Growing International Comovement in Stock Price Indexes - Assignment Example

Currency research paper Question The Japanese Yen has been gaining ground on the US dollar since 2009. In the year 2009, the USdollar was doing much better as compared to the Japanese yen; however, in the cause of 2011 and 2012, the Yen has been doing relatively better (finance.yahoo.com ).This may be attributable to the fact that the United States has been facing stiff competition from countries like china in the manufacturing area. The yen has gained ground because of the manufacturing of Toyota cars, which is the main source of income for the country (Jeon 22). Japan is the main production point for Toyota cars. The cars are used widely in the world and it is the main income earner for the country as compared to other sources of revenue. In comparing the euro to the dollar, the dollar has been on a general free fall. This is mainly because Americas has not been much dominant as it used to be in the past (www.npr.org).In the past, the American dollar was the most widely currency. However, with development of many economic powers, the dollar has stopped to be used widely. That means that other currencies are gaining more ground over the dollar with time. The general trend is that the dollar is losing its value with time as compared to the euro and the yen. Question 2 The economic health of a country is affected by factors that include the interest rates, inflation, and exchange rates. The exchange rate is among the most analyzed and manipulated economic measure by the government. The exchange rate will have an impact on the return that investors gain in the end. For example, if an investor is doing business with a company from a country with a weaker currency, the investor is going to gain from exchange rate fluctuations. That means that the investor will get exchange rate gains and gains from his or her business. That implies that a government should ensure that the exchange rate of its country is doing well as compare to other currencies to ensure that the country’s investors gain. There are a number of factors that determine the exchange rate of a country. The exchange rate is usually expressed as a comparison of other currencies. There are a number of factors that determine the fluctuations of the euro and yen against the US dollar. The factors include the following, 1. Differentials in inflation- Changes in inflation will have a direct impact on the currency fluctuations of a country. In the US, the rate of inflation is lower as compared to Japan and Britain. The rate of inflation in the US in 2013 was 1.5 as compared to that in the UK, which was 2.5. The rate of inflation has had an impact of the fluctuations in the euro and yen against the US dollar. The government of America has been able to perfectly regulate inflation rates. That ensures a stable market. A stable market is one in which the currency does not fluctuate with time. That means that the investors will be able to plan for the future because the investors will have a definite rate of return. A stable market will result into certainty among the investors and that will be a perfect ground for stabilizing the currency of a country. That is the main reason that makes the US dollar to be relatively stable as compared to the euro and threw Japanese’s yen. 2. Differentials in interest rates- the main contributors of a stable economy also include a stable interest rate. The interest rate will determine the lending rate that exists in a country. That implies that a stable intere3st rate will enable investors to comfortably ask for financial assistance from financial institutions because they are sure that they will be able to get the loans at a stable rate. The exchange rate, inflation, and interest rates are directly correlated. That implies that the central banks have an influence on both exchange rates and inflations because the interest rate is regulated by the central bank. High interest rates usually reward the investors with a higher rate of return and that is a positive thing for the investors. For example, when an investor saves his money in the bank, the money will yield a higher interest rate. That also applies if the investor invests in government bonds. In America, the central bank has set the interest rate at a favorable rate. That implies that investors in America have a better advantage as compared to the investors found in Europe and japans. That directly affects the exchange rates between the us dollar and the euro and yen. 3. Current account deficits- The current account is an account that shows the balance of trade that exists between trading [partners. The account reflects all the services, goods, dividends, and interest that exist between different countries. If a country has a current account deficit that shows that, the country is spending more on foreign trade earning. It also shows that the country is borrowing more from other countries. That will force an excess demand for foreign currency and that will make the currency of the country to be relatively lower as compared to its trade partners. In the year 2003, America had a good current account that means it had low borrowings, and that made its exchange rate to be relatively stable as compared to the yen and the euro (King et al 934). 4. Public debt- Most countries usually engage in deficit financing in an attempt to ensure that the country’s projects are accomplished. That implies that a country will have to borrow so that it can sustain its expenditure. Such activities are a positive thing because they are aimed at stimulating the economy of a country. However, such deficits are not attractive to investors. This is because the deficits will cause inflation to increase. In most cases, countries usually print new currency that will be used in repaying the public debt. That will have a direct negative impact on the economy because the inflation rate will increase. That means that investors will not be willing to invest in such country. That means that the exchange rate of a country will fluctuate negatively. For example, when investors do not invest in a country, the country will lack foreign currency. That means that the country will have to release the currency that is in the reserve so that the country will be able to transact with other countries and that will lead to a fluctuation in the exchange rate. In the case of the us dollar, America has a relatively better policy towards borrowing as compared to Japan and Britain (Hashimoto 67). That is the reason that their currency is relatively stable. Conclusion The above factors are also the same factors that affect the normal market place. The factors are a subject of market forces that apply in economics and that make them all rounded in all the different countries that are facing a problem on exchange rate fluctuations. The other factors that affect the exchange rate will include economic data, market sentiments, economic performance, political stability, and terms of trade (Leachman 67). Question 3 Fluctuations in the exchange rate of a country usually have a direct impact on the