Assignment Sample on International Financial Market
Introduction
In the International financial market, it is the trade of financial wealth between two individual countries. It is a wide set of institutions and rules where assets are traded between agents in surplus and agents in deficit.
Financial market investment is the market where investment in the share market, in stock and debt markets adds the source of income that can help to grow the wealth of the company. In the secondary market, financial instruments that are already issued such as shares, bonds, etc are purchased and sold.
Explanation and Discussion of investment Risk
Investment risk is termed as unpredictable losses rather than expected profit from investment due to a fall in the price of securities such as shares, real estate, stocks, bonds, etc. Every investment is with some degree of investment risk like market risk, default risk, the invested money is never returned to the investor due to the uncertainty of losses.
Different types of risk in investment are as follows: Different assets have different kinds of risk in investment. For example,
1) Cash investment: Cash investment leads with less risk as compared to other investment risks, as it delivers low returns.
2)Shares: As the share market is unpredictable, shares are also called equities or stocks, and are seen as the riskiest assets among other assets. Investing in the US-based share market is relatively safe compared to other share markets. As their share market contains higher risk options but equities are more likely volatile.
3) Gold and silver: Investment in the gold market is much safer compared to the share market.
But it is considered as it is risk-free, as gold does not pay dividends gold prices can fall. Silver has more experience and volatile and large change in price, as it has the same drawbacks to gold.
4) Bonds: Government bonds followed by investment-grade corporate bonds, where money effectively lends to large companies in exchange for a fixed rate of interest. High-yield bonds are a riskier option because they deal with companies that seem to have a high risk of default, and high-yield bonds are also called ‘junk bonds’.
5) Cryptocurrencies: There are various types of cryptocurrencies, Bitcoin is one of them. The price of Cryptocurrencies has been unstable in recent years, in a short space of time the rise and fall in price are shown, so they are not considered as less risky. Financial Services Compensation Scheme are not considered the cryptocurrencies investment, because scams are common in this kind of investment.
6) Property: Offices, warehouses, and warehouses are considered commercial property, investing in these properties can grow the money through rental income and grow the value of the property.
It’s important to understand the risk while investing in each of the assets. The chance of a higher return, in the long run, comes with the risk in investment. But being high-risk-averse because of the cause of losing money, will not give a higher return in the long return.
Explanation of Return objectives
Return objectives are termed as desired returns in real and nominal terms while a relative return objective is termed as outperformance relative to an index. It is the target to provide enough seeding money and maintain the value of the portfolio after allowing for inflation and taxes.
The relation between risk-return is considered as high, the level of uncertainty with high potential returns is associated with low levels of uncertainty with low potential returns.
Explanation and discussion of Investment Strategy
It is the strategy that guides the investor to take correct decisions in critical situations based on risk tolerance, goals, and capital need for the future. Investment strategy helps the investors to make focus on capital appreciation. For example, for making new products, investment is needed in a new business that offers new markets intended to make the company more successful over time.
There are various kinds of investment strategy are discussed below :
Value investing: This is a very subjective type of investing. The market does not have proper value, when the market corrects investors have the potential to post big gains and the company becomes very good.
Income investing: This investing focuses to make slow income from the investors. Income investing is of two forms, first one is income investing in bonds, which pay out continuously and the other one is investing in a stock that pays the dividends. Investors get paid as a percentage of profit in the form of a dividend, this gets converted into as the stocks were owned by the investors.
Growth investing: Growth investing is connected with sectors such as tech, energy, emerging market, aerospace. This investment is mostly found in the stock market, where investors believe in the value of the company. The growth investment strategy focuses to build capital by selling shares and equities that increase the value of the company.
Small-cap investing: Small-cap companies have few shares available for public purchase because investors generally don’t want to make too big of a percentage of a company. The total value is between $250 million and $2 billion.
Socially responsible investing: This investing is a little bit different from the previous one, this investing focuses on a larger impact of the investment.
Critically evaluate the practices, process, and principles of financial market
One of the critical limitations of the principle of the financial market is, it is fixed within the enterprise. Implementation of standards and practices within an institution or a business comes with accost. It needs both the software and hardware installation and orientation of the entire staff so that they can adjust to the new system. The operational standards are rigid by incorporating particular accounting parameters, when the work is complete the condition may vary from the original situation. The rules are unable to keep to make changes with the certain change in the market environment, and that leads to loss of revenue and bureaucracy.
In many developing nations, instruments, financial institutions, and limited financial markets are poorly defined in the legal system, as it may lower the return on investment or savings and it may cost more to raise capital. Insufficient financial transparency or limited source of information means that information is available to market participants and it may higher the risk than the economy with a more fully developed financial system. In a small market, it is more difficult to hold a diverse portfolio with only a limited selection of investment products and savings or financial assets. In such a financial market with low trading captivity and with few alternatives, it is costly and difficult to find the right maturity, product, or risk profile to satisfy the needs of lenders and borrowers.
Equity performance of the GlaxoSmithKline Pharmaceuticals
This pharmaceutical company is dealing with medicinal products, it has a good score in equity performance as well. Let us discuss the key performance indicator of Glaxosmithkline The company includes the Key Performance Indicator is to improve the working performance of the company.
The techniques and challenges are included in the company for the betterment of the working conditions, gather the new data from multiple systems and in its way it is suitable for decision – making at the management.
KPI with enterprise objectives, accessibility, ensuring data occurring, and development in the business maturity for the progress of the company form down to top.
As KPI measures the efficiency of the boi- tech company, quality, cost, development for healthcare services, and consumption of patients. The purpose of the company is using KPI is to improve the performance of ineffective working. It measures the level of the company.
