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Unit 3 Financial Market Level 5 GSM London

INTRODUCTION

Financial market is place where people trade financial securities, bonds and some other underlying assets that reflect total supply and demand at that particular period of time. It includes precious metals and other agricultural products. It a wider term that describe any marketplace where trading can be done in accordance with currencies and derivatives occurs. Cost in a financial market that are determine by making specific changes in the rules and regulations. This particular project is providing crucial information about different operation of financial markets and valuable important to an individual or company's (Takaya

There are certain theories and methods those are being used in financial markets which consists of efficient market hypothesis as well as their related implications. Analysis of operations and efficiency of financial markets are discussed under this report. To determine and collect valuable financial information and indices that consists of share prices to operate proper analysis of operations as well as their efficiency in the marketplace.

Q1: (a): Distinguish among various levels of market efficiency

An 'efficient market is state as an appropriate market in which they are large number of rational, profit maximization actively competing with trying to predict future market value of an individual securities. In efficient market, competition between many intelligent participants that lead in any tough situation, where at any stage the actual prices of individual securities already that reflect the effects of data. In other words, in an efficient market is a point in time the actual prices of securities will be positively estimate intrinsic value. There are mainly three level of market efficiency. Some of them are discussed underneath:

            Weak form efficiency: In this the prices of the securities instantly reflect all data of the past prices (Breedon, Chadha and Waters, 2012.). It included future price movements would not be estimated by using last year prices. All data related with past on inventory prices is of no use in predicting upcoming stock prices deviations.

            Semi-Strong efficiency: It is refers as assets price which is fully reflect every publicly published data. Henceforth, only investors and other stakeholders with extra inside data would have plenty of benefits in the market. It has been determine that strong form is theoretically related with persuasive, then the semi-strong from past request that is present in our common senses. It says that the market will be quickly digest publication of related information through moving prices fluctuations to a new equilibrium level that varies from overall supply and demand that causes by emergence of data.

            Strong form efficiency: It is known as price of asset that is fully reflect every public and internal information that are available to the company. Henceforth, no other one have a benefit in the market in predicting cost thus there is no information which would be provided at any extra value to outside stakeholders and investors. In case the current market prices is lower than the value cost which is justified by some other piece of private data (Mayntz, 2012).

Efficiency market theory: It is known as an important investment theory which state that it is impossible to beat the market because market efficiency would cause in existing share prices to incorporate and reflect every information in reliable manner. It is  a kind of modern theory of finance as a good starting theory which is efficient in capital market.

In 1970, Eugene Fama has published in their article that beside the meaning of efficient markets, also the distinction among the three forms of efficiency weak, semi-strong and strong aspects. The efficient market hypothesis and attitude of finance theory is having been the main aspects of modern asset pricing for the next coming years. Apart from this, certain theories are explaining assets pricing in effective manner. It happens to be major research areas in specialized literature.

FTSE all share and trend:

FTSE All Share  and trend

FTSE All share and trend-1

FTSE all share and trend-2

(b):  Critically assessment of “efficiency” of the London Stock Exchange (LSE) market

The main important aspect of this particular theory of efficiency market which provide crucial information about last couple of year performance of LSE market position. This hypothesis is said to be fundamental aspect for the financial model and has significant impact while making decision from investors as well as by other financial managers. As per the efficient market hypothesis of the inventory market, the securities prices reflect every information which is indifferent and cost-efficient. This data is more commonly present for all investors so that everybody that can have an absolute and incurred comparative benefits for some assets in respect to increase maximum growth for the company (Claessens and Forbes, 2013).

Henceforth, under this hypothesis of market effectively, even if there are more profitable opportunities that an investor will realize more quickly and hence, the market will remain balance for longer period of time. It has been determining that there are various types of EMH assumption which exist in perfect capital market. Thus, the capital market is more intense competitive, asset prices are more hard to be under or overvalued in more reliable manner. Because of which, investors would not be able to make abnormal gains by their overall transaction. On the basis of undertaken capital investment risk, they would be able to earn reasonable market return. In respect to keep the perfect market analysis, all associated assumptions would be made into account.

  • Initially, there are no taxes to be paid.
  • Secondly, all investors and stakeholders have the same available data.
  • Lastly, there are no any kind of agency cost to be connected with the stock ownership as well as no any transactions costs are arises for an individual those are associated with buying and selling of securities or any other shares.

