International Financial Market Issues - Essay Example

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INTERNATIONAL FINANCIAL MARKET by Task1. a) Treasury bill maturing 17th September 2007 Formula: Po= (Amount on offer/(r/ (365/n))) Amount on offer= 750,000,000 r=0.05693508 n=93 days Average Sales Price= 51700083448 Treasury bill maturing 22nd September 2008 Formula: Po= (Amount on offer/(r/ (365/n))) Amount on offer=400,000,000 r=0.05241187 n=93 days Average Sales Price= 29952994868 Treasury bill maturing 21st September 2009 Formula: Po= (Amount on offer/(r/ (365/n))) Amount on offer=1,500,000,000 r=0.0504771 n=93 days Average Sale Price= 116629060984 Treasury bill maturing 20th September 2010 Formula: Po= (Amount on offer/(r/ (365/n))) Amount on offer=1,000,000,000 r=0.0435198 n=93days Average Sales Price= 90182656694 Treasury bill maturing 19th September 2011 Formula: Po= (Amount on offer/(r/ (365/n))) Amount on offer=1,000,000,000 r=0.0517969 n=93 days Average Sales Price= 75771545841 Treasury bill maturing 17th September 2012 Formula: Po= (Amount on offer/(r/ (365/n))) Amount on offer=1,500,000,000 r=0.0332738 n=93 days Average Sales Price= 176928898238 Treasury bill maturing 23rd September 2013 Formula: Po= (Amount on offer/(r/ (365/n))) Amount on offer=500,000,000 r=0.0318362 n=93 days Average Sales Price= 61639441623 b) There was a dramatic movement in the yield/price conditions after 2008 because most of the investors are big institutions like the pension fund, investment funds, sovereign states, and banks. The sovereign states have significant strategic and economic considerations that inform the willingness to buy the treasury bills (Grabbe, 2006). Additionally, treasury bills are not purchased for their contribution and returns, but because they are the safest method for holding reserves. Although most people believe the risk in the financial system, the investors are ready to accept less return for the protection of reserves (Grabbe, 2006). Task 2: a) Development in the rate of inflation. Inflation in the United Kingdom experienced growth in the value of consumer services and retail sales. The two elements rose slightly during the 6 months of year, but it remained modest. Also, the housing market strengthened continuously. The intentions of investments continued to greatly aim at increasing efficiency, with minimal large expansion capacity underway. Also the manufacturing exports grew at a moderate level (Dufey & Giddy 2008). In recent months, the output in manufacturing grew for the domestic market. Consequently, there was a modest development in the turnover of business services. The annual rate of construction output declined as the building of houses increased. Generally, the output in the industry changed significantly on previous years. Additionally, the corporate credit conditions continued to improve gradually, but various companies reported the urge to dwell on the non-bank or internal funding. The intentions in employment edged higher over the recent months but were flat for the services of consumers (Grabbe, 2006). Also, the capacity utilisation remained below normal in both services and manufacturing. The labour costs for each employee grew modestly but in stable rates over the earlier months. Material costs’ inflation fell to lower levels and remained in stable conditions for the prices of finished goods (Dufey & Giddy 2008). The business services prices and manufacturer’s increase rate remained subdues, though the rate of profitability edged high with rise in output. Finally, the consumer price inflation rate remained unchanged. Bank of England Prospects for inflation: The Bank of England has foreseen a sustained output expansion, although the upturn pace is more likely to be tempered by financial crisis legacy. The spare capacity degree is expected to be constant for some time. The economic slack persistence is expected to continue dampening domestic inflation. Although Consumer Price Index is scheduled to remain at 3%, it is more likely to fall to a target of 2% over the prospected period. The growth in production need to attenuate the local cost pressures and outside price pressures are expected to wane. By the end of the prospected period, the Consumer Price Index inflation is generally balanced at a target of 2%. b) Development in Real Rate of Return. The real rate of return of Treasury bill has been fluctuating over the last years. The real rate of return depends entirely on the rate of inflation. Unlike inflation rate, the real rate of return for treasury bonds displayed various trends, where it reduced from 1.7% in 1995 to 1.07 % in 1997 and increased to 2.16 in 2005. The rate of return remained in a stable condition until 2008 when it declined. Thereafter, the rate has been stable and registered a 1.17 percent in 2010. The decline in the rate of return is attributed to inflationary environment that has been experienced over the last early years. This is because the market has been manipulated. The fluctuations reflected the variations in the inflation and nominal rate of return (Dufey & Giddy 2008). Despite the fluctuations, real rate of return recorded a positive feedback. Also, market lacked integrity, and the investors have shunned the market for fear that the rate of return lacked accurate price discovery. This has resulted to distrust, and illiquid