(solved) Financial Market Essay
Added on 2020-07-23
19 Pages4154 Words233 Views
Financial Market
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Q1(a)Different levels of market efficiency.................................................................................1Q1(b). Critical examination of London Stock Exchange market efficiency with reference toEfficiency market hypothesis (EMH).........................................................................................3c. London stock exchange...........................................................................................................5Q2 (a) Money market and Capital market...................................................................................7B Functions.................................................................................................................................8Q3 (a) Risks involved in International transaction and Eurocurrency Market...........................9Q3 (b) Eurocurrency Market and its importance......................................................................11Q4(a) Explain the terms............................................................................................................14CONCLUSION..............................................................................................................................14REFERENCES..............................................................................................................................16
INTRODUCTIONFinancial markets are where trading of buying and selling of assets like stocks, bonds,derivatives, commodities and foreign exchange. In this market investors make money andcompanies try to reduce risks with financial instrument. In this report there is brief descriptionabout money market instruments and capital market and they are influencing each other.Efficient market hypothesis has been elaborated in this report, as there are three different levelsof EMH which are strong form, semi strong form and weak form of hypothesis. Efficiency ofLondon Stock exchange has been explained with the reference of efficient market hypothesis.International trade plays an important role in economy but there are also risk involved related toit so for protecting them various methods has been discussed in this report.Q1(a)Different levels of market efficiencyDefinition of EMH:Efficient market hypothesis is not a rule, it is a model. It gives elaboration that howmarkets tend to work. It does not give directions to the market that how they must work.Basically there are three forms of efficient market hypothesis: Weak form EMH, Semi strongform EMH and Strong form EMH. Every level has their own implications:Eugene fama: Is the American economist which is best known for the development ofvarious theories and asset pricing framework. However, he has developed the theories relevantEMH which act as a funneling agent in terms of improving the adequate knowledge relevantwith the market efficiency.1
Illustration 1: Example of efficient market hypothesis(Source: Adams and Jiang, 2017)Weak Efficient EMH : It is the weakest form of efficient market hypothesis. Whenever,the past information related to price is been highlighted in the current market price then it isknown as weak from EMH. To earn excess return, this form of EMH cannot be used. Technicalanalysis cannot be used for predicting future price movements. Fundamental analysis can be usedin this form of market efficiency but it does not give long term advantage. Excess return can begained by using non-public information. For example, XYZ broker who works at London StockExchange. Without any prior experience he was very keen in investments. When he observed theprice of L equipment falls on Tuesday and it rises on Friday. After that he purchased 200 sharesof L's stock for 12 pounds per share on Monday but he was sad because price came to 10 poundsper share on Thursday. In the present scenario the market seems to be in weak form EMHbecause XYZ is not able to earn excess return by observing past price.Semi strong EMH : It lies between the two forms of market, strong and weak formEMH. In this form the prices are reflects all available public information and excess return isalso possible to earn through fundamental analysis. For predicting future price movements,neither fundamental analysis nor technical analysis can help. To earn excess return non publicinformation can be used. For example, Nargis held 300 shares of PNC company which he had2
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