Principal-agent theory provides definitive answers to how ownership Essay

Principal-agent theory provides definitive answers to how ownership and control problems should be overcome in particular firms - Essay Example As Lane indicates, the analysis of multifaceted private contracting initiated the development of the principal-agent theory. A difference can be made between temporary contracting as with the buying and selling of goods on the one hand and continuing contracting on the other hand whereby an individual hires another individual or group of individuals to work for them against compensation (2). A principal-agent correlation is a contract in which one or more individuals appoint another individual to carry out some service on their behalf whereby the former is the principal and the later is the agent. This entails entrusting some decision making power to the agent which is fairly common. For instance, a homeowner (principal) may employ a carpenter (agent) to repair her table while a client (principal) may hire a lawyer (agent) to defend his case. Principal-agent correlations also normally arise within organizations, even though the above two examples describe relations in a private setti ng. In organizations, the role of the principal is often played by the board of directors, which contracts a manager to manage the institution in the interest of the investors or in the interest of the stakeholders in the case of a nonprofit organization (Caers et.al, 26). Principal-agent theory is used to portray a dyadic relation between a buyer and a seller. At its most basic levels, this model originated from economics. In this relationship the buyer makes a deal with the seller and has the finances to acquire the seller’s service of the service. This means that the buyer has the control required to fund and realize the service that they require. Conversely, the seller can push the association to their favor and increase the price since they have more knowledge concerning the service they are providing than the buyer does. However, either the seller or buyer can employ this to their benefit depending on phrasing of the contract. Principal-agent theory assumes that the sel ler and the buyer do not yearn for a jointly beneficial result of the association, but would somewhat pay less or charge more than what the other is offering (Cohen, 5) In a principal-agent interaction at least two people are to partner in the formation of a service that has value. However, the two individuals are not of the same legal standing or partners. The agent is the individual who works for the principal while the principal puts up the payment for agent’s effort against the value that the agent gives to the principal in the form of a product of some sort. Consequently, principal-agent interaction is basically an agreement on how much of the value that the agent produces should go back to him/her as an earning. Nevertheless, what makes the principal-agent model unique is the extra assumption of asymmetric information, meaning that the agent knows more than the principal about the service under consideration in a manner that may influences the contracting results (Lane, 2). In the principal-agent model, the payoff to the principal relies on an action taken by the agent. The principal cannot contract for the action, but can pay off the agent founded on some evident sign that is associated with the action. The first mover is the principal who decides an incentive system for paying the agent depending on the apparent sign. On the hand, the agent decides the best action to take, given the incentives, and then chooses whether to accept the principal’s offer, based on the estimated payment and the prejudiced cost of carrying out the action. Upon agreeing, the agent decides an action that makes the most of his remunerations and the principal monitors the signal associated with t

Why Communications Essay Example | Topics and Well Written Essays - 750 words - 1

Why Communications - Essay Example Without communication, it may be impossible for other people to know what their colleagues think or like. As such, it is important for people to exchange information in order for them to understand each other. We use communication in all facets of our life. For instance, we socialize through communication since we use it to exchange information. This also helps us to create mutual understanding among us so that our communities can be habitable if we understand each other. Conflicts in a given society are minimised if people understand each other through communication. Another important element about communication that makes it valuable in our lives is that it differs from place to place. There are also different types of communication, for instance, the most common ones are verbal and non verbal communication. In as far as non verbal communication is concerned, it can be noted that there are different signs that are used to convey meaning between two people involved. There is need for one to understand different signs used by other groups of people in order to communicate effectively with such people. Another important issue that should be taken into consideration with regards to non verbal communication is that signs differ from place to place. It can also be seen that communication skills are required especially in verbal communication when one is to achieve his or her desired goals. In business for example, there are different communication skills that are used in order to achieve the desired goals. For instance, the communicator ought to use persuasive speech in order to appeal to the interests of the targeted people or customers. This in turn can compel them to buy the products offered. Therefore, persuasion is a very important component of communication. There are different concepts that characterise communication in different scenarios. The message itself is a very important

Will climate change destroy New York City How can it be managed ( Essay

