. 2) Talk about different option markets. 3) Talk about American market. 4) Talk about European market. 5) Explain major differences. 1) An option is a financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed

Neo Classical Model Of Financial Market Globalization

986 words - 4 pages Did the experience of emerging countries fully justify the prediction of neo-classical model of financial market globalization? Why or why not? Financial Globalization stems from the idea of Neoclassical Economics where efficient allocations of resources will bring prosperity to nations through globalization. Financial globalization is an aggregate concept that refers to increasing global linkages created through cross- border financial flows