International Finance: Yield Curves, Stock Markets, and Central Banks

This report delves into the intricacies of international financial markets, commencing with an exploration of yield curves, their underlying theories, and an examination of yield curves for 10-year government bonds in the UK, US, and China, assessing their implications for the economic outlook. The report then emphasizes the significance of international stock markets in fostering a robust economy, presenting various stock valuation approaches alongside their limitations, supported by real-world examples. Finally, it scrutinizes the functioning of central banks within the context of international financial markets and institutions, highlighting their pivotal role in maintaining price stability and stimulating economic growth. The report provides a comprehensive overview of key financial concepts and their practical applications within the global economic landscape.

International
Financial Markets and
Institutions

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Q.1: What are yield curves? its theories and the yield curves for 10-year government bonds in
the UK, US and China. What if anything, does this tell us about the economic outlook of the
financial markets?.......................................................................................................................1
Q.2: Importance of International stock market for the proper functioning of an economy and
the approaches to value stocks using world examples and drawbacks of the methods..............5
Q.3: Functioning of a central bank in the context if international financial markets and
institutions. Role of central banks and its supports and promote price stability and economic
growth in the economy................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
International financial market is the place where all types of organisations, entities and
enterprises, group of people as well as businesses get financial help to execute and promote their
trade activities at global level. There are some certain rules and institutions made where trade
activities take place regarding assets and surplus (Ehrmann, Fratzscher and Rigobon, 2011). It is
seen that institutions and stock market are growing day by day. Policies, regulations and rules are
made around monetary and fiscal policies. All the guidelines and the policies remain directly
connected with the government and the governance. This report defines the yield curve and the
theories which are associated with yield curves. Importance of international market in respect of
providing global share market and approving stocks in international market also defined in this
context. Role of central banks in respect of emerging the economy and in maintaining stability
subject to stock prices.
Q1. Yield curves, its theories and examining yield curves for 10-year government bonds in the
UK, US and China along with analysing what if anything, does this tell us about the
economic outlook of the financial markets
Yield Curves
It is a curve which indicates towards interest rates and set the point of bonds which
equal drives the credit quality but it bifurcate the maturity dates and the liabilities. There is a
frequency time calculated with the yield curve which compares the three months, two year five
year and 30 years such as U.S. Treasury debts (Doh, 2011). This curve is basically considered as
a benchmark for subsiding debts in the stock market. Line defines the mortgage rates, bank
lending rates and it is also used to anticipate variations in economic context subjected to output
and growth.
In summarised way yield curve is a way to evaluate the amount of risk in respect of bond
investors which may have a huge impact on the earnings received on investments.
Breakdown Yield Curve
This is considered as an idea and assumption of future interest and the changing rates of
economic activities (Cavusgil and et. al., 2014). There are some shapes found in yield curve
which indicates towards normal, inverted and flat position of earnings. As per the yield curve,
earning remains constant and stable in long term stage and gives optimum returns and earnings
in short term duration remains high as well as helps the organisation to run operations in a better
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way. A normal yield curve indicates towards longer maturity with higher yield as compared to
short term bonds. There are three shapes defined which are considered in yield curve:
Normal yield curve
Short term bonds carry lower yield to reflect interest of investor's money at less risk.
There are some essential aspects in order to determine amount of return and fact that an
investor's money is at risk.
This is the first shape which indicates towards longer term bonds which may rise
responding to periods of economic expansion. It is a common estimation that investors expect
high returns on longer maturity bond yields (Chen and Tsang*, 2013). Some of the investors
utilise the financial resources in shorter term securities and bonds to purchase long term maturity
bonds to earn high yield. Increasing rates of interest indicates towards the purchasing long term
bonds to gain higher returns in long term period. Environment of changing rates create
complexities for investors and financiers to ascertain the best investment option. To avoid the
changes, investors invest the amount in shorter bonds and maturities.
Inverted yield curve
It indicates towards the sloped down yield curves in order to earn longer term bond which
may regular to downfall for corresponding periods of economic recession. Some investors expect
high yield and returns in short term run. This indicates towards log term investors who settle for
lower rewards than short term investors. So, investors invest in longer maturity bonds and
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securities with high interest rates (Wang, Wu and Yang, 2013). At initial stage, investors get
positive and impressive returns on bonds and securities but in long term duration, earnings
become constant. This is the main reason which reduces the demand of short term bonds and
securities. Short term investment plans contain higher prices but lower yields. On the other hand,
longer bonds contain higher return at low price. A down slopped curve is prepared while
preparing the graph.