Will climate change destroy New York City How can it be managed ( weather science) - Essay Example As noted by Russs, Sandy resulted in damages amounting to about $20 billion with 43 people confirmed dead and many more injured by the storm. The transport facilities in the city, including highways, subways, railways and airports, were shut down. The city was thrown into darkness as critical infrastructure, including wastewater treatment plants, hospitals and infrastructure, were incapacitated. Communication systems were also cut following the effects of the storm. Reports on Hurricane Sandy pointed out the increase in the intensity and frequency of hurricanes observed in the North Atlantic from the 1980s. The devastation caused by Sandy had been worsened by changing climatic factors. Partly to blame according to the New York City Panel on Climate Change, NPCC (4) was the rise in the sea level in the region around New York City which increased the magnitude and extent of coastal flooding during Hurricane Sandy. Therefore, New York City remains exposed to destructive effects of clima te change. Borrowing from the Special Initiative for Rebuilding and Resiliency, SIRR, report authored after the exposure of the vulnerability of New York City by Sandy, there exist genuine threats to the city. Among the notable threats, heat waves, intense precipitation and coastal flooding have been noted to be the most extreme (NPCC 12). Heading towards 2050s, heat waves could increase in frequency, duration and intensity. New York has for a long time been experiencing an average of 18 days per year with temperatures of 32oC or 90oF and above. The SIRR report observes that by 2010, New York could experience between 26 and 31 such days. This could rise to up to 57 days a year by the year 2050. With this change would be an additional average of 110 to 260 deaths per year related to heat waves. The number of days when rainfall exceeds 2 inches or 5 centimeters could increase from the current average of 2 days per year to five by 2020. Coastal flooding has been projected to

Why Communications Essay Example | Topics and Well Written Essays - 750 words - 1

Why Communications - Essay Example Without communication, it may be impossible for other people to know what their colleagues think or like. As such, it is important for people to exchange information in order for them to understand each other. We use communication in all facets of our life. For instance, we socialize through communication since we use it to exchange information. This also helps us to create mutual understanding among us so that our communities can be habitable if we understand each other. Conflicts in a given society are minimised if people understand each other through communication. Another important element about communication that makes it valuable in our lives is that it differs from place to place. There are also different types of communication, for instance, the most common ones are verbal and non verbal communication. In as far as non verbal communication is concerned, it can be noted that there are different signs that are used to convey meaning between two people involved. There is need for one to understand different signs used by other groups of people in order to communicate effectively with such people. Another important issue that should be taken into consideration with regards to non verbal communication is that signs differ from place to place. It can also be seen that communication skills are required especially in verbal communication when one is to achieve his or her desired goals. In business for example, there are different communication skills that are used in order to achieve the desired goals. For instance, the communicator ought to use persuasive speech in order to appeal to the interests of the targeted people or customers. This in turn can compel them to buy the products offered. Therefore, persuasion is a very important component of communication. There are different concepts that characterise communication in different scenarios. The message itself is a very important

Brutality on women by the Japanese police Essay

Brutality on women by the Japanese police - Essay Example Brutality against women can be of many forms. It may entail enslavement, deportation or forcible transfer, torture, rape or even the non-spoken form of cruelty. The torture of not being able to freely state your thoughts or raise a voice to receive what you are entitled to. While looking at the Japanese economy, an act of disgrace which still murk golden pages of history would be the issue of the Japanese Imperial Government kidnapping and enforcing young girls under their occupation during the World War II into sex slaves. However, the Japanese Government still defends its acts and denies that the heinous act ever occurred. Walking down the lines of time, we can witness the estimates made by researchers about the number of â€Å"comfort girls† exploited during the past. The figure is expected to be around eighty to two hundred thousand; women were abused and brutalized in the â€Å"comfort centers†. The comfort women were administered, processed, dispatched and controlled by the Japan military. These women were to accompany the military to conquered places or colonial province and comfort them during the times of World War 2. These women were forced to please the military personals unless they were in hospital, there were no fixed leaves for the women, it purely depended on the needs of the men. They endured abuse and violence and were forced to accept military currency for their â€Å"services†. The torment of being forced everyday drained these women emotionally and psychologically. Post the war these women were allowed to leave without any sense of guilt or apologies from the gov ernment of Japan. These women could not openly speak about their ordeals due to the pressures from the society and were pushed to suffer the trauma silently.

