Financial Instruments And Institutions

Running head: FINANCIAL INSTRUMENTS AND INSTITUTIONS 1
Financial Instruments And Institutions
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FINANCIAL INSTRUMENTS AND INSTITUTIONS 2
Financial Instruments And Institutions
1) a) There are two fundamental circumstances under which the central bank of a
nation may conduct transactions in the foreign exchange market. Firstly, in the case of
stabilizing fluctuations, when the exchange rates are unpredictable, the investors will not be
willing to invest; hence, it will force the central bank to intervene. Secondly, In the case of
reversing the trade deficit, when the currency of a country is higher, the goods in the foreign
market are cheaper while the domestic goods are expensive, hence low export meaning a
trade deficit, the central bank will be compelled to reduce the currency value of the country.
b) The graph presented shows fluctuations in the exchange rates of the Australian
currency in relation to the USD. Diversity factors present fluctuations in AUS USD exchange
rate. For instance, speculations of the investors present a significant impact. A negative view
among investors will make them shun from investing hence, the currency value falls due to
low demand while a positive view will present a high currency value. Secondly, political
stability uncertainty in Australia causes fluctuations in the exchange rate. The value of the
Australian currency rises when the government is stable and falls during political instability
circumstances as investors tend to shun away from investing.
2) a) Financial risk refers to the possibility that the corporate stakeholders will incur
losses if the company’s investment doesn't provide an adequate return (Giglio, 2016). Some
of the risks include Inflation risk; it is whereby the market commodity prices will increase or
decrease according to the market conditions. Default risk is the money lend to a borrower
being unrecovered in the future. Liquidity risk is a financial asset being difficult to convert to
monetary form. Maturity risk refers to the maturity of financial instruments being uncertain
or volatile. Equity risk refers to the difference between the rate of return of a risk-free rate
investment and the one in an individual stock.