International Financial Markets and Econometrics

This article discusses recent movement in Pound/Dollar, causes of exchange rate volatility, impact of exchange rate volatility on international trade, feature and nature of potential risk in international financial transaction, management of risk, and reason for preference of currency option in International Financial Markets and Econometrics.

International Financial
Markets and Econometrics

TABLE OF CONTENTS:
Question 1........................................................................................................................................3
Recent movement in Pound/Dollar..............................................................................................3
Causes of exchange rate volatility...............................................................................................3
Impact of exchange rate volatility on international trade............................................................4
Critical analysis............................................................................................................................5
Question 2........................................................................................................................................5
Feature and nature of potential risk in international financial transaction ..................................5
Management of risk:....................................................................................................................6
Reason for preference of currency option:...................................................................................6
Disadvantages of hedging with currency option:.........................................................................7
Critical Evaluation:......................................................................................................................7
Question 4....................................................................................................................................9
Reference.......................................................................................................................................12

Question 1
Recent movement in Pound/Dollar
Spot exchange rate refers to the current price in the market through which one currency
can directly get exchanged with the another currency and the delivery take place at the earliest.
All the cash transaction in spot market generally take place on standard settlement day (Chen,and
et.al 2020). Do the settlement in spot market take place at T+2. Pound has climbed 0.64% in
against dollar, as it is one of the iconic and popularly traded currency in the world. This currency
pair refers to the major group of currencies in the world, and it is most important pair of currency
in the entire globe. But one of the major reason which has come out in the recent movement of
the currency pair is inflation (Gkillas and et.al 2021) . Owing to Britain's inflation rate is low as
compared to other countries of the world and therefore the purchasing power of people is high
their. Therefore, this is most important reason that the pound is strong currency. Inflation can be
known as the rate through which the prices of the products can be increased so in Britain
inflation is low due to which people can easily invest in different products and services. But for
many years it has been analysed that the British pound is stronger than dollars even the US has
more stronger economy and it is known as the superpower in the world.
Historical data
Month Price Open High Low Volume Change %
August 1.36 1.4 1.4 1.36 0 -2.1
July 1.39 1.38 1.4 1.36 0 0.54
Jun 1.38 1.42 1.43 1.38 0 -2.69
May 1.42 1.38 1.42 1.37 0 2.86
April 1.38 1.37 1.4 1.36 0 0.25
March 1.38 1.39 1.4 1.36 0 -1.1
From the above data, it can be analysed that Pound and Dollar has strong spot exchange rate. In
the month of August this has opened at 1.36 but the highest goes to 1.4 but the lowest price of
spot was 1.36. But in the month of July, the open price of spot was 1.39 and the lowest was
1.36 even the profit was 0.54. Besides this, in the month of June it was in loss -2.69 but again in

May this currency was in profit 2.8 which was higher tha n April and in
March again this currency faces loss and it was reported at -
1.1.
Apart from this, speculation is also major reason the movement in pound and dollar is
speculation, as speculators have lot of control over the market, and they follow the entire global
currency market. Speculators are the one who affect a lot to the entire British market and it
becomes very difficult to believe. Speculator is the one who study the market and also follow all
the trends of the market. They do not have any position in the market, but they enter and expect
that the currency market will move as per their expectations, and they will generate profit from
price movement. For instance — when economist states that the value of pound is going to rise
in the future, then suddenly the demand for pound increases in the market. When the investor put
large amount in currency to get generate high return the volatility in the currency increases
which leads to the movement in currency price.
Besides this, government debt has tremendous impact on the overall value of currency.
For example if all the financial institution of foreign and especially the foreign investor believes
that a country is not able to repay their debts and obligations, then they never go for investment
in such country. But the debt of UK government is in controlled for this reason there are many
investors available who want to invest their money in pound. Britain always have good
strategies and ideas to invest debt amount for the welfare and development of the country.
Causes of exchange rate volatility:
There are various factors which affect the exchange rate volatility in foreign exchange
market such as — Inflation rate, interest rate, government debts and various terms of trade. Apart
from this, political stability and changes. One of the major reason behind the change in Pound
and Dollar is changes in country's balance of payments, It states about the exports and imports of
the country. Deficit also impacts these currencies. Besides this, Terms of trade also states about
the ratios of export and import of the country. Along with this higher revenue and earning and
of the country also defines the overall spot exchange prise of the company. Along with this
recession also affects the interest rates of both country and it can bring weakness to the currency
but on the other hand this can made the specific currency strong. Apart from this,
speculation ,also put greater impact on the spot exchange rate of both the currencies. If the value
of currencies is expected to increase, so the demand of that particular currency increases among