Freudian Reading on Othello Essay Example for Free

Freudian Reading on Othello Essay Freudian Reading on â€Å"Othello† Is it possible for other people to act as our superegos? What are the effects of never resolving your oedipal complex? And when a situation becomes to over whelming, do we project our thought and feelings on to our peers? I am using â€Å"Through the Literary Looking Glass: Critical Theory in Practice† by Sian Evans and â€Å"Othello† by William Shakespeare to analyse the characters Othello and Iago as well as the major theme jealousy through a Freudian lens. The aim of this psychoanalysis is to try and give a better understanding of the character’s motivations and unconscious, narcissistic desires. The theme jealousy is revealed by both these characters throughout the play shows us how we need to be well rounded people, and the effects this has if we are not. The opening act of â€Å"Othello† begins with the marriage of Desdemona and Othello in Venice, Italy. Here we see a black, middle aged man, marry a fair, young, Venetian woman in front of an upper class white society. (This was highly frowned upon at that point in history). As the play proceeds Iago suggests to Othello that Desdemona is sleeping with Cassio, and tries to corrupt their marriage. This behaviour seems somewhat childish coming from a grown man and shows us how Iago doesn’t use his superego to control his id, as well as displaying his immense jealousy of Othello. However Othello believes what Iago is saying, as he has a reputation of being an â€Å"honest man†. Iago continues to insinuate Desdemona’s dishonesty to Othello and provides fake evidence. Othello gets increasingly â€Å"green-eyed† by the â€Å"poison† that Iago is telling him and becomes so overwhelmed by this jealousy that he goes back to his natural instincts, resolving issues through murder. This is a result of him joining the army at 7 and since then all he has known is war. The play ends with Othello acting on impulse and under the influence of his violent superego, murdering Desdemona, and then Iago after he realises Desdemona was innocent. He then proceeds to commit suicide as he believed this act would be considered noble, restore his reputation, and relieve his conscious mind of his violent actions. Othello is a mentally and emotionally frail character in the play. He joined the army at a young age and gradually became recognised in society as something other than a then a â€Å"middle aged†, â€Å"black moor†, due to his high rank in the army and then marrying Desdemona. However  when a supposedly â€Å"honest Iago† starts suggesting Othello’s wife is unfaithful, he is easily able to mentally control Othello through him never having resolved his oedipal complex. Othello had never resolved his oedipal complex because we see him give his mother’s handkerchief to Desdemona. Freud describes this as a method of transference and Othello is transferring his repressed love for his mother on to Desdemona. Iago then acting as Othello’s id then reveals Othello’s murderous superego which was caused by decades of warfare. We visually see this in the play when he says â€Å"How shall I murder him Iago† when Iago implies Cassio is sleeping with Desdemona. Here, Othello is also showing that his oedipal complex is still not resolved by transferring his repressed emotions on to new objects through his desire to murder Cassio (being the father) in order to be closer to Desdemona (being the mother). Later in the play we see hi s superego again when Desdemona (the woman he loves) becomes his enemy and he kills her. This act of murder was purely out of jealousy and the fear of him losing his reputation he has worked so hard for. â€Å"Yet she must die, else shell betray more men,† Shows us how Othello is subconsciously protecting his soldiers. Though a Freudian perspective it appears that Shakespeare has used Othello as a character to show us that if you are brought up with murder or warfare when you are young, you might never be able to overcome your violent superego as you get older and the detrimental effects this has. Shakespeare has also shown us how sublimation is applied through Othello, as he is someone that has the urge to hurt and kill and thus joined the army, so that the act of killing is morally justified by protecting their country or soldiers. He may not kill the person he wants to kill necessarily, but they will release their feelings by killing the enemy, if unless these feelings are manipulated by an external factor (Iago). Although many years have passed since â€Å"Othello† was written, people can still relate to it because human nature does not change. We all question those who are close to us, and whether or not they are honest and loyal. Shakespeare is using Othello to warn us of disastrous co nsequences that may arise when you are manipulated by a person (Iago) that capitalises on the jealous nature of another human. Iago is an