This is a research paper that will address three main areas in the study of finance. The first part is the UK capital markets where the paper will look at the structure and the roles of that particular capital market. The second part of the paper will look at an assortment of derivative instruments that include the swaps, the options and the futures while the third part of this paper will define the Eurocurrency and then focus on the Eurocurrency markets where it will look at the benefits and the dangers of the existence of the Eurocurrency markets in the global fiscal systems.
The structure and role of the UK capital markets
The UK capital markets are debt and equities market where entrepreneurs and governments can raise funds for long term purposes. It is a market in which money for a period for more than one year. It has the financial services authority as a regulator that oversees the capital markets in their specific jurisdiction to ensure that the investors are cushioned from frauds among other responsibilities (Michie, 1999). There are two types of capital markets the primary and the secondary market. In the primary one, a process called underwriting is used to sell bonds or stocks to investors while in the secondary markets, the securities that are already in existence are purchased and sold among the investors.
One role of the capital markets is raising capital for business. The capital markets give an opportunity for businesses and companies to raise expansion capital through selling of stocks to the public. Very many companies have raised money for expansion or for meeting their strategic plans through the sale of shares to the public through the capital markets (Michie, 1999). The second role is that of mobilization of savings for investment creating a rational method of allocation of resources when idle savings are invested in shares. These idle deposits that were previously kept in bank remain active under the capital markets especially in the promotion of businesses and government ventures, thus contributing to a stronger economic growth and improving the levels of productivity of firms and businesses. The UK stock market also facilitates mergers and takeovers of companies thus helping in growth of companies. This helps the companies to expand their product lines, promote the channels of distribution, increase their niche in the market and also cushion themselves against volatility. It also improves corporate governance especially because it has a variety of businesses under its control and the businesses will tend to, make improvements on their efficiency and management to meet the specifications of the capital markets and the shareholders demands (Michie, 1999).
This is why public companies that are regulated by the capital market authorities are usually better managed than the private ones that are not under the jurisdiction of the capital markets authority. The other role of the capital markets authority is to provide opportunities for investment for the small investors. Large business require a lot of capital base but investing in the different investment tools offered by the capital markets is convenient for the small investors and it gives the a chance to own a share of big companies if they do not have the wherewithal to start their own companies.
Finally, it helps the government in raising its capital for the numerous projects it undertakes. Through the capital market, the government will sell bonds to the public in order to finance infrastructural developments and other projects. This opportunity provided by the capital markets reduces the levels of taxation in the country because, to raise money for such projects, the government otherwise tax the citizens.
Swaps, Futures and Options as Forms of Derivatives
Swaps
A swap is a form of a derivative where two parties that counter each other engage in exchange of benefits of the financial instrument of one party to those of the others. The benefits accrued depend on the type of financial instrument at stake. Particularly, in the swap, the two parties often exchange a cash flow stream against the others cash flow stream. The streams in the financial circles are referred to as the swap legs (Howells Bain, 2004). The agreement of the swap usually defines the period when the cash flows are supposed to be paid and the manner in which they are calculated. At the initiation of the contract, one of these cash flow series is dictated by variables like interest rates, rates of foreign exchange, and prices of commodities or equities. The cash flows are usually calculated over a principal amount that has a notional nature that in normal circumstances cannot be exchanged between two counterparties. This means that the swaps can be used to generate an exposure that is unfunded to an asset that is underlying, since the counteracting parties have the capacity to earn profit or even make loss from the price movements without being required to make a posting of the notional amount to serve as collateral (Howells Bain, 2004).
Options
An option is a contract bade between a party that is buying and another party that is selling which ensures that the buyer has the right, to buy or sell an asset purchased before or at the expiry of the time that had been agreed usually at a price that is called the strike price. In return for the option granted, the seller will thus collect the amount payable from the buyer. There are two types of options, the call and the put option. The former gives the buyer the right to purchase an asset that is underlying while the latter gives the buyer the right to sell the same asset. The seller is obliged to sell the asset at the price that has been agreed should any buyer wish to earn that bright (Howells Bain, 2004).
Futures
A futures contract is a contract that is standardized that allows one to buy or sell a specific commodity that has a standard quality at a specified date in the future at a price that is determined by the market that is referred to as a futures price. The contracts are usually traded at an avenue called the futures exchange and they are not directly traded like the stocks, bonds or other securities, though they are still securities themselves. They are part of the derivative securities that are not usually direct. What determines the prices of these derivative tools is the equilibrium that exists between the forces of supply and demand among the purchase and the sell orders on the exchange at the time that the contract is being sold or purchased in the market.