LSE (London stock exchange) is a stock exchange which is situated in UK. It is one of the fourth largest stock exchange in the international level after the Tokyo Stock exchange. It has been seen that total market capitalization of GBP 3,396 billion in past 2012 year. It is considering that the LSE is one of the most appropriate stock exchanges out of 3000 companies from more than 70 nations. It had been admitted to trade on their market at more economical manner. The one of the most successful and dynamic industry as compare to other stock markets. It has over more than 500 firms, most of them are banks and stockbroker’s members. The major aspect of this stock market is that from so many years they have the history started in past 300 years ago in coffee houses in 17th century in UK. It was more vastly formulated in a strong and well regulated stock exchange places (Gigineishvili, 2012). Marks and Spencer is one of the leading retail company which is operating in more effective manner. It is selected because the market position of this company is more effective as compare to other companies.

Marks and spencer's chart

There are certain evidences against the efficient market hypothesis:

            It has been found that empirical evidences that support the weak-form and semi-strong forms of EMH, they are having no uniformity of acceptance. Plenty of investment professional will still meet the EMH with an appropriate deal to their specific client.

            Over-reaction and under-reaction: It is known as efficient market hypothesis that implies as investors would react quickly and remain unbiased in reliable ways to new information. They need to determine that stock with low long term past returns tends to have more future returns and vice versa. It is said to be huge challenges to the efficient market hypothesis which an individual often over and under react to new ones (Weinstein, 2011). 

            Value versus growth: It is said to be essential investment professionals and academics that guide as to create maximum value to the company on a regular basis. Typically, it is a value of strategies that consists of buying stocks that have low prices which is related with accounting books of accounting such as dividends and historical prices.

            Small firm’s effects: According to this particular effects, it has been found that average return on small inventory were too large to be deal with the capital assets pricing model. While average returns on wide stocks were too minimum. Research indicators that are most of the difference in comparison to small and large inventory in the ever month.

There are various types of activities that are categories and are represented underneath:

            Primary market: The LSE allows UK and global companies to join the equity market in accordance to gain access to capital and because of this the outcomes results in increasing money, increasing their share capital and obtain a market valuation through making initial public offering process. Further, it gives great opportunities in various size companies to quote since it operates different market. Companies from around to be world can list to a number of products which includes shares, depository receipts and other debt obligations (Ahmed, 2013).

            Secondary market: It is known as one of the most effective market for doing trade on main market and alternative market. The largest and well regulated companies from around the world are listed in the first marketplace. Over 1300 companies from almost 60 different nations in order to enjoy the privileges in LSE. The FTSE 100 index is said to be primary share index of the most highly capitalized UK companies those are listed on the main market.  The second referred market is for smaller growing nations. A lot of various industries are trying to join this market which is asking to grow their capital. Moreover, there are various markets that are associated with trade market (Tumminello and et. al., 2012).

            Trading: In respect to maximize the liquidity of inventory the LSE offer trading stock those are essential for the company in order to increase profitability position of the company. It consists of transfer of products from one individual or organization to another, often in exchange for wealth. It is an activities style of participating in financial sectors that seeks to increasing overall traditional investing done by the company.

            Information services: It is an effective form of financial market which used to provide information for a structure within an organization that is responsible for their data processing and recording of crucial data into their respective format.  Every second of trading day the London Exchange use to provide information ranging the data from individual trades and stock prices shifts to companies’ overall announcement.

            Derivatives: It was created to bring the cash equity and derivatives places that are closer together. As valuable outcomes which expand the trading of derivatives while it reduces the total risk and cost of the company.

Graph 1: Inflation rate:

The under mentioned charts is indicating total rate of inflation which is increase as per base rate %.  There is inverse relationship among inflations and interest rates. After 2008, it gets reduces drastically and remain constant till now.

Graph 2: Bank rate and policy rates

There is direct relationship among the repo rate and lending rates which are being charged by Banks to various borrowers in UK. Reduction of interest rate used to determine an economical monetary policy. It means that people would be able to borrow at minimum rate from central banks to relend to their borrowers at reduced rates than earlier.

Graphs 3: Bond rate in EU

From the above bond rate, it has been seen that the organise line is representing the rate in UK market. It means that it is more low as compare to other country rates.

Graphs 4: Bond price

According to this particular charts, it has been seen that bond prices of Bank of England is representing downward slope. It means that they are decrease in every year.

Graphs 5: Quantitative easing of UK central banks

It is a kind of central banks such as these bank of England use to create innovative money to make wide purchase of assets. It is a kind of policy in 2008 and to start phasing out negative interest rate of the in UK.

Graphs 6: FTSE 100

From the above in charts, it has been seen that FTSE 100 is open with 7.567.14 at the high rate of 7.598.51. The low rate it touches during the time is about 7.561.63. The share index of 100 top companies listed on the LSE with the highest capitalisation rate.