investors so that they can make good profit (Feng and et.al 2021). So the overall increase will
also rise the exchange rate of that currency.
Along with this trade movement is also one of the major cause behind exchange rate
volatility. If any change happens in the import and export it will directly impact the rate of
exchange. If the imports of the country raises, then the demand for foreign currency also
increases so the rate of exchange move against the country (Harris, 2021). On the opposite when
the export get increases as compare to imports then the demand of domestic currency increases
and the entire rate of exchange move in the favour of the country and every country wants this
situation in their nation. Besides this, stock exchange operations of the country also impacts the
rate volatility. It includes all the grant of, loans, payment of interest on foreign loans and
purchase and sale of foreign securities which can influence the demand of foreign funds in the
exchange.
Besides this, Banking operations also play major role in the volatility. As they sell
various drafts and transfer funds. Letter of credit and also accept foreign bills, so they have
major impact on the exchange and it can effect the volatility in positive and negative way.
Exchange rate volatility can be happened due to the monetary policy of the country.
Deflation and inflation can cause great impact on the exchange rate volatility . As inflation and
deflation bring change in the internal value of the money.
Impact of exchange rate volatility on international trade
There is a negative and positive and relationship remains in the relationship between
international trade and exchange rate volatility. If those trades who have risk averse mentality,
and they face high cost and risk in transaction it can be lead to the exchange rate volatility. If
then market is well-developed, it may allow traders and hedgers to use exchange rate and
volatility as hedging. It has been seen that, exchange rate volatility can create uncertainty in the
economy of the country and also it can decrease the overall investment. When the investment of
the country decreases then it put negative impact on the economic performance of the company.
Exchange rate of the country can be determined by the demand and supply. If the demand
of the products and services is high of any country then the exchange rate will hit the economy
positively because it will draw the attention of investors from the world, and they will impact the
economy of the country (Lingaraj and et.al 2020).. Besides this, political changes also impacts

the decision of investors, because every investor wants to increase their return and also want
wealth accumulation. Every investor wants to invest their money in those countries whose
politics present in stable situation. Therefore, if the country get involved in terrorism and other
criminal offence no one investor want to make any impact of exchange rate volatility on
international trade and no one investor wants to make investment in such countries so the
Exchange rate put negative impact on the economy of such country.
Exchange rate get impacted due to monetary policies and the overall economic
performance of the county. If any country holds a wide history of economic performance ans it
has strong monetary policy then it will draw the attention of investors. This will increase the
value of currency of a specific country. The various factors of recession also impact the
exchange rate of any company., because it determines the value of the currency. Besides this,
tourism also impacts the exchange rate. For example - if any traveller visit outside US they will
earn more by transferring money as USD get appreciated against different foreign currency.
Along with this, visitors weighted exchange rate is used to measure the exchange current rate of
the visitors market. So if the country has lots of tourist and destination places then there is high
chance that their currency will fluctuate very often.

Critical analysis
From the above part it has been criticized that provides detail information about the spot
exchange rate of Pond and Dollar and also represent the historical data. It also defines the main
causes which impacts the exchange rate volatility-in the foreign market (Benzid and et.al 2020).
Besides this, the impact of exchange rate volatility on international trade and how this impact
the overall economy of the country and how the political changes impacts the growth and
profitability of the country so that it can attract more and more new customers. This report also
provides the historical data of past six months which represents the reasons behind the changes
in the exchange rate.
Question 2
Feature and nature of potential risk in international financial transaction
Whenever any organization decides to get engaged in international financial transaction,
so they have to go through all the additional risk associate with them (Andreu and et.al 2020)
One of the major potential risk which are associated with the international business is foreign
exchange risk and political risk. These risk create hurdles for the company to generate revenue
form the international market.
Foreign Exchange risk

This risk is associated with the fluctuation in the value of currency due to which business
has to face loss sometimes. This risk is totally related with the appreciation in the domestic
currency as compare to foreign current. The major feature of this risk is that it direct affect all
the investors who trade in international market. It also damages the profitability of importers and
exporters. A devalued currency can easily affect the imports and inflation of countries. Foreign
exchange risk can be in the form of transaction risk which can be faced by the company and
conduct various financial transaction between different jurisdiction. The major risk is in the
exchange rate of the country (Sato 2021). The delay between the settlement and transaction is
popularly known as transaction risk. But transaction risk can be mitigated by implementing
various strategies of forward contract and options. Apart from this economic risk is the major
risk which can impact the market value of the company and this unavoidable risk and company
has to bear this whether they want or not. For instance : Geographical instability and
government regulation are the major economic risk which has to bear by the company in all the
situation , the management cant have any control on it.
Political risk:
Government and policy changes affect the international business. Changes in policies
can put restrictions on all the foreign companies to operate and trade in the market. Instability of
government can also impact the return of companies and investors. Besides this, all the decision
of government which are related with the Taxation. Trade tariffs, and laws will harm the
investment of company.
Management of risk:
In the entire world of financial market risk management is the procedure of identification,
and analysing and making strategies to mitigate the risk. But it is very difficult to separate the
risk from international trade market but effective management can do this. One of the major
strategy which can be used by company to minimize the risk is to develop an effective business
model for the market where they are investing. Company needs to adopt such business model
which fit the country and the entire demographic. Large countries who have diverse market and
geographic regions. In such country, business need to adopt multi- part model which defines
specific strategies for each region and demographic.
Another management strategies which will help the company to mitigate the risk is
making contingency plans. After choosing the country for business and knowing the risk and