extremely jealous character in the play. He is envious of Othello’s reputation, higher rank in the army, wife, and that he is more respected in a white society than him; even though he is middle aged and  black. This shown through the quote; â€Å"But for my sport and profit. I hate the Moor†Ã¢â‚¬ ¦Ã¢â‚¬Å"He has done my office†. Reputation means to a lot to Iago, and overall that’s all he cares about most, which shows narcissism and racism in his character. He believed that Othello robbed him of his reputation. We see this through the quote; â€Å"But he that filches from me my good name, Robs me of that which not enriches him, and makes me poor indeed†. Iago doesn’t use his superego to control his id so his urges and desires are unrestrained. This is shown throughout the play in his successful attempt to corrupt Othello’s marriage. Nearly one hundred per cent of the time when Iago is with Othello he is using reverse psychology to act as Othello’s superego and make him more jealous of Cassio; â€Å"O beware, my lord, of Jealousy! It is the green-eyed monster†. This is displaying two perspectives on Iago’s physiological state. Either Iago has zero control over his id, and just lets his jealous mind run wild. Or, he chooses not to control his psychopathic mind with his superego. This results in him tricking Othello into consciously thinking he’s jealous when he unconsciously isn’t. For example, when Othello asks for living reason (proof) that Desdemonas been disloyal, Iago tells him about an erotic dream that Cassio supposedly had one night while he was lying in bed next to Iago. In slee p I heard him say â€Å"Sweet Desdemona, let us be wary, let us hide our loves†. After Iago tells these rumours he then covers his tracks by deceiving Othello. An example of this is when he says; â€Å"Men should be what they seem† which is ironic coming from him, as he is not what he seems. He is deceptive and believable, and for Othello that is bad news for someone who is so easily jealous and mentally frail. â€Å"He hath a person and a smooth dispose, to be suspected, framed to make women false. The Moor is of a free and open nature, that thinks men honest but that seem to be so† This quote is reinforcing how Iago believes Othello will be easy to manipulate and deceive. Through this psychoanalysis we have a greater understanding of Iago’s motivations and unconscious desires. We see how he projected an overwhelming amount of jealousy he had for Othello on to him, and even though he thought he was in control of the situation and that he would come out on top, it led to both of their demise. For Iago jealousy played on the trust he developed in his relationship with Othello and whether Othello would believe him. However even though Othello did believe and trust Iago, Shakespeare still shows us  that jealousy destroys relationships and consumes the mind. My psychoanalysis of â€Å"Othello† has given me a new understanding of the play for a different perspective from what I would normally view it from. Iago and Othello both had major flaws in their characters which ultimately lead to their demise. Iago couldn’t control his id, which meant he was always acting on impulse without control of the superego and there was only a matter of time before he slipped up. Then Othello never resolving his oedipal complex meant someone like Iago could easily manipulate and mentally corrupt him. Both these characters have shown us as readers how we need to be well rounded people so we are not as easily susceptible to jealousy, and the effects this has if we are not.

Market Analysis and International Investment

Market Analysis and International Investment 1-(A) From various editions of the Economist, collect time series data of Big Mac prices for 3 countries and assess whether Purchasing Power Parity (PPP) holds. Discuss whether the (Big Mac Index) is a good Price index to be used in this analysis. Answer: The economist’s Big Mac index shown in table 1 has been used since 1986 as an indicator aimed to assess how PPP (Purchasing Power Parity) stands against most traded currencies such us the US dollar. Before entering into further analyses, it is worth providing some relevant information on the PPP theory and assess whether the Big Mac index implicitly delivers points of comparison that subsequently reflect exchange rate parity conditions across 120 nations where this worldwide known burger is largely sold.[1] Purchasing power parity theory by Rudiger Dornbush (Salamanca School) attempts to explain that two currencies adjust in compensation owing to the difference between the rates at which the two countries under watch are inflating. In relation to this, the underlying principle of the PPP theory lies in the law of a single price. This law can be simply explained based on the commodities trade whereby companies around the world tend to purchase goods from countries where these are more competitive in terms of price.