local companies. For example, a company will lose because of exchange rate fluctuations if the exchange rate of a country fluctuates negatively. That means that the local companies will have to make decisions based on the exchange rates. South Africa is among the hardest countries. In the country, miners have undertaken a number of strikes because the increase in living standard has been eating on the profit margins. Sheffield Ltd, which is an auto parts maker in Durban, has been directly hit by fluctuation in the currency. The weakens of the South African rand gas made the cost of chrome and nickel imports to increase. However, the company cannot forward the costs to the consumers. That has therefore had a direct cut on the company’s profitability and that also affects the affairs of the employees (Mcgroaty 1). The exchange rate of a country will affect the interest rates of the country and that has a direct impact on the borrowing costs of a company. The borrowing costs of the country will increase the expenses of the company and that will reduce the profit margin of the company. An exchange rate that is high will cause the exports of a country to be high as compared to imports. That will make the demand for exports to reduce and increase demand for imports. A reduction in the demand for exports will cause a reduction in economic growth and increased unemployment. That means that the local companies will be forced to cut on their production levels. That will reduce their levels of profitability and that is not a good thing for the economy of a country. The investors will also opt to relocate to countries that have a favorable rate of return because their main aim is profitability. That will lead to low employment levels and consequently low standard of living and a high dependency level (Hashimoto 231). Fluctuations in the exchange rate will also cause uncertainties in a country. This is because in a country where the currency is not stable, the investors will not be able to predict the future value of the currency against other currencies. That means that the investors have to speculate on their returns and that is the cause of uncertainty in the business. That will make most of the producers to be more reluctant in purchasing of international stock and that will cause the value of a currency to depreciate further. For example, J.P Morgan chase and company has made a cut in its forecast from 2.1% to 1.5% in Brazil because of the weak exports to Argentina (Mcgroaty 2). In such a scenario, the government should intervene to ensure a more stable exchange rate. However, government intervention will limit the free market forces of supply and demand and such countries will not have a free market. Companies in such an economy should be encouraged to use more of the futures market. The futures market will reduce the level of risk eminent to the companies that engage in international trade and that will be more favorable. The other way that currency fluctuations can be reduced is by the countries engaging in international trade joining up and coming up with a single currency. A single currency will ensure that there are no fluctuations and there will be more market stability (Hartmann 313). Question 4 The increase in inflation rates in the developed countries has had a direct impact on the global economy because it destabilizes the economy of many countries that have weaker currencies. Most of those countries are found in South America, Africa, and Asia. The problem has forced the central banks to increase the interest rates and that is a very risky part for investors because the economic growth is relatively slow. The increase in inflation rates has affected companies that are based in such countries has lead to increased costs. The increased interest rates increase the borrowing costs of companies (Jeon76). The developing countries have faced economic hardships because of the fluctuations in the exchange rate. As earlier stated, the interest rate, inflation, and exchange rate are directly correlated. That means that an increase in one factor will directly affect the other factors that control the stability of the economy. A poor currency will make the interest rates of a country to increase. This is because the interest rate and exchange rates are directly correlated. That means that a negative effect on one aspect will lead to negativity on the other. That will negatively affect the countries investment levels because the countries have to increase the interest rates. Increase in interest rates makes the borrowing costs in a country to be relatively high. That will mean that a company will find it hard to manage a loan that it may have attained from a bank. The costs will reduce the profit margin and that will make such countries not attractive to investors. The companies will also be faced with a burden of increased wage payment costs. In Argentina, the decrease in the value of its Peso has made it unattractive to investors (Leachman 5). That has made it to lug behind in terms of investment and that is a negative thing for the country. In Turkey, the fluctuations on the Turkish lira have had the following impacts on the economy, 1. A shock in the exchange rate has made the imports of the country less expensive and exports expensive. That implies that the country has had a decrease in the local products as opposed to foreign products. That means that the local economy will be slow to growth compared to other countries. 2. In the money market, a shock in the local currency makes agents to hold less local currency and that will decrease the interest rate of the country. That will moderate the demand of the currency and that will lead to a reduction in the price and output. 3. On the supply side of turkey, a positive shock on the Turkish lira decreases the cost of imports, decreases costs of production, and increases the domestic output of the country. Work cited Banhan Steve. Is there a positive side of the declining dollar. Retrieved on 10th march from http://www.npr.org/templates/story/story.php?storyId=15154553&sc=emaf. Web. Yahoo finance. Retrieved on 10th March 2014 from http://finance.yahoo.com/echarts?s=USDJPY=X#symbol=;range=20090101,20110222;c ompare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;sourc e=;. Web. Hartmann Straetmans. Asset market linkages in crisis periods. Rev. Econ. Statist. 86, 313–326. Print. 2004. Hashimoto Ito. High-frequency contagion between and the exchange rates and stock prices. Working paper. Print.2004. Jeon Furstenberg. Growing international comovement in stock price indexes. Quart. Rev. Econ. Bus. 30, 15–30. 1990. Print. Johansen, S., Estimation and hypothesis testing of co integration vectors in Gaussian vector auto regression models. Econometrica 59, 1551–1580. 1991.Print. King, Sentana, E., Wadhwani. Volatility and links between national stock markets. Econometrica 62, 901-934. 1994. Print. Leachman Francis. Long-run relations among G-5 and G-7 equity markets: Evidence on the Plaza. 1995.Print. Mcgroaty Patrick. Corrosive inflation eats at developing world. The wall street journal. 2014. Print. Read More