EPC-11 - Business Management.doc

Running Head: BUSINESS MANAGEMENT

Business Management

[Name of the Writer]

[Name of the Institution]

Business Management 2

Contents1.1 Define and discuss what the “Efficient Markets Hypothesis” means........................3

Definitions of Efficient Marketing Hypothesis (EMH).............................................................3Three Types of Efficient Marketing Hypothesis (EMH)...........................................................31. Weak Efficient Marketing Hypothesis...............................................................................42. Semi-Strong Efficient Marketing Hypothesis.....................................................................43. Strong Efficient Marketing Hypothesis..............................................................................5

1.2 In your opinion, did the financial markets act as would be expected under the “Efficient Markets Hypothesis” during the Credit Crunch? Use evidence to support your opinion..........................................................................................................................5

Credit Crush...............................................................................................................................5Effects of Credit Crush on the Markets......................................................................................6“Efficient Markets Hypothesis” and credit crush.......................................................................7

1.3 Choose one regulation put in place after the Credit Crunch. In your opinion, has this increased the efficiency of financial markets?............................................................8

Macro prudential regulation.......................................................................................................8Policies of Macro prudential regulation...................................................................................10

Critically evaluate any one of the theories of exchange rate determination for your allocated currency pair. Your currency pair is available on Moodle............................11

Exchange Rate determnation Theories.....................................................................................11FOREX Theory........................................................................................................................12Currency Pair: US dollar and New Zealand dollar..................................................................13


1.1 Define and discuss what the “Efficient Markets Hypothesis”

means.

Definitions of Efficient Marketing Hypothesis (EMH)

Efficient Marketing Hypothesis (EMH) is an investment theory, which states the non-real

businesses beatings situations in the markets because of the market efficiency effects. Market

efficiency powers exist to share the prices effects for incorporating the relevant information.

Efficient Marketing Hypothesis (EMH) is very useful for the investors for the profitable

revenues.

To understand the clear meaning of Efficient Marketing Hypothesis (EMH), the concepts of

the efficient markets are important to understand. “The efficient markets are the places,

where the price of the market is an unbiased estimator for the true value of the investment

projects. (Markets, 2014)”

The assumptions/ hypothesis about the market information play an important role to describe

the level of market efficiency for the investors. Information of the markets for the public and

investors plays an important role to describe the true situations of the foreign currency rate

for the sake of currency pair analysis (Markets, 2014).

Three Types of Efficient Marketing Hypothesis (EMH)

Efficient markets are the places for many business participants by having same aims and

objectives to get the same information for the competition concerns. The stock market is a

place with several profit finding professional. These businesspersons for the profit achievers

belong to the both private and public sectors by having same interests of revenues. Profit is

the major objective of the all participants in the markets.

Efficient Marketing Hypothesis describes the effective ways for getting revenues through

highly competitive markets. The three forms of the EHM illustrate different situations of the


markets that the all-profitable predictions about the revenues cannot be easily achieved

(Jones-Irwin, 1979). There are three types of the Efficient Marketing Hypothesis (EMH) to

understand effectively;

1. Weak Efficient Marketing Hypothesis

2. Semi-Strong Efficient Marketing Hypothesis

3. Strong Efficient Marketing Hypothesis

1. Weak Efficient Marketing Hypothesis

Weak Efficient Marketing Hypothesis clearly states that the marketers cannot predict the

future stock prices based on previous stock prices. Weak Efficient Marketing Hypothesis

actually highlights the important of direct technical analysis for the future predictions

regarding stock exchange prices. If the previous year prices are not useful for the future

predictions then there is no need of past prices discussions (Piper, 2014).

Weak EHM can be concluded in these descriptions;

1. The weak form of the EHM is very useful for the marketers and the investors, who

want to increase their profits by adopting different plans and strategies by having

proper information of the price settings.

2. To understand the concepts of the weak EHM, it is easy for the concerned people by

analyzing the historical data of prices and the volumes of the products. Otherwise, the

study of empirical and theoretical is difficult to analyses for everyone (Jones-Irwin,

1979).