[2] Following this first hypothesis, there is a determination mechanism starting when goods are purchased abroad and at the same time the demand for foreign currency results in increasing the value of the currency and putting extra pressure on the price of the good itself. Based on this scenario, the PPP entails that two currencies should stand at a level where buying the same goods in the two countries is equivalent. Furthermore, the theory projects that real effective exchange rate will remain constant through time. Based on further research, this work lays out some elements that intervene as potential culprits for not letting the PPP system operates over a short and medium-term horizon. As a relevant consideration to the findings and major setback to the PPP theory, the foreign exchange market framework has changed considerably over the last years moving exchange rates from fixed to floating. In the same context, capital movements and internal policies now explain differentials in exchange rates rather than a simplistic scenario of supply and demand of goods.[3] For instance, in 1973 the oil embargo led unexpectedly the United States, Japan and Italy to depreciating their currencies as a result of currency pressure. According to Buiter and Miller (1992), the exchange rate accommodation mechanism has a much broader significance than the one explained by PPP’s scope; the exchange rate is a measurement of competitiveness as a progressive or â€Å"non-casual† variable. Therefore, exchange rate is a price that reflects an efficient international financial market as opposed to a predetermined state controlled through market forces exclusively. Supporting the previous introduction and with regard to the Big Mac index headway between two years in a row, PPP does not always hold. Moreover, due to the composition of the product, Big Mac does not reflect a truthful price index to determine whether an exchange rate is undervalued or overvalued. According to the economist magazine, Big Macs are not cross-border trading goods as approximately 55% to 60% of the product costing is represented by non-traded goods such us labour, rent and services. Therefore, a price index with no dependence on international trading cannot fully reflect exchange rate comparisons; every country has a unique competitive position mainly produced by internal structures and factors such us labour market, productivity and purchasing capacity. Purchasing power parity theory brings cear shortcomings and most of them can be determined superficially by the Big Mac index and its trend. The most commonly mentioned problems behind the use of PPP: Trade Barriers Changes in patterns of demand and output Similar purchasing patterns and taste in products Varying price indices Taxation Long-term vs. short-term outlook Table 1 shows full coverage for the Big Mac index over a large group of countries. As a complementary part of the analysis this work has chosen two currencies to compare against the US dollar and determine the PPP trend between 2004 and 2005. In 2004 the Big Mac price in the US was US$ 2.90 compared to US$1.26 in China and US$ 5.18 in Norway. In 2005 the corresponding prices represented an increment of the US price by 5.5% to US$ 3.06, 0.7% in China and 16.9% in Norway reaching prices of US$1.27 and US$6.06 respectively. Following the PPP theory, it indicates that exchange rates move to rectify changes in inflation rates. In 2004 China’s currency was 57% undervalued and Norway 79% overvalued; the model expects that an inflationary process in the US of 5.5% would have generated a rectifying movement to close gaps. On the contrary, while the Big Mac price index in the US rose by 5.5%, China’s currency dropped further from 57% undervalued to 59% and Norway continued the other direction and got appreciated dramatically from 79% to 98%. If Big Macs could be exported, no buyers would be looking at Norway since its real international competitiveness is far below. However, in terms of purchasing capacity the Norwegians are potentially capable of purchasing Big Macs as their income per head is considerably higher than in US and China. (B)Choose any two countries and collect (approximately) one year of daily data of a forward exchange rate, the spot exchange rate and the two corresponding interest rates. Can you make any arbitrage profits? Carefully discuss. Answer: To open the discussion about the exchange rate market and its relationship with interest rates, the answer introduces the concept of Eurocurrency market. This is a marketplace where participants make money through borrowing and depositing currencies at a price dictated by interest rates. In this regard, the transactions period varies as short as overnight and in some cases as long as five years. For this exercise the answer considers one participant and two currencies, US Dollar and GBP based on data from 2005 central bank statistics. On January 31st 2005, this