benefits, management has to form various contingency plans so that when the expansion get
failed in the market. As every business involve certain level of risk, but it can be minimized by
proper management and planning. Financial market risk can be mitigated by protecting the
economic value of the company so that investors do not lose their interest in the company and
the share prices of the company do not fall down when the foreign investor take their money
back from the company (GBP/USD: Today’s Live Exchange Rate Data, Chart, Statistics,
Spreads, Volumes and Historical Comparisons., 2021). Firm and company can use various
financial instruments to manage the overall exposure of the risk such as company can focus on
their operational risk, credit risk, volatility risk, exchange risk and many more so that they can
survive in the market.
Reason for preference of currency option:
Currency option has many advantages over forwards and futures to hedge net payables
and receivables for international firms (Aguzzoli and et.al 2021). One of the biggest advantage of
option is that it actually gives the option to the buyer of option contract to exercise their right, if
the situation is not in the favour of buyer then they can simply walk off from the contract, and in
the worst situation buyer will lose only premium. But in forward and future contract this
advantage is not available to the buyer. As the forward contract is the customized contract and
traded on over the counter market so the risk of counterparty default is very high and therefore it
is not suitable for the purpose of hedging as the chances of loosing money is very high. For
hedging, it can be used inn the currency market volatility by fixing the rate of exchanges but due
to counter party risk it is risky for the company.
On the other hand, in future contract buyer and seller both have to pay initial amount to
enter the market but price fluctuation can impact the contract of the company, and they have to
execute them therefore it is not suitable for hedging. For this reason, Option is beneficial for the
company because after using all the option strategies company can use them in hedging.
Disadvantages of hedging with currency option:
Hedging with option contract has disadvantage over forward and future. As this con
become worthless any time when the buyer refused to execute the contract. The risk in option is
also unlimited as compared forward and future. Option is totally a paper based contract but on
the other hand future is paper less transaction and directly transfer all the profit and loss.

Another disadvantage of currency option is taxes, in some rare circumstances taxes gave
some short term capital gain to company. Wide fluctuation of currency also impacts the
portfolio and its value.
Critical Evaluation:
From the above question it has been analysed that it sates about the potential risk which
impacts the international financial transaction, and how to manage such risk by using appropriate
techniques of trading is discussed here (Zhou, 2021.). Besides this, selection of currency option
over forward and future is being defined which is a suitable for the business to mitigate the risk.
Apart from this, all the demerits which are associated with the currency option is being evaluated
so that company can do effective hedging and safeguard them.

Question 4
Monetary policy transmission mechanism
Monetary policy transmission mechanism is an approach that involve analysing the
impacts monetary policy create over the economy. This entire concept is to assess the possible
impacts monetary policy create over the economy. The transmission mechanism is further
characterised into long , variable and short time lags. This is completely difficult to predict the
impact of the monetary policy over the price level changes (Zhang and Huang, 2017). This
involve analysing different aspects and elements that involve changikng rthe official interest rate,
affect the bank and monetary market interest rate, affect expectations, asset price and such like
factors and elements. All this is analysed under the monetary policy transmission mechanism.
The role of the monetary policy is to analysis and evaluate the overall possible impacts all these
elements and factors create over the different sides and dimensions of the economic activity. The
role of the monetary policy transmission mechanism is to evaluate the different factor influence
the overall economic growth and development of the economy. The factor that can directly and
indirectly in both the ways influence the overall economic transmission is also analysed in this
part. Along with the factor that potential impacts these economic growth create over business
operations and functions are also fundamentally analysed in this section. The role of the
economic growth is very significant in nature as it support the economy to delegate the best form
of operations and functions that can create an impact over the economic growth and development
of the economic activity of the country. This mechanism is fundamentally based on the concept
and fact that this is essential for the overall economic transformation to identify the all different
factors and elements that potential influence the economic activity and the various development
perspectives of the economy. This is necessary for the overall economic growth to identify the
possible factors that influence and create an impact over the economic activity of country along
with the level of impacts these factors create over the economic activity.
Quantitative easing operations
Quantitative easing is a practice that is about to increase the overall supply of the funds
and monetary resources in the respective market. Under this process central bank try to increase
the supply of money by buying the government bonds and other respective securities. This allow
the government to increase the supply of money in the market to match up with the monetary
requirements of the economy. This practice is conducted at the time interest rates are almost nill

