Analysis of Economic Stability and Financial Markets

The assignment involves analyzing the implications of various plans and policies on national economies. It requires identifying strategies such as hedging and speculative techniques that can be used to manage financial markets and promote economic stability. The report also discusses the reasons behind financial crises, recessions, inflation, and economic downturns, and how they have been managed by governmental authorities.

INTERNATIONAL FINANCIAL
MARKETS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
A. FTSE future contract is at a forward premium..................................................................1
B. Identifying hedging strategy to protect against the market fall.........................................1
C. Analysing the speculative strategy in relation with adopting risks...................................3
QUESTION 2...................................................................................................................................4
Determining the facts of increment and decrement of stock prices as according to CAPM
model......................................................................................................................................4
QUESTION 3...................................................................................................................................5
A. Analysing the financial liberalisation and globalisation of financial markets and severe
fiscal imbalance which will help the emerging economy......................................................5
B. Analysing the reason behind international economic downturn which provokes the
financial crisis.........................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Process of international financial markets is to undertake adequate analysis over the
various operations such as exchange of securities and to facilitate appropriate deals among the
investors. In the present report there will be analysis based on various factors and operations
which in turn is required to analyse strategies like hedging speculative and capital asset pricing
model. It also comprises with the CAPM model and various key theories of financial markets
such as liberalisation, globalisation etc. Moreover, report consists of adequate knowledge and
information relevant with the operational functioning of FTSE 100 indexes and various
designators. Additionally, There has been discussion based on the reasons behind the global
financial crisis, recession and various economic terms that has had impacts on the financial
stability of the nation.
QUESTION 1
A. FTSE future contract is at a forward premium
In relation with ascertaining operational framework of FTSE 100 indexes which
comprises with a forward premium that indicates, domestic interest rate is comparatively higher
than the dividend yields. It defines that, theoretical equilibrium value for the futures prices is
associated with preventing profit arbitrage. In relation with making the adequate increment in the
profitability of the firms there has been application of various approaches which in turn bring the
future estimated outcomes. Therefore, there can be used if future contracts and substitution
which will replicate the principle. Thus, fair prices of the derivatives which in turn brings the
replicating portfolio with equal future pay-offs same as derivatives.
B. Identifying hedging strategy to protect against the market fall
Hedging strategies:
It is the techniques which enables market investors to have implication of strategic
instruments which in turn affect the market offset on risk of return as per adverse price
movements (Ahmed, Coulibaly and Zlate, 2017). Therefore, it will have impacts over investors
hedge which will be by making the another investments. Thus, it comprises with awarding the
protection to the investors on the basis of their invested money in the capital shares of the
business.
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The 15 million of investment has been made in 100 shares of FTSE and there has been
assumption of negative fall of such shares to the 4900 in October. Moreover, in relation with
protecting the damages will incur due to such fall there has been implication of Hedging strategy
(Thrift and Amin, 2017). This strategy comprises with the process of hedging people from the
negative impacts. Moreover, it has been pre-assumed that the share value will fall in October. So
to have satisfactory prevention there has been influences of the adequate insurance policies.
Thus, such insurance will not stop the event to happen but it will be assistive in terms of
reducing the impacts of negative fall (Domowitz, 2018). Therefore, to prevent the funds and the
impacts of such down fall there is need to have proper hedging which in turn will be effective
and adequate to have appropriate analysis over the market derivatives.
On the other side, to protect funds from down fall of the market there is need to analyse
the losses. Thus, the fall has been assumed at 4900 so that funds will worth at:
4900 x £15,000,000
5350
= £13738317
Therefore, it means that the loss will be:
£15000,000 - £13738317 = £1261683
However, it has been assumed here that the future will fall from 5400 to 4900 which in turn
influences the gains for 500 points * 8 points:
500*8 = 4000/ short futures
Moreover, the measurements can be stated as for:
1261683/ 4000 = 315.42 that is 315 contracts to be sale.
In addition, it can be said that the revenue will be gain by them as:
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315 X 4000 = £1260000 (Profits)
Total portfolio of shares:
£13738317+ £1260000 = £14998317 (Total future profit)
However, in relation with analysing the profits gained by investors to have the hedging of
the securities there will be ascertainment of the profits for 14998317 the total future profits.