person borrowed US$ 18’833.000 in the US and made the decision to arbitrage in GPB pounds. Diagram 1.0 illustrates the foreign exchange arbitrage based on the use of financial instruments to generate profits. Diagram 1.0 Source: Author calculations Borrowed at US$ 18’833.000 at 4.83% and one repayment at the end of the first year (365 day repayment of US$ 19’743.633) Evaluate potential arbitrage: Sell US$ 18’833.000 to buy sterling pounds at GBP/USD 1.8833 and obtained  £10’000.000 Made deposit of  £10’000.000 at 6.20% for 12 months and agreed to received  £10’482.999 Same take a forward contract to buy US$ 19’742.633 1year forward at sustaining GBP/USD at 1.8526 and sell:  £10’657.256; losses: ( £36.716) The arbitrage would produce losses as USD appreciates against the US dollar on a 12-month period; you cannot make profits. 2-(A) Discuss the importance of the exchange rate as an economic variable for international investment decisions or for importers and exporters. Answer: Exchange rates are a key factor that concerning their mechanisms of adjustments and vulnerability originates differential positions and volatility risk within an economic outlook. In relation to this effect, Buiter and Miller’s approach (1992) explains that monetary policies combining prices stabilisation, capital freedom and rational expectations in the foreign exchange market produce a â€Å"transitional† effect on the level of international competitiveness and leave industry sectors exposed.[4] For financial assets and exchange rates levels, international trade activities have rapidly evolved into a more developed and complex sector that operates freely within a global economic system and lead economies to frequently reaching higher levels of surpluses or deficits. On a daily basis scenario, portfolio strategist search for competitive positions worldwide that match investment targets. Concerning the structure of the investment, foreign exchange forecasts are a driving force at the stage of resources allocation and use of financial instruments (Derivatives). But how the exchange rates intervene as a decisive economic variable and in which sectors they deliver benefits or vice-versa? Milton Friedman gives his opinion to this question, starting by responding on the effects over exchange rates through monetary policies; he says â€Å"†¦..monetary policy actions affect asset portfolios in first instance, spending decisions in the second, which translate into effects on output and then on prices. The changes in exchange rates are in turn mostly a response to these effects of home policy (on output and prices?) and of similar policy abroad†¦..†[5]. If one assumed Friedman’s comments, domestic policies move exchange rates affecting decisions in a certain order. With regards to international trade, one of the most compelling examples on how exchange rates affect the performance of particular sectors compared to others is the case of the British economy. On one hand an overvalued pound has jeopardised to some extent the lack of competitiveness of the industrial production and exports in the UK by soaring internal prices and changing the productive structure of the country. Conversely, on the other hand the levels of interest rates together with a strong currency have triggered capital inflows, which are being allocated on different asset classes and also in the continuous boost of service sectors (i.e. Financial Services). To understand the mechanism linking imports and exports with exchange rates, Maurice Levi (1990) explains that on a supply and demand setting the supply curve of a currency illustrates the quantity of that currency supplied and the price of the currency, given by the exchange rate, the supply curve of a currency is calculated as a result of a country’s demand for imports. This event occurs when buyers pay for imports that are sold in foreign currency, then the country’s recipients of the goods must sell their domestic currency for the requested foreign exchange and when imports are invoiced in local currency the foreign beneficiary of the currency sells it. In any case imports result in the country’s currency being supplied. The amount of the currency supplied is equal to the value of imports.