Role of International Financial Systems in the Global Market

2021-05-07 10:54:13
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Currency exposure

Currency fluctuation has an impact on investment. With Multi-national corporations, currency fluctuation has an impact on the cash flows. The corporations have to convert the currency they receive to their domestic currency which will either see an increase or decrease on the cash receivable.

The corporation could however, reduce the risks of currency exposure on their investment. They may do this by either investing directly in the forex market, hedging or they can choose to invest in countries with a strong economy.

Portfolio evaluation

The stock prices are affected by various factors. For the multi-national corporation the UK market condition does not entirely affect their stock prices. The stock prices are affected by other factors in the countries they operate in. Countries that operate in the UK alone are affected purely by the Market conditions in the UK.

Introduction

International financial systems play a huge role in the global market and well-being of most international cooperations on a day to day basis. The global financial market has evolved consistently and continues to do so. However, the aim for investment in the stocks market remains fairly constant: to make profit and to minimize risk. The availability of mobile applications and websites that are geared towards monitoring the status of the stocks market are just a few pointers to the evolved nature and modernization of this essential part of the global economy.

The potential risks involved in stock market investments, in most cases scares away most people. However, a deeper understanding, analytical approach and overall intelligence in the investment process leads to satisfactory and handsome returns on the earlier stated investment.

There are a lot of factors affecting the stocks market including value of trade currency, type of stocks, stock fundamentals, and capital among others. It is thus vital to not only understand the market but also have a careful approach to the stocks market. Before building a stocks market portfolio, one has to put in to consideration some key aspects including his/her age, amount of time the person is able and willing to wait for investment growth, future expectations, knowledge of the market and the need for a financial advisor if necessary.

This paper gives a detailed report on financial investment undertaken in the UK foreign exchange market for a period of one month. A sum of 1,000,000 was invested in the stocks market. The investment was monitored an analyzed to give a clear picture of the state of the international stocks market. It provides an investigation on the impact of various financial market constraints and how they are tackled to give a worthwhile return on capital.

The objective of the project was to familiarize with the process of investment and management of international portfolio. In addition, it is also aimed at providing a deeper insight on the risks associated with fluctuations of the trade currency on the international market and to develop a deeper understanding of the overall international trade market.

Investment strategy

An investment strategy mostly depends on ones objectives, the risks involved and the time frames available. The time frame available in this case is one month which is a short time period. The investment strategy was therefore an active strategy. I used an aggressive investing strategy which involved buying of stocks when the prices are low and selling them when the prices went up. I traded in equities.

Derivatives were however not chosen after an in-depth portfolio analysis. As much as derivatives provide a few advantages such as speculation of movement of an asset, enhancement of portfolio performance and protecting an asset against risk through hedging (Zucchi), they also have limitations of complexity that led to my decision. The first disadvantage of trading in derivatives is the pricing complexity; since the investor is not the asset owner, a safe bet or an agreement with a third party has to be made on the price direction which is difficult. Also the unique language used on derivatives is far too difficult to comprehend in most cases,

The portfolio for the following FTSE Multinational Corporations was created; Barclays Bank, British American Tobacco, BP and the BT Group. The non-FTSE stocks selected were Abeam, Mulberry Group, Indus gas and Premier African Minerals Limited. The trading activities were carried out every Monday and Thursday as from Thursday February 11th 2016 to Monday March 07th 2016. The transaction cost was taken to be one percent.

I chose to trade on above named corporations due to the positive trend in their price momentum. I looked at the top 100 companies and companies that are stable and have good management. The list at the London Stock Exchange is unbiased and these companies do not make it there due to the government, or any person who wants to make a hefty commission of off them, they make the list because investors are able to bid on them thus make their prices go up and make them make the list.

The multi-national corporations I chose are from different industries. This is so because external factors in the environment tend to affect all firms in an industry. For example change in the government sale on the tax imposed on cigarettes will affect all companies producing cigarettes in the UK and not only BAT.

As I chose my stock, I avoided stocks that move in small volumes regardless of if the market is good or bad. The types of stock are conservative, they are held by investors who want stability. When the market is performing poorly, they give an illusion that the firm is doing well and after the market recovers the companies are still while other companies are doing great and moving forward.

I did not trade in stocks where the company had either merged or had been bought-out. These companies stock price are very speculative. With the company being bought-out, the stock price is usually not based on the market-position of the company but rather on the development of the buy-out offer.

Before choosing on corporations to trade, I looked at their chart for the past one to two years. I avoided the companies that had high volatility on their week-week prices. There are also other ways that I used in choosing the above mentioned corporations, they include; choosing companies with high earnings growth. When a company does good today it can also keep doing good in the future because it may takes years or even decades before competition takes a way such a company down in the market.

Performance of investment strategy

My investment strategy worked because of the short duration of time I had. Active investing mostly involves one buying and selling shares or equities in the financial market. With the aggressive investment strategies I was able to maximize on the returns as it is geared towards the growth in capital. The risks involved are higher. In aggressive investment I was able to adjust my trading stocks in a short period before the prices could fall any further. The strategy also worked because of the corporations I chose. The stock prices were steady and their price kept on increasing thus I was able to make profit.

With the short period involved, the transaction cost was high due to the numerous transactions carried out. The stock prices did not increase significantly over the period. The period was short and in some corporations the volumes traded were not as much. I made wrong decisions which affected the returns. There is no time for the stock prices to recover as one has to make another decision in the shortest time possible and available to him.

At the end of the trading period an investor may choose to diversify into other investments. An investor may now choose to passive investment strategy. He may invest in derivative. Government bonds have a lower risk profile and has fewer transaction cost. This will help the investor make more profit.

Investment options

Structured markets

An investor may also choose to invest in structured products. These are less risky than stocks and bonds. It is a contract entered into by an investor and a financial institution to pay the investor at different times, a defined return which depends on the performance of the stock market.

Bridging loans An investor may also choose to use the profits as bridging loans. This is normally given to property buyers who qualify for a mortgage but cannot wait. For example a property owner might need to renovate a commercial space but may not qualify to get a buy-to-let finance before the renovations are over. An investor may start pooling bridging loans. There are usually short-term loans and one can be able to spread the risks.

Lending to peers An investor may choose to lend money to peers. These are usually constituted by small scale businesses. It brings together investors who will earn little if they put their money in cash deposits and small-scale business that will benefit from low interest rates. There is however a big risk of defaults since the businesses may go bankrupt or the individuals may be unable to repay the loans. Another demerit is that the interest rate is too low normally ranging between 4-5 percent at most.

Forestry an investor may invest in woodland. The returns are from the increase in land value. Increase in land va...

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