Role and Functions of Capital Markets and Money Markets

Financial Markets

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Q1 A) Difference between different levels of market efficiency................................................3
B) Critical analysis of efficiency of London Stock Exchange....................................................4
Q2 Compare and contrast role and functions of the capital markets over money markets.
Discuss how an activity of money market influences asset prices in capital markets.................6
Q3 A) Discussing nature of potential risks in global transactions and explaining how
international traders manage risks...............................................................................................7
B) Discussing functions and operations of Eurocurrency market and importance of this market
in trade transactions.....................................................................................................................7
Q4 A) Explaining various terms related to financial markets.....................................................8
B) Critically explain need for regulation of financial markets....................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial markets are helpful for channeling funds to the ultimate borrowers from he
lenders who have enough quantum of surpluses. Present report deals with importance or
significance of financial markets in the economy by which requirements of funds can be met
with much ease. In relation to this, money market and capital market both are explained with
their key roles and functions in effectual manner. Moreover, money market leads to influence
asset prices in capital markets are explained. Different forms of EMH are explained along with
efficiency of LSE. Various risks and their nature are discussed which occurs in global trade
transactions and how this can be managed through forward foreign market is discussed as well.
Key functions of Eurocurrency market and importance in trade transactions is enumerated in the
report. Furthermore, terms related to financial market are discussed along with need for
regulating financial market. Thus, it can be said that these markets are utmost vital in
international level as it help to achieve economic efficiency.
MAIN BODY
Q1 A) Difference between different levels of market efficiency
The Efficient Market Hypothesis (EMH) is quite useful for analyzing the current share
prices of the company in the market in effective manner. It incorporates all the relevant
information which help investors to easily analyze share prices of the firm in the best possible
way (Baharumshah, Slesman and Devadason, 2017). There are basically three types of EMH
such as weak, strong and semi-strong which can be distinguished below-
Weak Strong Semi-strong
1. This form of EMH means
that stock prices of company
in current scenario and as
such, it reflects past prices and
is based on historical data.
1. The form of EMH states it
is effective to assess share
prices as both information
available to public and
privately held information is
provided as well (Slabinski.
2016).
1. Semi-strong form states that
only information which is
imparted to use by public is
provided to the investors
2. This is weak form of the
company as it has no technical
analysis of the market can be
used to assist investors in
taking effective decisions.
2. This is termed as strong
form as all the necessary
information is listed of public
and private information and as
such, these are accounted for
current share prices.
2. It has only public
information and no private and
as such, technical analysis
cannot be used by investors
for taking decisions.
3. The weak form states that
all information such as
publicly held and private is
not included than investors
3. It is strong as private
information such as future
earnings prospectus, new
products and legal issues
3. It incorporates public
information such as financial
statements, income earnings
report etc. are only provided in

cannot assess share prices of
the company.
related information and public
one is also included by which
investors can assess current
market prices of stock in the
best possible manner.
current stock price. Thus,
shareholders cannot attain
price of shares and technical
analysis cannot be performed.
4. This type of form is weak
enough as historical data is
taken into account and as
such, current prices cannot be
ascertained in a better way
(Jermann, 2017).
4. This form is applicable
mainly where there is perfect
market. It is not possible when
restrictions on trading are
present.
4. Fundamental analysis
cannot be possible as only
partial information is available
by which decisions cannot be
made in effectual manner.
5. The example of weak form
is that just because Marks &
Spencer’s (M&S) have 30 day
down share price does not
imply that share price will
raise or not in the future. Here,
historical data is gathered
which classifies as weak form
of EMH.
5. Example of strong form is
that private information such
as equity shares’ offering
which only top management
has the access is incorporated
in the stock price.
5. Example is that partly
information of public such as
financials and partly private
includes when firm releases
income and as such, shares
prices changes in after trading
hours (Lin, Sun and Yu,
2018).
B) Critical analysis of efficiency of London Stock Exchange
London Stock Exchange (LSE) is one of the largest and oldest stock exchanges operating
since 300 years ago. It has admitted more than 3000 companies from several countries for the
purpose of trading. Thus, it is well-structured stock market and important financial institution
among other bigger stock markets. The efficiency of LSE can be seen that there are various high
performance companies which are producing good quantum of profits in the country. Moreover,
firms are competing with another in order to attain greater market share in the best possible
manner. The EMH clarifies whether market is weak, semi-strong or strong which are three forms
of EMH market. These have already been discussed in above paragraphs. Weak form is that
future stock prices cannot be predicted by seeking the historical data and as such, technical
analysis cannot be possible. Investors are not able to take decisions in effective way. Semi-strong
is the one in which information is made publicly available and investors can analyze current
share price. On the other hand, strong form means that there are both public and private
information incorporated in stock price and reflected after trading hours to investors to
effectively analyze the same (Barucci and Fontana, 2017).
In relation to EMH, theory on financial market named as APT (Arbitrage Pricing Theory)
can be explained. The theory implies that it is asset pricing model means that return on asset can
be estimated by utilizing relationship between such asset and risk factors. This means that risky
asset expected return is provided by APT theory which is opposite of CAPM (Capital Asset
Pricing Model) which is based on the market expected return. Thus, risk related to asset can be
evaluated with the help of APT theory. M&S Company which is the biggest firm in UK listed on