2. Semi-Strong Efficient Marketing Hypothesis

Semi-Strong Efficient Marketing Hypothesis neglects the importance of published

information for the future stock exchange predictions. Semi strong EMH needs a fundamental


analysis for the published information to the stock exchange price patterns. Analysis of the

financial statement is concerns to this type of hypothesis in the price analysis (Piper, 2014).

Semi-Strong EMH is very useful to develop the future earnings based on the proper analysis.

It describes the day-to day changing effects in the earnings. The hypothesis of the semi-

strong EMH states the unexpected revenues, which do not influence the exact expectations of

the investors (Jones-Irwin, 1979).

3. Strong Efficient Marketing Hypothesis

Strong Efficient Marketing Hypothesis favors to trust the present information about the stock

exchange, whether it is published or unpublished. Only legal trends are concerned to this type

of hypothesis (Piper, 2014). Strong form of the EMH is not considered as an efficient

measure for true predictions. Strong EMH is very important because of two major reasons;

Firstly, if the markets were inefficient in past then there is the need of MPT to study keenly

for the possible resolutions. Secondly, the condition of reasonable efficient market is the

efficient form of practical MPT study (Jones-Irwin, 1979).

1.2 In your opinion, did the financial markets act as would be

expected under the “Efficient Markets Hypothesis” during the

Credit Crunch? Use evidence to support your opinion.

Credit Crush

Credit crush is a situation, in which there is a sudden severe reduction in the provision of the

credit or money for the lenders from the banks. The term credit crush is the second name of

the “credit crisis” in the financial markets. The description of the credit crush is the lack of

the available currency resources for the consumers as well as for the investors and the

businesspersons.


Credit crush is also a situation, where the banks and the credit card companies do not produce

liquid money for the loans and the business exchanges at the national and international level.

If the loans are taken or lending, then there high rates of interest rates to impact as an

inflationary gap in the economy. In the situation of credit crush in the markets, only rich

investors and the well-off people can run their business very efficiently for the profitable

revenues through collection of the much more assets.

It is a poor situation for the poor people or the poor investors, as the banks do not give loans

to the poor people because of high interest rates. The rich people and the rich investors get

many benefits through enough credit having. The rich situations for the rich and the poor

circumstances for the poor are the name of credit crush in the financial markets (Crush,

2014).

Effects of Credit Crush on the Markets

Credit crush crisis is considered as a great threat in the field of global financial markets since

1930s. Many investors faced great losses during that period, and many gained profits that

time. Because of credit crush, the markets face these kinds of reactions (Perry, 2014);

Trade of T-bills with the negatively yielding

Severe risk premiums soaring for the corporate bonds

In 2008, international stock exchanges faced the same severe credit crush

S & P 500 market faced the severe credit crush in 2008 inflationary period

In 2008, the global stock markets went down by more than 30% loss

In the situation of credit crush, confidence level of the markets goes down and same

in the situations of the liquidity problems for the business community

The effects of credit crush are very severe for the financial markets. The monetary policy

faces severe weak reaction in result of credit bubbling situations. These common reasons of

the credit crush include such kinds of problem (Watch, 2010);


Issuing the variety of credit instruments at the level of figurative scale

Increase in the debts for the household products and services

Rise in the risky favored situations depicting by the investors and the marketers

Ups and downs in the currency system in the world

In the credit crush situations, international banks play an important role to fix the inflationary

situations and the currency problems in the national and the international markets.

“Efficient Markets Hypothesis” and credit crush

The “Effcint Market Hypothesis” simply describe the avalable prices in the markets, which

can not change easily. These price levels are difficult to manage for the stabilised situations.

When the investors open the secrets of the informative materials, they find different price

rates for the bonds and securities in the process of buying and selling during the bidding.

High priced securities increase the value of price in the pushing manner. The unexpected

prices open the hard situations in the buyng and selling process, which is the main concern of

the efficient market hypothesis. Financial crisis are the major cause of the failure of efficient

market hypothesis (Rudden, 2012).

