Credit Crunch and Commodities Market - Essay Example

This issue is affecting world trade in that it is currently making it difficult for banks to provide loans to businesses given the significant losses encountered so far as following prior sub-prime mortgage lending. Following from the integration of capital markets, the credit crunch will lead to a fall in stock markets in the US and this may be transmitted through contagion to other major stock markets of the world such as the U.K, China, Japan, EU, etc. International organizations may witness a drop in their stock prices.

In addition, the credit crunch may lead to greater fluctuations in exchange rates and interest rates and this will mean that international organizations need to rethink their risk management policies.This led to a tightening of credit because banks faced a liquidity problem arising out of the high rate of defaults on mortgages. The stocks of banks and financial institutions began to slide and the Dow Jones experienced a significant fall in points as several large financial institutions in the United States hovered on the brink of bankruptcy.

Some financial institutions received help from the Government while others like Shearson Lehman filed for bankruptcy. The crisis in the financial institutions and the tightening credit also had repercussions on the rest of the economy, resulting in a drop in consumer confidence and purchasing with the economy sliding into a recession.1.1Problem Statement and Research QuestionsFollowing the present global financial crisis that has created havocs into the global financial system and the world economy.

The paper expects to provide answers to the following questions:How have the crises affect commodity prices in the. As the report declares the stocks of banks and financial institutions began to slide and the Dow Jones experienced a significant fall in points as several large financial institutions in the United States hovered on the brink of bankruptcy. Some financial institutions received help from the Government while others like Shearson Lehman filed for bankruptcy. The crisis in the financial institutions and the tightening credit also had repercussions on the rest of the economy, resulting in a drop in consumer confidence and purchasing with the economy sliding into a recession.

This study will examine the current financial crisis caused by the decline in the availability of credit and the impact of the credit crunch on the commodities market. The major source of data for this study will be the literature review, taking into account the views of experts on the causes of the credit crunch and the consequences that arise in the commodities market as a result of the credit crunch. In addition to this secondary data, the primary data used in this study is the price indices of different commodities as reported by the IMF over the years, in order to examine the changes that are discernable in the commodities market due to the credit crunch.

Attention will also be on the activities of some major banks. The rest of the paper is organised as follows: part two presents a theoretical framework where major terms and theories relating to the study are discussed, it also provides a review of relevant literature which enables the researcher to identify gaps in the literature.