Flat yield curve
This curve arise form inverted or normal curve. It depends upon the changing economic
conditions. This curve passes through a period where short term rates rise to the point they are
closer to long term rates (Gerlach, 2011). his helps to analyse factors which makes the yield
curve flat and constant. Interest rates become higher when an economy transitioning from
expansion to lower development and recession stage. Yield on longer maturity bonds also starts
falling and yield on shorter bonds become high. This is the overall process which arise from
either inverted yield curve or normal curve.
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Theories and the yield curves for ten years government Bonds in the UK, US and china
For the first time, it is seen that china was facing dreaded prospect: Inverted bond yield
curve was the main phenomenon which indicates towards long term interest rates on bonds and
securities. There was a contingent situation arise in front of investors and financiers that whether
they should invest in shorter bonds or in longer bonds and securities. It was important to analyse
the factors and the subject to developing the strategies and the plans in order to make stable stock
market position in chine.
In other countries such as the UK and US, the curve indicates towards the reliable
indicator of a downturn. Cleveland Federal Reserves have become eligible to maintain a
recession probability measure based on short term and long term government bond prices. Banks
and financial institutions write down the bond yields which was predicted to future growth and
development of nationwide economy. GDP growth rate arose for future but it was recorded
lower than the past records.
Economic and financial market outlook
The global economy is becoming strong due to international stock and financial market.
In Canada, the US and the European countries are analyses subject to evaluate the flexibility of
international stock market. Financial market allows organisation to deal in stock market, bond
market, currency market, commodities, money market and derivatives. Institutions have different
aim and functions in respect of financial activities. There potential gains were recorded in
second quarter. Apart from that, UK customers were keeping the short term bond maturities
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which caused lower growth rate of economy. China was another strong country which increased
results subjected to returns in second quarter. It was estimated that the GDP growth rate of 3.5%
in 2017 and 3.6% in 2018. There were some notable chance found in respect of determining the
impact of BREXIT and NAFTA.
Q2. Importance of International stock market for the proper functioning of an economy and the
approaches to value stocks using world examples and drawbacks of the methods
International market provides large feasibility and path for global enterprises and
business. Global international market found at vast level. About $80 trillion international trade
securities were recorded to be trade in 2012 (Curdia and Woodford, 2011). Mutual fund industry
traded about $26.8 trillion globally. Exchanged traded securities were recorded worth $2 trillion
globally in 2012. International financial market support the global economy in many ways such
as creating money, money claims, facilitating specialization and promoting trade, risk
management and enabling individual firms to be insured.
International financial market is directly interconnected with the global economy. It
analyse the complexities and the conflicts which become barriers subject to growth and
development of global economy. The U.S. Banks and are subject to more stringent regulation
than banks elsewhere. With the help of international financial market global economy become
more active subject to growth and development. Global Institute Connectors Index evaluated in
respect of flow of goods, services and financial services. Across 131 countries were covered in to
analyse the potential impact of import and export policies and the stock market.
Global financial flows promote economic growth and the global financial institutions and
helps to meet the needs of Main Street (The financial transmission process, 2018). Shadow
banking is one of the consequential element of the decision. There are various type of discussion
found in respect of developing strategies. Various type of business and internal activities remain
associated with the financial management and operation. International financial market is
basically works around the regulations and the plans.
Realities of monetary power
As per the banking act 1933 there was a Fed regulation was made subject to controlling
the interest rates and banks could pay depositors under regulations. Since 1940 the Fed has been
expended the power to protect the rights and possession of customers. Fed also provides
guidelines and the rules related to financial institutions meet the requirements of the Equal Credit
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opportunity Act. It allows the customers to choose suitable capital investment option without any
external forces. Due to which banks become more fluent in providing credits and loans to
customers. It also conducts the U.S. Interventions in foreign currency markets on behalf of
excess amount of reserves a bank holds.
Approaches to valuation of stocks using real world examples
Various approaches are found in respect of evaluating and measurement of stock
valuation such:
Discounted cash flow valuation: This is one of the measurement approach which helps
to evaluate the cost of investment in respect of developing the scope and features of investment
alternatives. These are the types of better alternatives to find out effective tools and measurement
tools. DFC analysis is used to find out effective and best investment opportunities.