Thus, the implication of the total profits and gains which in turn will be helpful and beneficial for
the operational practices as well as it ascertains the profits in against the future losses (Lahmiri,
2017). Additionally, there has been adequate protection or insurance cover has been awarded
from the risks.
C. Analysing the speculative strategy in relation with adopting risks
Speculative strategy:
Speculation is relevant with the act of trading the assets which will be helpful in
conducting the financial transactions as well as determining the significant risks of losing the
substantial revenues (Maggiori, 2017). Thus, with the influences of such speculations there has
been risks of reduction in the speculations in relation with obtaining the higher gains. Thus, there
market has been driven by the speculators for securing long term needs of the investors.
It has been assumed that there will be loss of 4900 shares in the coming time and that will
incur a huge risk to the organisation or the investors. Moreover, in relation with having the
adequate protection as well as prevention from such risks there has been need of implicating the
adequate techniques such as Speculative strategies (Schmidt and et.al., 2017). Thus, sell the
future will be at 5400 which has been assumed to be fall for 4900. It means that 500 points will
be fall at 8 per point than means 4000 of total profit will be attained by them.
Therefore, there has been risk of running in the cash market which rises up-to 5350 to
5400. Thus, as if it rises to 5900 then there will be loss of 500 points on future contracts.
Similarly, to 4000 of gains which will be also expired at 5900.
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QUESTION 2
Determining the facts of increment and decrement of stock prices as according to CAPM model
To ascertain the changes into share prices which were being decreased and increase in
response to higher risk-free rate. Therefore, there will be use of CAPM technique to identify the
fluctuations in the share prices and reasons behind such variations. Thus, in accordance with the
Capital Asset Pricing Model there has been measurements which requires the expected returns
comprises with the rate of return (The Capital Asset Pricing Model, 2018). The beta coefficient
as well as risk free rates. Thus, the implication of such technique will be helpful to the investors
as they will become able to analyse the profitability and gains through such technique. However,
there has been various assumptions which are needed to be analysed and ascertained by the
professionals (Perri and Quadrini, 2018). It has been criticised due to its unrealistic
assumptions and which were needed to be identified as to have accurate reasons behind such
outcomes. Therefore, there has been huge variations in the stock prices as per the changes in the
operations as well as requirements in the market. There can be several reasons behind the rise
and fall of the risk free rates in the market which will require beta as the measure of risks.
Moreover, it can be said that when the risk free rates rises, there will be increment in the
required rate of returns. Similarly, the generated cash flows will be discounted with influence of
higher discount rates which will bring the lower outcome values. On the other side, if there is a
rise in the economic growth there will be increment or rise in the excepted cash flows (Lin, Sun
and Yu, 2018). Thus, which has the unfavourable impacts over the rise in the discount rates
which will be required in discount cash flows. In relation with the Federal fund rates there has
been increment and decrement in the share prices. Thus, it has been analysed here that, if Fed
rises its interest rates which will eventually impacts over rise in the money borrowings which
will become expensive and will have impacts over depositing the money which will become
more attractive to the investors (Ahmed, Coulibaly and Zlate, 2017). Thus, the rise in the interest
rates which will eventually brings them the favourable gains.
Therefore, the rates will have fluctuations as per certain requirements such as less money
will make less spending and that will impacts over down fall of stock prices. Similarly, the more
money will provoke the higher investments and that will have positive impacts over the rise in
the share prices 2017). Thus, the fluctuations in the rates of return is mainly of based of level of
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spending made by the investors in a particular corporation. Moreover, it can be said that there
will be rates which were being required by the investors totally based on the systematic risk of
their portfolios (Domowitz, 2018). Thus, there has been removal of the unsystematic risks which
were being ignored. On the other side, there has been various assumptions which were being
made by the portfolio theory on which the CAPM will be based on developing the minimum
level of returns required by the investors (Lahmiri, 2017). Thus, it has been inter-sections linked
to the Security market line which will be corresponds with risk free rates.