[6] On the contrary, the demand curve for a currency shows the value of the currency that is demanded at each likely exchange rate. The need to buy a country’s currency takes off from the need to pay for the country’s exports; the currency’s demand curved is derived from the country’s export supply curve, which shows the volume of exports at each price of exports[7]. To summarise the answer, exchange rates send strong signals to both, portfolio investors and international traders; however the degree of the effect varies depending on the competitive position of the economy. In terms of traded goods, exchange rates place the level of international competitiveness of goods compared to the same goods in other country. On investment allocations such us bonds and equities, an exchange rates outlook is essential to sustain or withdraw positions. In relation to investments, exchange rate risk is generated by uncertainty in the future exchange rates at which the asset or liability will be converted into dollars. Thus, bonds, foreign stocks, real estates and accounts receivable and payable may be subject to exchange rate risk if their value in home currency is beaten by exchange rates. Concerning imports and exports of services such us tourism, banking services, consulting, engineering amongst others react to exchange rates variations in the same way as imports and exports of goods. (B) Collect data for 3 countries of your choice and assess the importance of the exchange rate for international equity investors. Use different investment horizons. Equity investors react to market sentiments, set out overall investment positions and individual strategies underpinned by economic forecasts. Decisions are based upon a group variables and future scenarios; for instance it is widely recognised the existing inverse relation between interest rates and equities. When interest rates are moved up by major central banks such us the Federal Reserve, European Central Bank (ECB), Bank of England and Bank of Japan, shares lose momentum and in most of the cases fall. In terms of foreign exchange conditions, investors go long on equities when they feel comfortable with correct valuation of the currency and if the economy’s balance of payments works in line with the external position of the country. In other words, the exchange rate is determined by the aggregated equilibrium between currency demand and supply. If any country is not in the position to sustain its competitiveness on its currency it sends strong signal for investment decisions. The following three countries US, UK and China have been selected to understand how bursaries respond or relate to changes in exchange rate: US Dow Jones (1-Y Horizon) US is a highly liquid market, Chart 1.0 shows market transactions above 2 billion US dollars a day sustaining levels over 1 year horizon. The Dow index moved up from 10500 (approx) in June 2005 growing by 3.8% (approx) to June 9th 2006. In chart 2.0 Euro gains grounds on the US dollar by almost 5% over the same period as shown on the Dow Jones outlook above. Thus, Euro appreciated by 5% against US dollar and Dow Jones with a slight growth without losing transaction levels. Hence, no particular direct correlation is found on the two variables (Exchange rate and Stock Index). However, it is relevant to clarify that more components such us interest rates expectations, unemployment levels in the US and Euro land, mortgage activities, retail index and companies profitability have an effect on these trends. UK FTSE (2-Year Horizon) In a 2-year Horizon, FTSE shows strong momentum soaring by 22% (approximately from 4500 to 5500); uptrend with a relevant drop in June 2006 due to oil prices and decision on interest rates accommodation by the FED and ECB. This analysis in terms of the pound outlook shows two scenarios for the currency. In 2004 starts at GBP/USD1.82 falling to its 18-month lowest level to 1.72 (5.8%), then it picks up again and in less than 5 months rebounds to 1.85. Again the analysis does not find a direct relationship between a positive steady FTSE trend and sterling variations. CHINA Shanghai Composite 6-Month Horizon The third example involves Chinese Yuan and US Dollar, which have experienced international trade growth five times faster than in 1990s decade. On one hand, Chinese moved from being the 9th most important destination for US Exports to being currently the 4th delivering an impressive uptrend in 2005 above 20% increase (United States Trade Representatives, 2006). On the other hand, the effect of Chinese exports has been stronger, in 2004 china’s trade surplus with the US increased by 24.5% to 202 billion US dollars, the largest between two economies according to the Economic Policy Institute in 2006. Over the last 6 months, the Chinese Yuan has not followed a revaluation against the US Dollar; as it would have been expected due the international trade context explained before (only 2% appreciation). In relation to the Shanghai composite index, it has experienced spectacular growth outperforming other stock markets (44% increases in the same period). Based on these figures, the analysis indicates, exchange rate is not the driving factor to buy stock in China; investors continue forecasting strong growth in Chinese listed companies due to strong internal market performance, domestic consumption as well as industry development. 