Emerging Financial Instruments in the Foreign Exchange Market - Essay Example

?TOPIC: Research Porfoilio XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX Contemporary issues in the foreign exchange market Overview of the topic The foreign exchange market, also referred to as the forex market, is involved with the trading of global currencies. It is the most liquid financial market globally. Participants in this market include institutional investors, central banks, and global financiers such as the World Bank, financial institutions, corporations, speculators and governments. Simply put, the forex market finances international trade (DeLong, Smith, Walter, 2012, pp. 81). Due to the increased level of global trade, the foreign exchange, market has grown since as early as 1980 to present. It is estimated that on average, global foreign exchange turnovers have increased from $1.7 trillion in the year 1998 to $3.98 trillion in the month of April, 2010 (Weithers, 2012, pp. 221). Amidst all this growth, the foreign exchange market has had its challenges and emerging issues which affect its operations and growth. One of the major challenges facing international trade is global and regional recessions such as the global credit crunch and the EU financial crisis. Economic openness or regions also highly impact the forex market. Some of the emerging issues in the foreign exchange market include financial instruments such as in spot transactions, forwards, swaps, future and options. Hedge funds have also developed with the growth of the forex market. The following project will be investigating the contemporary issues in the foreign exchange market and their effects Research questions First, what are the emerging financial instruments in the foreign exchange market and their effects on the market? Second, what are the effects of regional and global recessions on the foreign exchange market? Third, what is the relationship between economic openness of economies and the foreign exchange market? Fourth, what are the major determinants of the exchange rates in the global market? Fifth, what are the challenges in the foreign exchange market? Data To answer the first question, I will collect data from existing literature about developments in financial instruments in the dynamic foreign exchange market. These include turn overs in the options and future markets. Google scholar has credible sources on information. World Bank’s website (data.worldbank.com) has reliable data on facts such as volumes of forex exchange trade, economic openness of countries and variables which could indicate intensities of regional and global recessions. These include GDP and Public Debt levels of countries studies. Data will be collected over the period from 1990 to 2010 from countries most actively involved in the foreign exchange market such as the UK, Japan and the US Proposed methodology A correlation coefficient will be calculated to determine if there is any relationship between emerging issues, such as options, futures, economic openness and business cycles, and the development of the global foreign exchange market. I will use a regression model to estimate the effect of the former variable (emerging issues such as options and futures turnovers, economic openness and business cycles) on the later variable (global foreign exchange market turn overs). Emerging issues are the independent variables while the global foreign exchange market is the dependent variable. The following model will be estimated F = C + a*O +b* Fu + c*Eo + d*Bc Where; F – foreign exchange market turnover C – Constant O – Options turn overs Fu – Futures turn overs Eo – Economic openness index Bc – Business cycle indicator References DeLong, G., Smith, R.C., Walter, I., (2012), Global Banking, Oxford: Oxford University Press. Weithers, T, (2012), Foreign exchange: A practical guide to the fx markets volume 309 of wiley finance, New York: John Wiley & Sons. Effects of banking market structure on firm performance Financial institutions such as banks are important elements of economic and social progress. The banking sector plays a major role in financing investments which in turn improve the socio-economic status of an economy. The banking industry has seen tremendous developments over the past two decades with general shift of markets towards free competition. This has been as a result of increased competition associated with globalization and increased efficiency in operation of banks across the globe. Due to increased completion, banks have increased their focus on improving their performance through developments of strategies aimed at boosting profits and increasing the firm’s stability (Athanasoglou, Brissimis, & Delis, 2008, pp. 132-133). Profitability and stability of a bank are good indicators of a bank's performance. There is need to determine factors affecting performance of this crucial sector of an economy. The following research proposal intends to plan an investigation of effects of banking market structure on firm performance. Focus will be made on banks in developed vis-a-vis emerging economies. Profitability will be one of the key indicators of a firm’s performance. Research questions Firstly, is there a relationship between a bank’s market structure and its performance? Secondly, if there is existence of a relationship, to what extent does a bank’s market structure affect its performance? Thirdly, what is the difference between banks’ market structures in developed and emerging economies? Fourthly, what is the difference between the performance of banks in developed and emerging economies? Lastly, does a greater market power for a bank lead to a better performance of a bank? Data Performance of the banking sector will be measured by the banks returns on equity and assets. Data will be collected from 17 Western European economies classified as developed and 23 countries classified as emerging economies. These emerging economies will comprise 13 countries from the Middle East region and 10 from Eastern Europe countries). The data will factor in performance of 1929 banks the regions referred to over a period of twenty years between the year 1999 and 2008. The BankScope database and the World Bank database will act as the main online sources of data used in this research. Methodology The model developed in this paper incorporates the traditional structure-conduct-performance (SCP) and the relative market power (RMP) hypotheses with the view to assessing the extent to which the bank performance can be attributed to non-competitive market conditions and pricing behaviour. As advanced by Smirlock (1985, pp. 74), the hypotheses above can be tested by model below: ?it = ?0 + ?1MSit + ?cr4it + ? it Where: i - bank t - year ? - measure of bank performance MS - market share at a firm level, CR - concentration ratio at the market level References Athanasoglou, P.P., Brissimis, S.N. & Delis, M.D., (2008), "Bank-specific industry specific and macroeconomics determinants of bank profitability", Journal of International Financial Markets, Institutions and Money, vol. 18, no. 2, pp. 121- 136. Smirlock, M., (1985), "Evidence of the (Non)-Relationship between Concentration and Profitability in Banking", Journal of Money, Credit and Banking, vol. 17, no. 1, pp. 69-83. Read More