Financial Market Regulations and Effects

This project report delves into the importance of financial market regulation. It highlights the need for rules and regulations to ensure safe and reliable operation in the face of various securities trading activities. The role and functions of money and capital markets are discussed, with an emphasis on maintaining the integrity of financial systems.

Financial Market

Table of Contents
INTRODUCTION...........................................................................................................................1
Q1: (a): Distinguish among various levels of market efficiency............................................1
(b): Critically assessment of “efficiency” of the London Stock Exchange (LSE) market....4
Q2...................................................................................................................................................12
(a): Role and function of capital market...............................................................................12
Q.3..................................................................................................................................................14
(a): Critical evaluation of potential risks in international transactions.................................14
Q4...................................................................................................................................................17
Purpose of regulating foreign market:..................................................................................18
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

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 (Takayasu, 2013).
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
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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:
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(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.
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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.
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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,
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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.
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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.
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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
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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
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Figure 1Quantitative easing of 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
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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
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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
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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:
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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.
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 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.
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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.
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(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.
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REFERENCES
Books and Journals:
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.
Online
Financial Market Regulation. 2012.[Online]. Available
through:<https://www.brookings.edu/book/financial-market-regulation-and-reforms-in-
emerging-markets/>.
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