Graphs 7: Housing prices in London

According to the above chart, it has been seen that housing prices in London will go in a same direction as inflection rate of a country. While on the other hand FTSE market will also change as per the change in inflation rate because this can be said that the rise in the inflation rate will also increase FTSE market. In case decrease in inflation rate will also drop the market at the same point of time. 

Q2

(a): Role and function of capital market

The financial market is known as systematic marketplace that an investors deal in financial market. It would provide a vehicle for proper allocation of savings to overall capital investments. It can be categories into money market and capital market. It has been found that both the markets are crucial in financial sectors. In capital market is said to be long term securities. It is a market in which securities are having indirect claims to a capital investment. It uses to plays a vital role in the alteration of an economy because, it will be providing proper mode of transmission for assembly of funds. This article uses to present to determine the comparison among money and capital market (Financial Market Regulation, 2012).

Basis for comparison

Money market

Capital market

Meaning

It is known as effective  segment of the financial market that is leading and dealings of short term securities are done.

It an important financial management where long term securities are issues and traded.

Nature of market

It is said to be more informal market.

According to this, more formal types of market is being determine by most of the investors.

Risk

In this particular market, the list is more low.

It is more comparatively high in accordance with the money market.

Purpose

To fulfil short-term credits to require during an accounting year.

To analyse long term credit requirements of an organisation.

            Role: The role of capital market is an essential for inclusive growth in terms of wealth distribution and making effective capital investment for an investor as well as stakeholders. This would increase economical fiscal inter mediation. It enhances mobilization of saving and therefore improve efficiency and increase capacity of investments.

            Functions: There are various effective functions which is needed to be followed in an organization. Some of them are discussed underneath:

  • It would provide long term funds that is necessary for investment decisions.
  • By the help of this, investors can make identification of their total capital investments and their related viability (Titman, Keown and Martin, 2017).
  • It is used to facilitates the international capital inflows.

            A financial market is said to bring buyer and sellers needs together to trade in assets prices such as stock, bonds, commodities and currencies. The main purpose of using this particular market is to set costs for international trade, raise capital and transfer liquidity as well as overall risk. Apart for this, component to financial place, two of the most similarly used are money market and capital market. Money markets are used to analyses government and other entities as a means for lending and borrowing for short-term basis. It is usually related with the assets that are being held for more than one-year time.  Capital markets are mainly used for long term assets that are related with maturities of greater than one accounting period of time. It used to provide a wide variety of functions for both individual and corporate at the same point of time. It has been seen that most of the company wants to make their capital investments overnight and looks to the money market to attain their essential needs and wants for the company.

Q.3

(a): Critical evaluation of potential risks in international transactions

It has been observed that there are various risk factors associated with international trade that consists of major barriers in order to grow in the same manner. Economists need to have differed on the real advantages of international trade. The total maximization of export market is widely important to an economy. It is essential aspects that can formulate an economy, but at the same time specific domestic player’s ca be outperformed through financially balance in multinational industries that become so important in more similar nations. It is more characteristically higher in accordance to international trade.

Risk: It refers as one of the main factors which is based on uncertain events or situation that, if it arises has both positive and negative effects on a project overall aims and objectives.

Uncertainty appreciation period: It is known as one of the specific ability to assess the unlimited collection with an economical certainty which is lacking at the time of increasing any claim.

Fluctuation period: It has been seen that normal hormone changes can cause overvaluation that are to be more irregular in a given situation. It means that company would start experiencing lost period.

Depreciation period: It is the time at which the assets is available for use. It is said to be the location and situation which is necessary for the company to be capable of operating in the same manner.

There are certain types of risks that are associated with international trade which can be divided under various types (Paul and Baschnagel, 2013). Such as:

            Economic risks: Risk of concession is done to control economic aspects those are making huge impacts on the profitability of an organization. Risk of non-acceptance and protracted default in any marketplace.

            Political risk: There are certain crucial aspects which are making huge impacts on the overall performance of an administration. Some risk of non-renewal of import and exports licenses in order to operate business in most effective manner. Risk of imposition of an import has been ban after the delivery of products all around the nations.

            Commercial risk: It is an essential aspect which is associated with banks which is lacking of ability to honor their role and responsibilities. In these kind of situations, a buyer is failed to pertaining in order to make payment because of financial obligations.

It has been determining that types of foreign exchange that a company can be exposed to transactions and economic exposure. In case of some companies, international exchange risk will be managed from the center. Forward foreign exchange market would provide an option to the importer to make payment of their investment according the rate at which interest is more in other company. It would ensure the future delivery of a foreign currency at a particular exchange rate. The cost at which contract is being made is termed as forward rate. This is sign in order to control their future risks that are arises in an organization case of making payment of imported products.

