As the yield curve with long term maturity level tends to minimise the risk factor hence yield curve is a very important factor behind the estimation of the level of risk in the market related to a security. Thus higher the risk steeper is the yield curve and vice-versa. The yield curve may shift up or down depending on the change in the market. But it is assumed that the change in the maturity period by the same amount as that of the interest rate of the securities causes the yield curve to shift in a parallel manner. The risk factor cannot be interpreted properly as the whole theory is based only on approximation. Thus while analysing the securities market tough yield curve plays a major role yet it should not be only drawn on assumption basis. Capturing the overall interest rates of the security thereby predicting the risk factor is the prime function of the yield curve. This helps in analysing the economic events that may result in affecting the related securities (Sheeba, p.202). Thus the yield curve generally goes steep due to excessive issuance of treasury in the market. Financial crises The financial crises in the economy are due to the unequal distribution of information present with either of the buyer or the seller. Thus we can conclude that the financial crises in the economy are mainly due to the presence or practice of the asymmetric information in the economy. The problem that can arise due to the asymmetric information is the adverse selection of the financial instruments which on the contrary will affect the economy. The per capita of the advanced companies being high the dynamics viewed were much better of even under the financial crises which mainly took place in 2008 which has left a mark on the market as a whole. Their drop in the labour productivity is comparatively less than those of the emerging nations. But the advanced countries being under the saturation point of economy getting out of the present situation may cost them a lot of time. The massive financial crises faced in 2008 in the recent years has lead to a sudden drop in the employment in the economy as a whole which resulted in the decrease in the spending capacity of the people leading to the fall in the standard of leaving of the people. But the developing countries having scope for revival this situation of crises can be overcome by 2015. From the case study of Washington Mutual Bank we get to know the financial crisis of the economy was due to the contribution of the banks engaging in high lending rates related to mortgaging. Thus the period of economic crisis led the bank running tremendously under loss as the loan had been sanctioned remained unrecovered to the net payable amount. Foreign exchange market Interest rates are the monetary controlling factor of the economy and hence formed for carrying out transactions in financial institutions. The inflation rates cause the interest rates to fluctuate in the economy. When the economy suffers from high inflation the interest rates are higher to make the borrowing more costly in the economy and vice versa. The equilibrium is the point where the demand and the supply of the market intersect is the point where the prices of various commodities and the services decided. Again, on the basis of the price is the valuation of the commodities or services made. However, it is through market that the price fixation is done based on its type as to whether it is a perfect
Term structure / yield curve, financial crises and foreign exchange market Table of Content Financial crises 3 Foreign exchange market 4 References 5 Term structure / yield curve The calculation of the interest rates of various securities having different maturity dates is done by yield curve…
Yield Curve. Yield Curve The yield curve is defined as a “graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest” (Investing Answers, 2011, par. 1). From the Bloomberg website, the yield curve as of 8 April 2011 is depicted below: Source: Bloomberg, 2011 Using the yield curve, today’s financial marketplace expects interest rates to remain steady over the near future with short term yields generating lower returns than long term yields.
The last traded price of the stock of Wal-Mart Stores Inc. is $53.19 on 29th August, 2011. The price of the stock at the same point last year was $50.55. The price has shown an increase of 5.22% in the past one year. During the year the stock has been at a high of $57.57 and a low of $48.41.
It has traditionally performed the role of converting one currency into another (Madura, 2009). It is consistent with the principles of market economy laid down by Adam Smith, according to which the value or price of a currency is determined by the market forces of demand and supply.
John Sloman (1999)
Individuals participate in the foreign exchange market for a number of reasons. On the demand side, one principle desire for foreign currency is to purchase goods and services from another country or to send a gift or investment income payments abroad.
No doubt, our reading of the latest literature leads us to terminate that, in difference by the profession's consensus scrutiny of the 1980s, official intervention can be effectual, particularly from side to side its role as a signal of policy intentions, and particularly when it is publicly proclaim and concerted.
So foreign exchange markets deals with each nation's currency. Its value then depends on how the selling and buying activities of the said currency. Say for example, peso has a lower value than dollar. The value of peso depends on how much dollars have been exchanged into peso.
The author of the essay emphasizes that the inverted yield curve is a rare phenomenon, and indicates that bonds with longer-term maturities command lower interest rates as compared bonds with shorter-term maturities. It is also mentioned that ‘Inverted yield curve’ is an indicator of pessimism being creeping into the behavior of economic set up of a nation.
If we compare the price movement of the stock with that of the S&P 500, NASDAQ and Dow Jones Industrial Average, we see a positive correlation between the stock price and the three indices. The stock prices have moved with the market in the past one year. But on the
According to the research findings, the foreign exchange market is a decentralized interaction between buyers and sellers of currencies that determines the relative worth of currencies. It would be impossible to have foreign trade and investment without the existence of such markets that facilitate the conversion of one currency into another.
The Yield curve as discussed above has various securities with different holding period return. As the yield curve with long term maturity level tends to minimise the risk factor hence yield curve is a very
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