QUESTION 3
A. Analysing the financial liberalisation and globalisation of financial markets and severe fiscal
imbalance which will help the emerging economy
Financial Liberalisation:
The impacts of financial liberalisation, globalisation of financial markets which will lead
to sever imbalance and that have impacts over the financial crisis in the emerging market
economies. IT has impacts over the financial market of the countries as if the governance
authorities as well as financial market will liberalise their domestic financial system which will
be followed by reducing or removing the restrictions over the financial institutions (Schmidt and
et.al., 2017). Therefore, here the motive of government is to have the higher long terms growths
and strong financial health of country's capital accounts. Therefore, the removal of the financial
restrictions from the global market which in turn has the negative or positive impacts over prices
of securities. Moreover, it can be said that, the financial liberalisation will have positive impacts
over developing economies (Financial Crises in Emerging Market Economies, 2015). Thus, the
balance capital market will help in improving the domestic production as well as make rise in the
economic level of countries. Thus, it approaches in improving the domestic production in a
nation which in turn brings the adequate gains or reserves to the government (Maggiori, 2017).
Globalisation of financial market:
The securities such as shares, bonds, debentures has been traded over the international
platform which in turn will be beneficial in bringing the appropriate capital gains to the domestic
industries. Moreover, these are the appropriate which in turn impacts over improving the FDI in
the countries as well as rise in the economic level (Perri and Quadrini, 2018). It brings the
revolutionary changes in the economies and the financial markets. Thus, it benefits the
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companies to have the adequate number of international investors which in turn make their
fruitful investments in the business (Lin, Sun and Yu, 2018). Thus, it will have positive impacts
such as the provocation to the domestic production, rise in the operating level as well as
improvements in operational gains. This, approaches will improve the emerging economies as to
have better exchange rates and balances their currency value in the global economy.
Fiscal Imbalance:
It indicates the fiscal imbalance of the revenue gains as well as expenses incurred by the
government. Therefore, in relation with the fiscal federalism there has two kinds of fiscal
imbalances which will be measured as vertical as well as horizontal fiscal imbalances. Moreover,
if the fiscal were being analysed and measured in between two different levels of government
which will be denoted as the vertical fiscal imbalances. Thus, when such imbalances were
measures in between the government at the same level it will be known as the horizontal fiscal
imbalances (Ahmed, Coulibaly and Zlate, 2017). Moreover, in relation with improving the
economic conditions and financial viabilities in the national industries the use of fiscal imbalance
will be helpful. In addition, it will be very effective and helpful in improvement in the emerging
economies.
B. Analysing the reason behind international economic downturn which provokes the financial
crisis
Financial crisis has impacts over the growth and economic stability in the various nations.
Thus, it has covered all the developing as well as developed nations. There has been various
reasons and causes which has invited such crisis in the national boundaries of these nations. The
main reason which has impacted financial health of the nations is providing the excessive sub-
prime mortgages at lower rates in market (Thrift and Amin, 2017). Thus, due to these impacts
there has been reduction in the gains in comparison with government spendings (From the
financial crisis to the economic downturn, 2018). The banks and various financial institutions
had reduced their interest rates due to higher competition and managing the brand name in the
market. Similarly, there have been various reasons behind it such as:
International economic downturn:
The negative fall of the economy which has had impacts of various elements. Thus,
among such variations there has been huge impacts of inflations, rise in stock prices as well as
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increment in the unemployment rates. Therefore, the done return of economy has invited the
inflation which has incurred over the nations such as rise in the prices of the necessary
commodities and imports in the national boundaries as compared with the exports. Thus, it has
impacted over the reduction in the currency value and domestic productions (Domowitz, 2018).
There are various nations such as UK, USA and European countries that has the negative GDP
rates during that period. The rise in the prices of commodities has indicates the scarcity of the
necessary commodities in the nation. Governmental policies to have satisfactory level of sales
has provokes the excessive facilitation of the sub-prime mortgages and housing loans which had
affected the global level of the of economies (Lahmiri, 2017). The developed nation has direct
influences of the global financial crisis as the government does not have appropriate amount of
funds or reserves.
Similarly, the policies which were being adopted by the government of various nations as
to have appropriate improvement in the domestic production which has impacted over the
strength of the financial crisis and poor corporate governance (Schmidt and et.al., 2017). In
accordance with the operational and trade practices among various nations the down fall of
currency value has created the huge inflation impacts over economic variations.
