INTERNATIONAL FINANCIAL MARKETS

International Financial Markets

International Financial Markets

Question 1

Interest rates are the price for borrowing money. Interest rates move up and down, mirroring many factors. The most significant amidst these is the supply of funds, accessible for loans from lenders, and the demand, from borrowers. For example, take the mortgage market. In a time span when many persons are borrowing cash to purchase dwellings, banks and believe companies need to have the funds accessible to lend. They can get these from their own depositors. The banks pay 6% interest on five year GICs and charge 8% interest on a five year mortgage (Merton, 88).

If the demand for scrounging is higher than the funds they have accessible, they can lift their rates or borrow cash from other persons by issuing bonds to organisations in the "wholesale market". The trouble is this source of funds is more expensive. Therefore interest rates proceed up! If the banks and trust businesses have many of cash to loan and the housing market is slow, any borrower financing a dwelling will get "special rate discounts" and the lenders will be very competitive, holding rates low.

Question 2

The optimal hedge ratio may be defined as the quantities of the spot instrument and the hedging instrument that ensure that the total value of the hedged portfolio does not change.

The hedge ratio, therefore, can be represented as the coefficient in a regression of the price of the spot instrument on the price of the hedging instrument1 (Pilbeam, 15). This coefficient, however, may be more appropriately represented as time varying rather than static. It has been argued in the literature that the true relationship between economic or financial variables can be better captured by time varying parameter (TVP) models rather than fixed parameter (FP) models. One reason for this is based on the so-called Lucas (1976) critique, which states that agents rationally anticipate policy changes or the effect of unexpected events and therefore change their behaviour correspondingly.

Question 3

Futures agreements are only valid for a specific extent of time, and when the present agreement expires, traders must update their swapping programs and their charting programs to use the next contract. Most futures markets use contracts that are legitimate for 3 months, and have expirations in stride, June, September, and December, but there are furthermore futures markets whose agreements expire more often, or at distinct times.

Some well liked futures markets that expire at the most common expiration designated days are:

EUR - The Euro to US Dollar futures market

GBP - The British bash to US Dollar futures market

YM - The Dow Jones futures market

ES - The S&P 500 futures market

ER2 - The Russell 2000 futures market

DAX - The DAX futures market

Futures agreements are the smallest one-by-one units that can be swapped (like a lone share on a stock market). Beginning day traders generally trade lone contracts, whereas experienced day traders may trade multiple agreements at the identical time, thereby expanding their trade's earnings and decrease ...