or zero than only this practice generate positive results (Kryzanowski, Zhang and Zhong, 2018).
This is essential to afford the securities that are about to invest at a good price. The whole
concept of quantitative easing practice involve supporting the monetary requirements of market
with support of monetary resources. Fiscal policy changes are also coordinated under this to
increase the supply of money in the economy. This is coordinated on the basis of the demand and
supply of money in market. The fundamentals of quantitative easing is to delegate the strategic
direction that can favour the government to support the overall supply and demand of monetary
funds and resources in the respective target market. This is a key part of the quantitative easing is
to identify the overall requirement of the monetary resources and funds in respective target
market and on the basis of the identified data this is about to make sure the proper availability of
funds in the respective target market. Different aspects related to fiscal policy is also directed in
this part for processing the supply chain of the currency in the respective target market. The aim
of this practice is to delegate the funds over various operation and functional activity associated
with the economy. Quantitative easing play crucial role in controlling the monetary supply's the
economy. The analysis of respective demand in the market of currency play a fundamental role.
All decisions are taken in this are based on the level of monetary requirements' ion market and
on the basis of the needs and monetary requirement this play a vital role in managing the balance
between monetary supply and demand of money in the respective target market.
Impacts of Monetary policy transmission mechanism and Quantitative easing operations in
international capital market and stock price
Monetary policy transmission mechanism and quantitative easing are the concept of
economics that support the government and central bank to sustain a good flow of monetary
resources in market. This is essential for the government to control the supply of money and
resources in the market. Demand and supply of money is always targeted to equate so that
inflation rate could be controlled by the government in United Kingdom. The impact of the
monetary policy transmission mechanism and quantitative easing in international capital market
is such that it control the capital market and stock market (Bonatti, Fracasso and Tamborini,
2020). Both the concepts affect the supply of money and also influence the price of the stock in
the money market. Quantitative erasing drive the price of the stock in market that further
influence the demand of the stock in the respective target market. The key impact of both the
concepts is over the value of stock and supply of money in the respective target market. The

current exchange value in international market also get influenced with support of both this
policies and direction of money. The stock prices are widely influenced the level of supply is
available in the market in context to the overall demand of the market. The key role of both these
practices is to control the monetary resources in the market along with influencing the stock
supply and value in market. The decisions taken are fundamentally influenced and affect the
overall market structure and the total requirements of the money and stock in the market. The
fluctuation of market also get influence in this practice. The role of both the techniques and
practices is to drive the market situation in a particular direction. This is important for the
government to control the demand and supply of the monetary resources and also affect the stock
value in market. All these are inter related with the economic growth of the country. The
significance of these practices directed the monetary supply and demand in the international
market. The overall growth and development of the international monetary market also get
influenced against the adoption of these practices and techniques.
Critical evaluation and critical analysis
Critical evaluation and analysis are the term demonstrated as identifying the positive and
negative aspects of the situation. The role of the critical analysis and evaluation is about to
identify the different elements and aspects related to the practical situation of the organisation.
Critical evaluation and analysis is a process that involve identifying the different areas associated
with the operations and functions of the economic activities. The role of the critical evaluation
and analysis involve identifying the core elements or factors that certainly direct the economic
flow or operations associated with the economy. When it comes to finalising the monetary
policies in economy this is essential to understand the different elements related to the economic

activities conducted. Decision making is a process that is highly based on the critical evaluation
and analysis phase of the economic activity. In order to make the best suitable decision making
this is fundamentally essential to identify the various elements related to the economy flow and
functions (Jakl, 2017). This analysis is based on the graphs and charts are also used to determine
the different core performance indicator of the economy. Evaluation and analysis is critically
discussed under this part as a part of the economic activities conducted. In this state economy is
completely analysed and assessed so that best suitable decisions are taken to sustain a good flow
of economic operations. The role of the analysis and evaluation approach is to ascertain the
economic activity and flow and to make the most strong decisions possibly can drive the overall
economic situations. This section is important as it allow the government and respective
authority to analysis about the outcome of the different decision making taken by the authorities.

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Online
GBP/USD: Today’s Live Exchange Rate Data, Chart, Statistics, Spreads, Volumes and
Historical Comparisons., 2021 [Online] Available through :
<https://www.poundsterlinglive.com/data/currencies/gbp-pairs/GBPUSD-exchange-
rate>

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