marketplace that has devastated economic activity. UK Treasury bill is one of the liquid markets and its concern about the integrity of the market cannot be allowed. Bearing this in mind, the T-bill rate of return has remained the most coveted tools in the investment universe (Steil, 2004). c) Bids to Cover Ratio. Treasury bill maturing 17th September 2007 n=93 days Formula: =Bids Received/Bids Accepted Amount on offer= 750,000,000 Amount Tendered for: 4,918,200,000 = (4,918,200,000/750,000,000) = 6.5576 Treasury bill maturing 22nd September 2008 n=93 days Formula: =Bids Received/Bids Accepted Amount on offer= 400,000,000 Amount Tendered for: 1,488,750,000 = (1,488,750,000/400,000,000) =3.7219 Treasury bill maturing 21st September 2009 n=93 days Formula: =Bids Received/Bids Accepted Amount on offer= 1,500,000,000 Amount Tendered for: 2,343,250,000 = (2,343,250,000/1,500,000,000) = 1.5622 Treasury bill maturing 20th September 2010 n=93 days Formula: =Bids Received/Bids Accepted Amount on offer= 1,000,000,000 Amount Tendered for: 3,391,900,000 = (3,391,900,000/1,000,000,000) =3.3919 Treasury bill maturing 19th September 2011 n=93 days Formula: =Bids Received/Bids Accepted Amount on offer= 1,000,000,000 Amount Tendered for: 5,325,500,000 = (5,325,500,000/1,000,000,000) =5.3255 Treasury bill maturing 17th September 2012 n=93 days Formula: =Bids Received/Bids Accepted Amount on offer= 1,500,000,000 Amount Tendered for: 3,822,000,000 = (3,822,000,000/1,500,000,000) = 2.548 Treasury bill maturing 23rd September 2013 n=93 days Formula: =Bids Received/Bids Accepted Amount on offer= 500,000,000 Amount Tendered for: 1,362,200,000 = (1,362,200,000/500,000,000) =2.7244 Generally, the issue has been influenced by expectations of the investors. This involves the expectations the investors have on the future performance of the Treasury bill. Also, the issues are affected by the confidence of the investors regarding their investments. Consequently, herd instinct involves investors herding together for investment (Oxelheim, 2005). This behavioural finance is based on the assumption that structure of information and features of market participants influence the investment decisions of investors. They focus on how the investors act and interpret macro and micro information to make decisions in investment. The investors consider their goals, constraints, needs, and objectives of investment. It is not always possible to make a successful decision for investment. Task 3: The movements in interest rate are very important to stock market prices. The investors of stock watch for economical signs and regulators that may determine the way interest rate take in the future. The signs and regulators are not always reliable in the long run, but give the investors information on the trends and development of interest rates (Dufey & Giddy 2008). The Federal Reserve Open Market Committee commonly referred to as Fed, set crucial interest rates and the stock market reacts to any changes that come along. More importantly, the Stock market responds to the anticipated action of the Fed prior to meeting (Honeygold, 2009). The rate of interest control money supply and its flow in the economy. When the interest rates are low, consumer consumption increases and businesses borrow money to expand and other wants at rated that are more affordable. When the money is in excess in the economy, consumers will be encouraged to spend more. This is beneficial to both consumers and businesses. Generally, when the flow of money is cheap, many jobs are created (Honeygold, 2009). The above is significant to the stock market up to a certain level. It is at this level that Fed becomes worried that the economy is growing at a faster rate and this pose a threat of raising level of inflation. When the interest rates are high, the flow of money in the economy will be very slow. Higher interest makes it experience for businesses and consumers to borrow (Oxelheim, 2005). The slowing effect lowers the inflation chance but, it drains the profit for corporate and thus hurt the prices of stock. Therefore, the movement in the stock market will react to the latest inflation reading. Long term investors should ignore the fight over interest rates but maintain a keen look on the long term effect (Dufey & Giddy 2008). Whether one is in the market for selling or purchases, timing will greatly be affected by the short-term fluctuations. The interest rates will rise because uncertainty is on the rise, and the economy is also rising. During this higher interest environment, it is advisable for investors to own stocks. This is because if the yields are rising, it implies that there is an improvement in growth and companies have better pricing power (Steil, 2004). It is not bad when the interest rate rises for the right reasons. Strategists propose the banking sector institutions to benefit more from rising rates (Oxelheim, 2005). Reference Dufey, G., &Giddy, I.H.2008.Theinternationalmoneymarket.EnglewoodCliffs, N.J.: Prentice-Hall. Grabbe, J.O.2006.Internationalfinancialmarkets.NewYork: Elsevier. Honeygold, D.2009.Internationalfinancialmarkets.NewYork:NicholsPub.Co. Oxelheim,L.2005.Internationalfinancialmarketfluctuations:corporateforecastingandreportingproblems.Chichester [WestSussex: Wiley. Steil, B.2004.Internationalfinancialmarketregulation.Chichester:J.Wiley. Read More