The hypothesis does not describe clearly the current or expected values of the bonds and the

securitis, which become the cause of loss for the investors. Market trends describe the clear

picture of the hypothesis. Some expert argues that the Effcint Market Hypothesis does not

impact the market efficiency through credit crush. In the start of 21st century, the Effcint

Market Hypothesis theory has proved that it has no impact on the credit crush situations in

the national or international markets.

Many news reports have proved the Effcint Market Hypothesis as a dead theory in the

ficancial markets. Because the three forms of Effcint Market Hypothesis are not ever true for

the future presctions. Another evidence has proved that the Effcint Market Hypothesis is one


of the credit crush cause, but indirectly it leads to the crisis by different nterventions(Harford,

2011).

1.3 Choose one regulation put in place after the Credit Crunch. In

your opinion, has this increased the efficiency of financial

markets?

The efficiency of the financial markets describes that the markets are ever in the stable

conditions. Based on the information, the market behaviors can know very easily. This

market behavior goes towards the stabilized markets at the equilibrium level. In case of

unestablished markets, there is a rational bubble form to analyses the true information.

Market imperfections are because of the lengthy working hours per day, a lot of differences

in the time zones, restrictions in the regulations, etc.(Alan Greenspan, 2009).

Different rules and regulations play an important role to solve different kinds of problems in

every field of life. The regulations are very useful in the institutional practices at the flexible

prices rates to controlling the instablised situations, Keynesian theory is one of the examples

for the marketing stabilize strategy by adopting different terms and techniques in the markets.

Macro prudential regulation

Macro prudential regulations are very useful to analyses the different types of systemic risks

with the help of broadening support. Macro prudential regulation follows the natural forms of

the analysis for the recognition of the systemic risks in the markets (Alan Greenspan, 2009).

The scope of macro prudential regulation is very broaden in the financial market. The

regulation is specifically designed to identify the market risks and stabilities in terms of costs

and price issues. Provision of the credit and the decreasing costs are the major concerns of

this type of regulatory system.

Macro prudential regulation is very useful in the credit crush situation. Credit crush is the

severe form of suffering the investors due to the banks behaviors. Not only the lenders, but


the household debtors also face serious losses and more risks for loss in the future. The

combination of the households and the lenders’ stress make the distress economy overall.

These problems arise due to the aggregate weaknesses of the financial sectors by disrupting

the financial markets very badly (Nier, 2014). The important workings of the Macro

prudential regulations are such as:

Weighing the sectorial risks in different variations

Macro prudential regulation decreases the effects of price deregulations by

introducing new strategies in the form of new loans to cover the previous losses. For

example, a few months ago, Turkey increased the requirements for the new lending

plans for the new households in terms of increase in the loans rate policies.

Providing dynamic facilities

Macro prudential regulatory system provides dynamic facilities in the financial

markets. The dynamic facilities are the forces to impress the bank loan strategies for

covering the loan losses in the good times. The balance sheets of the banks are

prepared in the easy returns conditions forms for the lenders. The example of proving

dynamic facility could be seen in Spain in the year of 2008.

Targeted measures for the foreign currency lending

Macro prudential regulatory system measures the decreasing trends of risks including

the limits of the portfolio for the foreign currency lending trends.

Policies of Macro prudential regulation

Macro prudential policies are very effective in some sort of terms;

Refining and building the institutional foundations

Designing of the analytical frameworks for the efficient monitoring system for the

risk assessment

Providing guidelines for the appropriate actions for the policies


Establishing the international cooperating systems for the currency stabilizing

The implementations of the rules and regulations are useful to be protected from the great

losses during the business. Due to the presence of regulatory authorities or the regulations, no

investor or the financial power can be a serious cause of losses in the businesses.


B2 – Exchange rates - Indicative limit for part B2 - 1000 words

Critically evaluate any one of the theories of exchange rate

determination for your allocated currency pair. Your currency pair

is available on Moodle.