3- Today is the 16th of December 1998.You are a small importer/exporter having to pay  £5,000,000 on the 26th of February 1999.You are concerned about exchange rate risk and you are considering using currency futures to hedge your currency risk. What would be your hedged and unhedged outcome with hindsight? Carefully explain what will happen over this hedging period with your margin account. One Pound Sterling futures contract is  £62,500 and the initial and maintenance margins are $2,295 and $1,700 respectively. Answer: (Using spreadsheet â€Å"Market†) and concepts from Brian Kettell (Financial Economics p321-330) In futures the principle is to sell what is overpriced and buy what is underpriced. In this example if the GBP/USD is overpriced (futures) less US dollars per Sterling pounds you should sell the futures contract on February 26th 1999 (Long Position in the Spot Market), which means purchase GDP/USD at the Spot Rate Spot Price Futures GBP/USD 1.6750-08 1.6060-1.5998 (at a Premium) The advice for the US importer is to protect the US value by hedging 80 contracts of Sterling Pounds using futures contracts. However, in this case the US dollar as of February 26th when the payment will be made, the futures price shows a US dollar at a premium, which means, the dollar will appreciate. Action: Unit of Trading  £ Pounds Go long in the future market selling your futures contract (right to deliver at 1.6060) and holding on at the the Spot Market. Currency Hedge US dollar against British Pound:  £5.000.000 at a spot rate February 26th 1999: Action buy future Contracts:  £62.500 Number of contracts: 80 Value locked on December 16th 1998:  £62.500 x 1.6750= US$ 104.687 Value of each futures contract on February 26th 1999: £62500 x 1.6060 = US$ 100.375 Net Profit of each contract: US$4. 312 x 80 = US$ 344.960 (Hedging profits) At the end of the period, without hedging you would have benefited as US dollar got appreciated. However, with hedging you will obtain profit margins of US$ 4312 in each contract improving your initial margins. Bibliography Bank of England Statistics available at: http://www.bankofengland.co.uk/statistics/index.htm Economic Policy Institute available at: http://www.epinet.org/content.cfm/webfeatures_econindicators_tradepict20060210 The Economist Big Mac Index available at: http://www.economist.com/markets/bigmac/displayStory.cfm?story_id=4065603 Federal Reserve Statistics available at: http://www.federalreserve.gov/datadownload/Build.aspx?rel=H15 Kettell, B. (2001) Financial Economics, Making Sense of Market Information: Prentice Hall: London Levi, M (1990). International Finance, the Markets and Financial Management of Multinational Business. McGraw-Hill Series in Finance: United States MacDonald R, Taylor M, (1992). Exchange Rate Economics Volume I â€Å"Monetary Policy and International Competitiveness: The problems of adjustments Willem H. Buiter and Marcus Miller, Published by Edward Elgar: England Walmsley, J. (1996). International Money and Foreign Exchange Markets, An introduction. Published by John Wiley Sons Ltd Baffins Lane Chichester. West Sussex Appendix Appendix I. Daily Data End month average Daily forward weighted interest premium/discount rate, instant Daily average of 4 rate, 12 months, US Spot exchange rate, access deposit, UK Banks base rates Dollar US $ into Sterling Bank branch accounts IUDAMIH XUDLDFY XUDLUSS IUMTHAI 04-Jan-05 4.75 -3.075 1.8833 n/a 05-Jan-05 4.75 -3.005 1.8881 n/a 06-Jan-05 4.75 -2.97 1.8754 n/a 07-Jan-05 4.75 -2.925 1.868 n/a 10-Jan-05 4.75 -2.905 1.8748 n/a 11-Jan-05 4.75 -2.85 1.877 n/a 12-Jan-05 4.75 -2.895 1.8932 n/a 13-Jan-05 4.75 -2.85 1.8806 n/a 14-Jan-05 4.75 -2.755 1.8684 n/a 17-Jan-05 4.75 -2.715 1.8593 n/a 18-Jan-05 4.75 -2.85 1.8669 n/a 19-Jan-05 4.75 -2.895 1.8769 n/a 20-Jan-05 4.75 -2.93 1.8706 n/a 21-Jan-05 4.75 -2.92 1.8693 n/a 24-Jan-05 4.75 -2.94 1.8757 n/a 25-Jan-05 4.75 -2.89 1.8647 n/a 26-Jan-05 4.75 -2.955 1.8815 n/a 27-Jan-05 4.75 -2.945 1.8864 n/a 28-Jan-05 4.75 -2.935 1.8829 n/a 31-Jan-05 4.75 -2.92 1.8859 2.18 01-Feb-05 4.75 -2.9 1.8799 n/a 02-Feb-05 4.75 -2.895 1.8848 n/a 03-Feb-05 4.75 -2.84 1.8794 n/a 04-Feb-05 4.75 -2.885 1.8858 n/a 07-Feb-05 4.75 -2.835 1.8657 n/a 08-Feb-05 4.75 -2.855 1.8561 n/a 09-Feb-05 4.75 -2.965 1.8578 n/a 10-Feb-05 4.75 -2.95 1.8712 n/a 11-Feb-05 4.75 -2.96 1.8654 n/a 14-Feb-05 4.75 -2.945 1.8869 n/a 15-Feb-05 4.75 -2.935 1.8872 n/a 16-Feb-05 4.75 -2.83 1.8786 n/a 17-Feb-05 4.75 -2.81 1.8906 n/a 18-Feb-05 4.75 -2.79 1.8944 n/a 21-Feb-05 4.75 -2.8 1.897 n/a 22-Feb-05 4.75 -2.9 1.9057 n/a 23-Feb-05 4.75 -2.985 1.906 n/a 24-Feb-05 4.75 -2.955 1.9077 n/a 25-Feb-05 4.75 -2.89 1.9153 n/a 28-Feb-05 4.75 -2.89 1.9257 2.18 01-Mar-05 4.75 -2.875 1.9198 n/a 02-Mar-05 4.75 -2.94 1.9101 n/a 03-Mar-05 4.75 -2.9 1.9084 n/a 04-Mar-05 4.75 -2.885 1.9258 n/a 07-Mar-05 4.75 -2.87 1.9139 n/a 08-Mar-05 4.75 -2.86 1.9311 n/a 09-Mar-05 4.75 -2.835 1.9212 n/a 10-Mar-05 4.75 -2.77 1.9236 n/a 11-Mar-05 4.75 -2.72 1.927 n/a 14-Mar-05 4.75 -2.64 1.9119 n/a 15-Mar-05 4.75 -2.61 1.9157 n/a 16-Mar-05 4.75 -2.65 1.9284 n/a 17-Mar-05 4.75 -2.595 1.9237 n/a 18-Mar-05 4.75 -2.555 1.9155 n/a 21-Mar-05 4.75 -2.515 1.8962 n/a 22-Mar-05