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Term Structure / Yield Curve, Financial Crises and Foreign Exchange Market - Essay Example
Finance & Accounting
Pages 3 (753 words)
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…
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. ...
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