Chart showing Euro to dollar

  • Spot rate: It is the rate at which forign exchange contracts are being made by one parties. These kind of rates changes drastically in some situations. It the present rate at which two individual made contract to buying and selling of securities.
  • Forign exchange rate: It is kind of exchange sport transaction which is based on agreement among two parties to buy one currency in respect to selling another currency at the agreed price for settlement on that particular date.

Graph: Both foreign exchange rate UK to Euro-currency

(b): Function of Euro-currency market

It is a kind of money market under which currency kept in outside banks of the nations where it is legal tenders in case of borrowing and lending done by the banks during the period of time. This seems to utilize by banks, multinational corporation and mutual funds as well as hedge funds that wish to regulate needs in domestic market.

There are certain important functions that are associated with this market. Such as:

  • These domestic currencies of one nations at the time of deposit in a second nations. Like for examples, UK pounds denominated deposits in a banks outside of United Kingdom.
  • All banks in which Euro-currency are deposited in Euro banks (Volosovych, 2011).
  • It is known as euro banks in a fiscal mediator that simultaneously bids for the time of deposits and make loans in a currency other than that of nations which is situated in that particular nations.

            It is necessary to allow company to expand their market for both products and services that cannot have been available to that particular nations.

Pie chart of market size:

Advantage and disadvantage of useful for international transactions:

There are various benefits those are essential for increasing growth of market for the company. Such as:

  • Lower purchased price or costs.
  • Greater access to deliver products technology
  • Improve relationship of suppliers

            Limitations: It is not operating for longer period of time, the continual short-term hedging of repeated transactions can not limited effectiveness to an organization. Chances of illegal transactions are more.

Q4.

(a): Asymmetric information: It is said to be an effective information which fails and occurs in respect to one party to an economic transaction possesses high material information instead of another one. It is associated with the study of decisions that are related with various transactions.

(b): Moral hazard: It is a kind of situations under which one party gets concluded in a risky activities determining that it is safe from all kind of risk and other individual would incur those costs.

(c): Adverse selection: In common terms, a situation in which sellers have data that buyer does not have regarding few aspects of product quality. It some kind of tendency those in dangerous jobs or huge risk lifestyles to get certain kind of insurances.

Purpose of regulating foreign market:

There are certain regulations that are in place to ensure that the markets those are operating in more effective manner. It is essential requirement because there are certain environmental, social and government products and services that are effective for the company. It is necessary for an individual to which subjects financial institutions to certain needs that are essential for financial system. It is done to make proper regulation of all necessary transaction during the time to get more appropriate outcomes in near future time (McMorrow and Roeger, 2012).

CONCLUSION

From the above project report, it has been concluded that financial market is an essential place to make trading of various securities in effective manner. There are various rules and regulations are needed to be followed at the time of operating their business in more reliable and safe manner. They are aiming to regular the integrity of financial systems in more appropriate ways. Role and functions of a two important markets such as money and capital market.

REFERENCES

  • Ahmed, A. D., 2013. Effects of financial liberalization on financial market development and economic performance of the SSA region: An empirical assessment. Economic Modelling. 30. pp.261-273.
  • Breedon, F., Chadha, J. S. and Waters, A., 2012. The financial market impact of UK quantitative easing. Oxford Review of Economic Policy. 28(4). pp.702-728.
  • Claessens, S. and Forbes, K. eds., 2013. International financial contagion. Springer Science & Business Media.
  • Gigineishvili, M. N., 2011. Determinants of interest rate pass-through: Do macroeconomic conditions and financial market structure matter? (No. 11-176). International Monetary Fund.
  • Mayntz, R., 2012. Crisis and control: Institutional change in financial market regulation. Frankfurt am Main: Campus Verlag.
  • McMorrow, K. and Roeger, W., 2012. The economic and financial market consequences of global ageing. Springer Science & Business Media.
  • Paul, W. and Baschnagel, J., 2013. Stochastic processes. Springer.
  • Takayasu, H. ed., 2013. Empirical science of financial fluctuations: The advent of econophysics. Springer Science & Business Media.
  • Titman, S., Keown, A. J. and Martin, J. D., 2017. Financial management: Principles and applications. Pearson.
  • Tumminello, M. and et. al., 2012. Identification of clusters of investors from their real trading activity in a financial market. New Journal of Physics. 14(1). p.013041.
  • Volosovych, V., 2011. Measuring financial market integration over the long run: Is there a U-shape?. Journal of International Money and Finance. 30(7). pp.1535-1561.
  • Weinstein, B. A., CFPH LLC, 2011. Enhanced system and method for managing financial market information. U.S. Patent 7,890,396.
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