International Financial Markets and Econometrics

International Financial Markets
And Econometrics

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
QUESTION 1..................................................................................................................................3
(a). Causes of exchanges rate volatility in the foreign exchange market....................................3
(b) Exchange rate volatility impact international trade and financial data..................................4
QUESTION 2..................................................................................................................................6
Nature of risk in international transactions..................................................................................6
Advantage of currency option against future contracts...............................................................7
Disadvantages of the currency option against the future contracts.............................................8
QUESTION 3..................................................................................................................................9
Financial econometrics investigation of the London Stock Exchange........................................9
The implications of your empirical investigation for the financial markets..............................11
QUESTION 4................................................................................................................................13
International money markets have impacted international capital markets and stock prices....13
CONCLUSION..............................................................................................................................15
REFERENCES................................................................................................................................1

INTRODUCTION
International financial market is the place where the financial wealth and traded between
their individuals and many other countries can be done. While having such things this could also
come to know about how usually they can deal with many things and make sure for having their
high effective things in capital and market. It can be also widely seems that some of the rules and
institutions where are the assets that could take place and supports more agents and surplus.
While this could be directly lay down with having their proper trading and make sure for having
their more effective rules and regulation in agreements among various countries. This report will
explain about spot exchange rate that could causes the volatility in the foreign exchange rate.
Along with this international trade impacted over the exchange rate. While also examined about
the potential risk that could effective the international transaction and international trade.
Critically examined about the currency option with future and forwards contracts in hedging net
payables. Moreover, financial econometrics methods and evaluating more about the share prices
index and implication of empirical investigation for the financial market. Furthermore, at last
interest rate policy and QE via through international marketing impacted capital market and
stock prices.
MAIN BODY
QUESTION 1
(a). Causes of exchanges rate volatility in the foreign exchange market
Exchange rate volatility is unexpected movement in the exchanges rates and volatile
exchange rates creates international trade decision more difficult because volatility increases the
exchange rate risk ad it impacts on the potential of money (Bahmani‐Oskooee and Harvey,
2021). Diversification in government funds constantly impacts on the exchange rate volatility
and currency exchanges rate increase the diversification and variation in business expansion at
international level.
Exchange rate defined as a which on county converted into the another country, export in
different country highly influence the currency exchange process. Import can reduce the
country's economy and export can generate higher profitably and develop stability and increase
currency value as well. Sending and receiving money internationally is knows as determine
exchange rates.

On the basis of recent trend multiple people focus on expand their business activity in
different place, But expansion of business in foreign market face so many challenges, and
currency prices changes highly influence the business expansion. Multiple factors influence the
foreign exchanges rates are as follows,
Inflation rate
Variations in market product rate and changes in inflation rate cause influence the
currency exchanges rate. Lower inflation rate improves the quality of good and services sales in
market. And higher inflation rate impact and influence the product sales. So its important that
country manage their inflation rate for services in the foreign exchanges market.
Term of trade
A county's effective trade policy can improve the export policy but diversification in
trade policy highly influence the product selling. And it directly impacts on the country's revenue
as well. Export can generate higher revenue and increase the currency's value but product export
in the UK countries amount should higher than other so its major cause for foreign exchange
market.
Political stability and performance
Country's political situation and economic performance directly impact on currency
power. Less currency rate improves the potential of foreign investor. But variation in political
legal rules influence the financial position of company and it gives uncertainty in exchanges rate.
Increase foreign capital lead the value of domestic currency, it is higher cause for the foreign
exchange market.
Interest rates
Variations in interest rate influence the currency rate and higher interest rate is cause for
the country exchange rate (Dada, Olomola and Adedokun, 2021). Higher interest rate people not
expand their business in foreign because of their higher interest rate of landers, machinery,
production machinery and many more. It influences the business expansion in other country, so
increase in interest rate is also major cause for foreign exchange market.
(b) Exchange rate volatility impact international trade and financial data
Exchange rate develop risk on transaction cost and it influences the internation trade.
Interneuronal trade influences by the multiple factor and it directly affects the country's
economy, so its essential country focuses on the management of international trade changes like

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