Impacts of financial crisis over international economic recessions:
The influence of the economic variations which has invited the economic instability that
will be improved as to have adequate growth and development in the nation. The financial crisis
has mainly affected small scale industries which in turn has the negatively reduced the
employment rates in the countries. Thus, there are various industries which were become
insolvent and bankrupt due to GFC as well as poor pricing machismo has invited poverty or
recession in the economy (Maggiori, 2017). Therefore, during the period 2008-2009 there are
higher unemployment rates in various nations. Thus, the millions of jobs were nearby the losses
and inadequacy of governmental policies. The FDI rates were also lower than expected by the
governmental professionals.
There have been sever and synchronised downturn in the world economy which are
indicative to the international business confidence reduction. Thus, the financial and economic
drawback has impacted industries in terms of lower market value, share prices as well as poor
management of the work. Therefore, the main reasons behind the recession was the trade and
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financial flows which has direct reduction in buyers requirements as well as privet investments.
Thus, due to downfall of the share prices of the entities investors has loses confidence among the
industries and the profitability so which has provoked the reduction in the fall of investment
volume (Perri and Quadrini, 2018). On the other side, it has impacted over increment in the
liability or commercial credits which were imbalance the current ratios of the nation.
However, the impacts of the dramatic economic downturn which has had impacts the
rapid reduction in the revenue contracted by government. There has been rise in the requirements
of social services which has indicated the fallout of the economy (Lin, Sun and Yu, 2018). Thus,
in relation with the further economic elements there has been increment in the public
expenditures such as medical allowances, pension, infrastructural development etc. therefore, the
rise in the demands as well as poor governance over economic policies has impacted the nation
with improper balances of employment rates, monetary system, inflation and stock market.
CONCLUSION
In accordance with the above report it can be said that the implication of various plans
and policies which will be assistive to the development of the national economies. But such a
plan needs proper execution and administrative efforts by the government. The report is
comprises with the various strategies such as Hedging, speculative techniques which in turn
useful for the market derivatives and managing the financial markets for the longer terms.
Further, there has been discussion based on reasons behind the financial crisis, recession,
inflation and economic downfall of GDP rates. Thus, such changes has been managed by the
governmental authorities as to have adequate development of operations which will improve
economic stability.
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REFERENCES
Books and Journals
Ahmed, S., Coulibaly, B. and Zlate, A., 2017. International financial spillovers to emerging
market economies: How important are economic fundamentals?. Journal of International
Money and Finance. 76. pp.133-152.
Domowitz, I., 2018. Automating the continuous double auction in practice: Automated trade
execution systems in financial markets. In The Double Auction Market (pp. 27-60).
Routledge.
Lahmiri, S., 2017. A study on chaos in crude oil markets before and after 2008 international
financial crisis. Physica A: Statistical Mechanics and its Applications. 466. pp.389-395.
Lin, E. M., Sun, E. W. and Yu, M. T., 2018. Systemic risk, financial markets, and performance
of financial institutions. Annals of Operations Research. 262(2). pp.579-603.
Maggiori, M., 2017. Financial intermediation, international risk sharing, and reserve
currencies. American Economic Review. 107(10). pp.3038-71.
Perri, F. and Quadrini, V., 2018. International recessions. American Economic Review. 108(4-5).
pp.935-84.
Schmidt, P. and et.al., 2017. On the construction of common size, value and momentum factors
in international stock markets: A guide with applications.
Thrift, N. and Amin, A., 2017. Neo-Marshallian nodes in global networks. In Economy (pp.
159-175). Routledge.
Online
The Capital Asset Pricing Model. 2018. [Online]. Available through
:<http://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-
study-resources/f9/technical-articles/CAPM-theory.html>.
From the financial crisis to the economic downturn. 2018. [Online]. Available through
:<http://oecdobserver.org/news/archivestory.php/aid/2753/From_the_financial_crisis_to_t
he_economic_downturn.html>.
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Financial Crises in Emerging Market Economies. 2015. [Online]. Available through
:<http://wps.pearsoned.co.uk/wps/media/objects/15998/16382113/web_chap/
M25_MISH3624_08_SE_Ch25_W-1-W-21.pdf>.
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