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Financial Markets Assignment

   

Added on  2020-07-23

17 Pages4878 Words35 Views
Financial Markets

Table of ContentsINTRODUCTION...........................................................................................................................3MAIN BODY...................................................................................................................................3Q1 A) Difference between different levels of market efficiency ...............................................3B) Critical analysis of efficiency of London Stock Exchange.....................................................4Q2 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...............10Q3 A) Discussing nature of potential risks in global transactions and explaining how international traders manage risks.............................................................................................13B) Discussing functions and operations of Eurocurrency market and importance of this marketin trade transactions...................................................................................................................13Q4 A) Explaining various terms related to financial markets...................................................15CONCLUSION..............................................................................................................................16REFERENCES..............................................................................................................................17

INTRODUCTIONFinancial 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 BODYQ1 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 StrongSemi-strong1. This form of EMH means that stock prices of company in current scenario and as such, it reflects past prices andis 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 thatonly information which is imparted to use by public is provided to the investors2. This is weak form of the company as it has no technicalanalysis 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 assuch, these are accounted for current share prices.2. It has only public information and no private andas such, technical analysis cannot be used by investors fortaking 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 whenrestrictions on trading are present.4. Fundamental analysis cannot be possible as only partial information is availableby 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 daydown 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).The EMH was developed by Eugene Fama who stated that shares are traded in the marketat fair value. Thus, investors cannot make technical analysis and as such, they face dilemma either to buy under valued shares or sell the same at highly inflated prices. Thus, investors have no choice but to make riskier investment. B) Critical analysis of efficiency of London Stock ExchangeLondon 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 formsof 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-strongis 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

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