Relative valuation: This approach is used to analyse and comparing the notion of
comparing the price of an assets to the market value of same type and nature of assets. In this
field of securities various type of financial resources and securities are defined in order to
maintain the confidentiality of security information.
Contingent claim valuation: CCA is one of the approach which is implemented on
organisation in order to evaluate the value of assets which depends in turn and the future value
assets. This is an application which is used to analyse corporate debts and obligations. This
approach helps to pay-off the debt holders and the equity holders when the debt in example
matures.
Q3. Functioning of a central bank in the context if international financial markets and
institutions. Role of central banks and its supports and promote price stability and
economic growth in the economy
Central bank plays vital role in subject to booming and structuring the level of
organisation. International economic forum of the America has announced the delighted to speak
about 13th conference of Montreal. There are some essential elements are considered while
making global financial policies and the strategies in order to maintain the order of flow of cash
and inventories (Bittencourt, 2012). Globalisation encompasses various phenomenon and trends
which led them towards growing independence of most economies throughout the world. It was
displayed which affect the transactions and the goods and services.
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International financial market played vital role in order to emerge the stricture and
standard of the economy. Globalisation of stock market and international financial services
allows the global organisation to trade in multiple countries. There are various type of emerging
countries are found to evaluate the competence of global market. As per the report there were
some figures found in respect of GDP such as financial openness and stands more than 130% of
the world GDP.
Role of the Central Bank in supporting economic diversification and productive
employment in Cambodia
There is a significant role found in respect of developing the economy and growth
structure of Cambodia. There are some challenges were faced by the Cambodia such as
macroeconomic performance of sectoral structure of the Cambodia economy, employment
poverty and inequality, national development policy and economic diversification and challenges
to economic diversification (Tognato, 2012). Changing rate of foreign currency was the major
challenging factor which affected the economic structure of organisation. Central back of
Cambodia introduced a strategy which help the Cambodia to resolve the issues and conflicts.
After identifying the key factors there are some monetary role and policies and the role of
financial factors policy. Monetary policy tools and operation for macro stability and the role of
banking system supported the structure of Cambodia economy.
CONCLUSION
This report is prepared to define yield curves, theories and the yield curves for 10 year
government bonds in the UK, US and China. Approaches to valuing stocks using real world
examples. Functions of international financial market and institutions in functioning of central
bank also analysed in this context. It helps to support and promote price stability and economic
growth in the economy.
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REFERENCES
Books and Journals
Ehrmann, M., Fratzscher, M. and Rigobon, R., 2011. Stocks, bonds, money markets and
exchange rates: measuring international financial transmission. Journal of Applied
Econometrics. 26(6). pp.948-974 .
Doh, T., 2011. Yield curve in an estimated nonlinear macro model. Journal of Economic
Dynamics and Control. 35(8). pp.1229-1244.
Chen, Y. C. and Tsang*, K.P., 2013. What does the yield curve tell us about exchange rate
predictability?. Review of Economics and Statistics. 95(1). pp.185-205.
Wang, Y., Wu, C. and Yang, L., 2013. Oil price shocks and stock market activities: Evidence
from oil-importing and oil-exporting countries. Journal of Comparative Economics.
41(4). pp.1220-1239.
Gerlach, J. R., 2011. International sports and investor sentiment: do national team matches really
affect stock market returns?. Applied Financial Economics. 21(12). pp.863-880.
Curdia, V. and Woodford, M., 2011. The central-bank balance sheet as an instrument of
monetarypolicy. Journal of Monetary Economics. 58(1). pp.54-79.
Bittencourt, M., 2012. Financial development and economic growth in Latin America: Is
Schumpeter right?. Journal of Policy Modeling. 34(3). pp.341-355.
Tognato, C., 2012. Central bank independence: cultural codes and symbolic performance.
Springer.
Online
Yield Curves, 2017. [Online]. Available through:
<https://www.bloomberg.com/news/articles/2017-12-11/the-yield-curve-is-flatter-
remind-me-why-i-care-quicktake-q-a>.
The financial transmission process, 2018. [Online]. Available
through:<https://onlinelibrary.wiley.com/doi/full/10.1002/jae.1173>.
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