Term Structure / Yield Curve, Financial Crises and Foreign Exchange Market - Essay Example

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