Financial Markets: Capital vs Money Markets, Impact of Quantitative Easing, Market Efficiency, Exchange Rate Volatility, Asymmetric Information

Financial Markets

Table of Contents
MAIN BODY..................................................................................................................................3
Question 1:.......................................................................................................................................3
(a) Comparing and contrasting key role and functions of the capital markets with money
markets.........................................................................................................................................3
(b) Critical explanation of impact of Bank of England’ Quantitative Easing over bond and
stock prices..................................................................................................................................4
Question 2:.......................................................................................................................................6
(a) Distinguishing between different levels of financial market efficiency................................6
(b) Critically assessing the efficiency of London Stock Exchange market in recent years and
explaining the implications..........................................................................................................7
Question 3:.......................................................................................................................................9
Main causes of exchange rate volatility in the foreign exchange markets..................................9
Question 4:.....................................................................................................................................10
(a) Critically Explaining............................................................................................................10
(b) Need to regulate financial markets.......................................................................................12
REFERENCES................................................................................................................................1

MAIN BODY
Question 1:
(a) Comparing and contrasting key role and functions of the capital markets with money markets
Money Market is the term used for referring to the markets that are not organized. In
these markets financial instruments are quickly traded by banks, financial institutions, brokers
and money dealers. The financial instruments that are traded in money market are highly liquid
(Li and et.al., 2021). These instruments are redeemable within a period of less than a year. For
instance, commercial paper, trade credit, T bills, certificate of deposit etc. These are highly
significant for the business for improving their liquidity and meeting their requirements for
working capital.
Capital Market is a part of financial market which is related with the financial products
that are traded over a long period, like stocks and debentures. This helps businesses for meeting
their capital requirements for long term purposes, capital market deals in providing long term
finances to businesses (Han and et.al., 2018). There are two categories in this namely: primary
market – new issue of securities to the public, secondary market – exchange of securities
between investors.
Basis For Differentiation Money Market Capital Market
Definition It is that part of financial
market by which short term
instruments are traded.
This part of financial market is
concerned which trading of
long term financial
instruments.
Instruments Involved Promissory notes, trade credit,
treasury bills, commercial
papers, bills of exchange, call
money, etc.
Equity shares, preference
shares, bonds, debentures, etc.
Types of investors /institutions
involved
Commercial banks, financial
banks, central bank, chit
funds, financial companies,
etc.
Underwriters, mutual funds,
stockbrokers, commercial
banks, individual investors,
insurance companies, stock
exchanges, etc.
Nature of Market Informal in nature. More formal markets.

Liquidity of the Market High liquidity. Low liquidity.
Maturity Period Maturity period is less than a
year.
Maturity is longer, there is no
specific time frame.
Risk Factor As the maturity period is less
than one here, the involved
risk factor is low.
Less liquidity, long maturity is
associated with high risk.
Purpose Fulfilling the short term needs
of the businesses for credit.
To fulfil the needs of the
businesses for the long term
requirements of credit.
Functional Merit Increases the liquidity of funds
in the economy.
Brings stability in the
economy.
Return on Investment Low returns. High returns.
(b) Critical explanation of impact of Bank of England’ Quantitative Easing over bond and stock
prices
Bank of England is the central bank of United Nations. Quantitative Easing is the process
by which Bank of England purchases assets on large scale financed by issuing currency. It is
form of monetary policy used by the nation during crises for the first time. The report published
by the House of Lords Economic Affairs Committee in 2021 July concluded that the quantitative
easing by the Bank of England helped in successful stabilization of United Kingdom’s economy
in the conditions of crises.