Exchange Rate determnation Theories

Foreign exchange rate is a kind of market, where different currencies are exchanged at

specific rate. The specic rates for the exchange of the currencies is called foreign exchange.

There are many theories in repecst to the exhange rates, some are presented below

(Anastopoulos, 2014);

1. Supply and Demand Theory

The forces of demand and supply impact the foreign currency in a negative manner. When

there is increase in the foreign currency supply, in result the demand for foreign currency

decreases. There are some market forces to control the foreign currency fluctuation in the

markets.

2. Purchasing Power Parity (PPP)

According to this exchange theory, the use of one unit currency of Euro (which is a

purchasing power) results can same for all goods purchasing all over the world.

3. The approach of Balance of payment

This approach describes the specific factors of demand and supply to influence the domestic

sountry’s currency. Balance of payment approach is a useful technique to record all foreign

monetary measures for the transactional causes through central banks.

4. The aproach of Monetary policy

This theory clearly describes the rates of exchange for the adjustments of the currency

demand and supply in the national and international markets.


5. The theory of Portfolio Balance

This approach is useful to describe the assets of the investors in the form of portfolios to

reduce the risks of losses in the foreign countries investments (Anastopoulos, 2014).

FOREX Theory

Forex (Foreign Exchange Market) is the name of international currency markets to exchange

the currency into different countries by changing the currency rates according to the date and

value of the country. In the FOREX system, different types of dealers are there through

effective communication from the phone calls or the e-mail services. FOREX trade system is

famous all over the world by functioning different tasks relating to the price and currency

concerns (Forex, 2014). In 1602, Amsterdam became the first place for the first FOREX

stock exchange in the world. FOREX theory is concerned to the some technical fields of

work, which are

Indicators / Oscillators e.g. RSI (relative strength index)

Number theory e.g. Fibonacci numbers, Gann numbers

Waves e.g. Elliot wave theory

Gaps e.g. low-high, closing-opening

Trends e.g. moving or following averages

Information on the chart e.g. triangles, Head and Shoulders, Channels, specific

candles

Main partners of the FOREX foreign exchanges are the commercial banks, exchange

markets, investment funds, central banks, firms for conducting foreign trade organizations,

stockbroker companies, private officials or the private owners, etc. (Forex, 2014).

There are many benefits of the FOREX exchange trades;

Strong forex leverages

Commissions at zero forex rates


Limiting the risk rates for the brokers

Price guarantees for the investors

Twenty four hour marketing timings

The trade of currency through FOREX is ever done by pairs. Pair currency is a unique term in

the field of foreign exchanges. There are different signs and symbols for the pair currency

processes in the form of ABC / DEF. in real the ABC /DEF are no the exact currency pair but

show the sequence in this form to identify the exact situation. Actually, the ABC and DEF are

used for two counties currency in a pair form.

It is a fact that the FOREX market is the biggest market in the world in the exchange of the

currency based processes. The broker uses the market very efficiently for the great revenues

(Forex, 2014).

Currency Pair: US dollar and New Zealand dollar

The currency pair of the US dollar and New Zealand dollar is written as the “NZD / USD.”

This currency pair of the New Zealand and the US dollars describes that how many US

dollars are equal to the purchasing of the New Zealand dollars. Trading of the “NZD / USD”

is a popular term as “Kiwi.”