Benefits and Risks of the existence of Eurocurrencies
Eurocurrency markets are facilities that are used by banks to hold deposits from countries that use different currencies form the one that is used in the country of that bank (Apergis, 1997). One of the benefits of the Eurocurrencies is that they enable players in the finance sector to escape the numerous regulations and restrictions that are very costly, imposed by various governments. Some of these impediments that players in the financial sector try to escape by utilizing Eurocurrencies include requirements of reserve, the FDIC fees that are charged allover the world in the financial markets, and the restrictive regulations that hinder competition among banks. The other benefit of using the Eurocurrency is the existence of the Eurodollar as the benchmark since the US dollar is the domineering currency in the Eurocurrency trade making the minimum amount of short term loan to be one million Eurodollars. Banks also prefer Eurocurrencies because they have a wider profit margin than any other form of currencies (Apergis, 1997).
Central banks and regulators are concerned about Eurocurrency because they are considered stateless money, and they have very little regulations,which include restrictions such as taxes, restrictions on capital movements and exchange controls which regularly apply to currency.However, bank deposits do not apply to Eurocurrency markets.Banks utilize Eurocurrency markets to turn over profit it is more profitable to store and move funds in Eurocurrency markets than the countries that are not involved in Eurocurrency.Euro banks tend to arbitrage with low cost of market and flip the funds earned by these deposits for a higher profit from the market, this practice is preferred by banks because of the lack of government restrictions placed on these loans.This creates a problem if countries are trying to regulate their capital flows.Eurocurrency spreads are generally narrower than a single countries currency spread due to their lack government regulations. The interest rates in the Eurocurrency markets are more competitive than in the domestic financial markets and the ability to borrow in unrestricted markets creates fluidity in the global fiscal systems. The improved international financing has led to the liberalization of the fiscal markets at the domestic level thus reducing the varying interest rates between countries.
Finally, the Eurocurrency markets have engineered global economic expansion due to the freedom of fiscal accessibility it affords investors and lenders. However, there are some dangers that arise from the existence of the Eurocurrency markets and one of them is partial regulation that can allow the infiltration of rogues in this fiscal system that can destabilize the whole system. Secondly, the Eurocurrencies markets have exposed most currencies to volatile climates due to the speculative nature of the market and this has made the currencies to suffer speculative attacks in the process (Apergis, 1997). The other risk involved in this case is the belittling of the international fiscal policies especially due to the unregulated nature of the Eurocurrency markets which can set dangerous precedence.
The structure and role of the UK capital markets
The UK capital markets are debt and equities market where entrepreneurs and governments can raise funds for long term purposes. It is a market in which money for a period for more than one year. It has the financial services authority as a regulator that oversees the capital markets in their specific jurisdiction to ensure that the investors are cushioned from frauds among other responsibilities (Michie, 1999). There are two types of capital markets the primary and the secondary market. In the primary one, a process called underwriting is used to sell bonds or stocks to investors while in the secondary markets, the securities that are already in existence are purchased and sold among the investors.
One role of the capital markets is raising capital for business. The capital markets give an opportunity for businesses and companies to raise expansion capital through selling of stocks to the public. Very many companies have raised money for expansion or for meeting their strategic plans through the sale of shares to the public through the capital markets (Michie, 1999). The second role is that of mobilization of savings for investment creating a rational method of allocation of resources when idle savings are invested in shares. These idle deposits that were previously kept in bank remain active under the capital markets especially in the promotion of businesses and government ventures, thus contributing to a stronger economic growth and improving the levels of productivity of firms and businesses. The UK stock market also facilitates mergers and takeovers of companies thus helping in growth of companies. This helps the companies to expand their product lines, promote the channels of distribution, increase their niche in the market and also cushion themselves against volatility. It also improves corporate governance especially because it has a variety of businesses under its control and the businesses will tend to, make improvements on their efficiency and management to meet the specifications of the capital markets and the shareholders demands (Michie, 1999).
This is why public companies that are regulated by the capital market authorities are usually better managed than the private ones that are not under the jurisdiction of the capital markets authority. The other role of the capital markets authority is to provide opportunities for investment for the small investors. Large business require a lot of capital base but investing in the different investment tools offered by the capital markets is convenient for the small investors and it gives the a chance to own a share of big companies if they do not have the wherewithal to start their own companies.
Finally, it helps the government in raising its capital for the numerous projects it undertakes. Through the capital market, the government will sell bonds to the public in order to finance infrastructural developments and other projects. This opportunity provided by the capital markets reduces the levels of taxation in the country because, to raise money for such projects, the government otherwise tax the citizens.
Swaps, Futures and Options as Forms of Derivatives
Swaps
A swap is a form of a derivative where two parties that counter each other engage in exchange of benefits of the financial instrument of one party to those of the others. The benefits accrued depend on the type of financial instrument at stake. Particularly, in the swap, the two parties often exchange a cash flow stream against the others cash flow stream. The streams in the financial circles are referred to as the swap legs (Howells Bain, 2004). The agreement of the swap usually defines the period when the cash flows are supposed to be paid and the manner in which they are calculated. At the initiation of the contract, one of these cash flow series is dictated by variables like interest rates, rates of foreign exchange, and prices of commodities or equities. The cash flows are usually calculated over a principal amount that has a notional nature that in normal circumstances cannot be exchanged between two counterparties. This means that the swaps can be used to generate an exposure that is unfunded to an asset that is underlying, since the counteracting parties have the capacity to earn profit or even make loss from the price movements without being required to make a posting of the notional amount to serve as collateral (Howells Bain, 2004).
Options
An option is a contract bade between a party that is buying and another party that is selling which ensures that the buyer has the right, to buy or sell an asset purchased before or at the expiry of the time that had been agreed usually at a price that is called the strike price. In return for the option granted, the seller will thus collect the amount payable from the buyer. There are two types of options, the call and the put option. The former gives the buyer the right to purchase an asset that is underlying while the latter gives the buyer the right to sell the same asset. The seller is obliged to sell the asset at the price that has been agreed should any buyer wish to earn that bright (Howells Bain, 2004).
Futures
A futures contract is a contract that is standardized that allows one to buy or sell a specific commodity that has a standard quality at a specified date in the future at a price that is determined by the market that is referred to as a futures price. The contracts are usually traded at an avenue called the futures exchange and they are not directly traded like the stocks, bonds or other securities, though they are still securities themselves. They are part of the derivative securities that are not usually direct. What determines the prices of these derivative tools is the equilibrium that exists between the forces of supply and demand among the purchase and the sell orders on the exchange at the time that the contract is being sold or purchased in the market.
Benefits and Risks of the existence of Eurocurrencies
Eurocurrency markets are facilities that are used by banks to hold deposits from countries that use different currencies form the one that is used in the country of that bank (Apergis, 1997). One of the benefits of the Eurocurrencies is that they enable players in the finance sector to escape the numerous regulations and restrictions that are very costly, imposed by various governments. Some of these impediments that players in the financial sector try to escape by utilizing Eurocurrencies include requirements of reserve, the FDIC fees that are charged allover the world in the financial markets, and the restrictive regulations that hinder competition among banks. The other benefit of using the Eurocurrency is the existence of the Eurodollar as the benchmark since the US dollar is the domineering currency in the Eurocurrency trade making the minimum amount of short term loan to be one million Eurodollars. Banks also prefer Eurocurrencies because they have a wider profit margin than any other form of currencies (Apergis, 1997).
Central banks and regulators are concerned about Eurocurrency because they are considered stateless money, and they have very little regulations,which include restrictions such as taxes, restrictions on capital movements and exchange controls which regularly apply to currency.However, bank deposits do not apply to Eurocurrency markets.Banks utilize Eurocurrency markets to turn over profit it is more profitable to store and move funds in Eurocurrency markets than the countries that are not involved in Eurocurrency.Euro banks tend to arbitrage with low cost of market and flip the funds earned by these deposits for a higher profit from the market, this practice is preferred by banks because of the lack of government restrictions placed on these loans.This creates a problem if countries are trying to regulate their capital flows.Eurocurrency spreads are generally narrower than a single countries currency spread due to their lack government regulations. The interest rates in the Eurocurrency markets are more competitive than in the domestic financial markets and the ability to borrow in unrestricted markets creates fluidity in the global fiscal systems. The improved international financing has led to the liberalization of the fiscal markets at the domestic level thus reducing the varying interest rates between countries.
Finally, the Eurocurrency markets have engineered global economic expansion due to the freedom of fiscal accessibility it affords investors and lenders. However, there are some dangers that arise from the existence of the Eurocurrency markets and one of them is partial regulation that can allow the infiltration of rogues in this fiscal system that can destabilize the whole system. Secondly, the Eurocurrencies markets have exposed most currencies to volatile climates due to the speculative nature of the market and this has made the currencies to suffer speculative attacks in the process (Apergis, 1997). The other risk involved in this case is the belittling of the international fiscal policies especially due to the unregulated nature of the Eurocurrency markets which can set dangerous precedence.
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