Exchange rate for converting United States Dollar to New Zealand Dollar: 1 USD =

1.26430 NZD

USD NZD$ 1 USD NZ$ 1.26 NZD$ 5 USD NZ$ 6.32 NZD$ 10 USD NZ$ 12.64 NZD$ 50 USD NZ$ 63.22 NZD$ 100 USD NZ$ 126.43 NZD$ 250 USD NZ$ 316.08 NZD$ 500 USD NZ$ 632.15 NZD$ 1,000 USD NZ$ 1,264.30 NZD$ 5,000 USD NZ$ 6,321.52 NZD$ 10,000 USD NZ$ 12,643.03 NZD$ 50,000 USD NZ$ 63,215.17 NZD$ 100,000 USD NZ$ 126,430.34 NZD$ 500,000 USD NZ$ 632,151.72 NZD$ 1,000,000 USD NZ$ 1,264,303.43 NZD

Last Updated: 01/12/2014 23:05:53

Currency Pair Indicator:NZD/USD

Buy NZD/Sell USD

Buy New Zealand Dollar/Sell United States Dollar

Convert from United States Dollar to New Zealand Dollar

Source: http://themoneyconverter.com/USD/NZD.aspx

The NZD / USD currency pair describes the composition of both countries dollar. The trend

of trading the dollar with the New Zealand is called the trade of “Kiwi.”

Trading of the Kiwi is very famous all over the world, because trader purchases the New

Zealand dollar as a beneficial salary and sells it with the cheaper USD currency.

Interesting Facts of the New Zealand dollar

The New Zealand dollar is the official and home currency of the country. The

currency is also the official currency of some other countries, such as Niue, Cook

Island, Tokelau, and in the Pitcairn Island.

http://themoneyconverter.com/USD/NZD.aspx


The economy of New Zealand is very rich by depending upon the raw materials,

exports, dairy products, and the fishing. The prices of common commodities are

normal and the GDP growth, interest rates, etc. are at normal prices, which make the

economy very strong.

The economy of New Zealand is moving toward the industrial economy very steadily

in the fields of machinery, food processing, transportation parts, mining, and banking.

Advantages of the NZD/ USD trade

Trading and businesses through NZD/ USD currency pair is very advantageous for the traders

and as well for the investors. There are long-term benefits in the trading of NZD/ USD

currency pair. Some powers can affect the currency pair very efficiently, such as the

intervention of the Reserve Bank of New Zealand and the Federal Reserve Bank of the

United States. The combination of the both Federal banks is known as RBNZ. The

announcements from the RBNZ can affect the trends of rate of interests as well as to

influence the NZD/ USD currency pair (forex, 2014).


References

Alan Greenspan, 2009. Cognition, Market Sentiment and Financial Instability: Psychology in

a Minsky Framework. [Online]

Available at: http://storre.stir.ac.uk/

Anastopoulos, M., 2014. Theories of Exchange rate determination. In: International

Finance . s.l.:s.n.

Crush, T. C., 2014. The Credit Crunch; Simple Explanations and Innovative Solutions.

[Online]

Available at: http://www.creditcrunch.org/

Forex, 2014. FOREX (Foreign Exchange Market). [Online]

Available at: http://forextheory.com/

Harford, T., 2011. Don’t blame the (mostly) efficient markets hypothesis. [Online]

Available at: http://www.ft.com/

iForex, 2014. NZ Dollar/US Dollar. [Online]

Available at: http://www.iforex.com/

Jones-Irwin, D., 1979. Chapter 2: Forms Of The Efficient Market Hypothesis. In: Excerpt

from Robert Hagin, Modern Portfolio Theory. s.l.:s.n.

Markets, E., 2014. MARKET EFFICIENCY - DEFINITION AND TESTS. [Online]

Available at: http://pages.stern.nyu.edu/

Nier, L. I. J. a. E. W., 2014. Macroprudential Policy: Protecting the Whole. [Online]

Available at: http://www.imf.org/

Perry, B., 2014. Credit Crisis: Market Effects. In: s.l.:http://www.investopedia.com/.

Piper, M., 2014. Efficient Market Hypothesis: Strong, Semi-Strong, and Weak. [Online]

Available at: http://www.obliviousinvestor.com/


Rudden, P., 2012. Don’t Blame Theory for the Credit Crunch. [Online]

Available at: http://blog.alliancebernstein.com/

Watch, E., 2010. Effect of the Global Credit Crunch on Market. In:

s.l.:http://www.economywatch.com/.

Documents

EPC-11 - Business Management.doc