GlaxoSmithKline aims to make a strong focus on patient products, with the most brilliant execution for launches, claims, global pipeline, etc. It focuses to deliver continuous industry-leading growth. Under the new marketing model, the use of high predictability scientific data, digital tools, data analytics, etc. The opportunities to gather data from the impact on our ability to drive higher performance.
Shares of the FTSE- 100 members perfectly rose as much as 2.5% to touch more than a two-year high of 1,701.6. With sales more than doubling.
.GlaxoSmithKline now expects annual earnings for 2019 to decrease by between 3% and 5%, an improvement from a previous of a 5% to 9% fall at constant currency.
According to the company, the new concept reflects improved operating performance and lowers the interest expense and tax benefits.
Financial data of the GSK
| Year | Equity share capital |
| 2020 | 169.41 |
| 2019 | 169.10 |
| 2018 | 84.70 |
| 2017 | 84.70 |
This table, shows the increase in the equity shares of the company, with the increase in the year. This simply means the well-scored performance of the GSK in the pharmaceutical company.
GlaxoSmithKline aims to make a strong focus on patient products, with the most brilliant execution for launches, claims, global pipeline, etc. It focuses to deliver continuous industry-leading growth. Under the new marketing model, the use of high predictability scientific data, digital tools, data analytics, etc. The opportunities to gather data from the impact on our ability to drive higher performance.
In the competitive market, in the pharmaceutical industry, there is much competition in every company. In the time of the pandemic. The GSK holds a secure position in the industry and makes continuous growth in sales and income of the company. This shows the continuous growth in the company.
The long term borrowings of the GlaxoSmithKline Pharmaceuticals
| Year | Long term borrowing |
| 2020 | 0.02 |
| 2019 | 0.18 |
| 2018 | 0.58 |
| 2017 | 0.99 |
| 2016 | 1.60 |
Financial performance of GlaxoSmithKline for the year 2018- 19
| Days | Equity performance |
| 5 | 1,410.68 |
| 10 | 1,415.64 |
| 20 | 1,454.82 |
| 50 | 1,4464.52 |
| 100 | 1,495.67 |
| 200 | 1,511.31 |
This table shows the equity performance of GlaxoSmithKline Pharmaceuticals, the moving average of the equity is increasing with an increase in the no. of days. As it shows the better performance, GlaxoSmithKline has an acceptable payout ratio and its dividend is well covered by cash flow. There is a great combination, as earning per share grows and also dividend payments grow slowly. According to the research, the overall performance of Glaxosmithkline scores very well.Critically evaluate the financial investment and activities
Sale charges and high- expected ratio: While investing in the funds with expenses ratios higher than 1.20% as it will be considered on the higher cost. Various good fund companies have no sales charges. Fees lower overall investment returns.
2) Unstable investment: Since the market is unstable, investment in the Bombay Stock Exchange is subjected to very high risk. In just a single day, the shares of a company fluctuate so many times. Investors sometimes face severe losses due to the price fluctuation uncertainty most of the time.
3) Abuses of management: This concludes unnecessary trading, continuous replacement of employees, and selling the losses they prefer to the quarter end to fix, this leads to the window – dressing of the company.
4) Execution of poor trade: For searching investors for faster execution times, maybe because of day trading, short investment horizons, timing the market, and mutual funds provide a weak execution strategy.
4) Inefficiency of tax: Investors do not have any choice when it comes to payouts of capital gain in mutual funds. Throughout the year, due to the redemptions, turnover, gains, and losses in security holdings investors receive distributions from the fund that are uncontrollable events of tax.
5) Time consumption: The process of investment in the National Stock Exchange is very time-consuming, it is not so easy to invest in the lottery as it takes too much time to complete the formalities of investment.
6) Brokerage Commission: Whenever an investor purchases or sells its shares, the commission brokerage with some amount is compulsory to pay to the broker, which kills the profit margin of the investor.
Theories and methods used in an investment portfolio
Theories of portfolios are used for the guidance of the investors to select the proper securities that minimize the risk and maximize the returns. The theories are classified into various categories are as follows :
Random walk theory ( Efficient Market Hypothesis): The Random walk theory assumes that the information is fully spread to all the investors immediately so that the investors have full knowledge of the changes in the industry, company, or economy. All the information reflects the current stock prices in the market. The price security of two days ago, will provide no help in predicting the price security of two days later. It also helps to assume that the stock markets are efficient or not. The Random walk theory is also called the ‘Efficient Market Hypothesis’ because of this reason.
Formula plans: Formula plans are primarily oriented to achieve loss minimization and maximization of return. The changes in procedures or techniques are developed to enable the benefit of the investors from price fluctuation in the market by buying stocks when prices are low and selling them when prices are high. This technique is considered a formulas plans.
Formulas plans possess the following features :
The portfolios are periodically adjusted and monitored accordingly.
The ratio between the investment defensive portfolio and the aggressive portfolio would be predetermined such as 1: 1 or 2: 1.
The investors construct two portfolios, one defensive and the other is aggressive. Aggressive portfolios such as equities and defensive portfolios such as debentures and bonds.
The amount available for investment is already predetermined.
Dow Theory: This theory formulated that the stock market does not move on a random basis, but it is influenced by three distinct cyclical trends that guide the direction.
- i) Primary movement: This movement can sway the entire market up or down.
In the stock exchange market, the prices of the securities are for the long-term movement like for one to three years or more.
- ii) Secondary reactions: this reaction is the opposite of primary movement, and lasts only for a short while. This is also called corrections.
iii) Minor movement: These movements have no analytical value and are not important, as they are for the short durations
The modern portfolio theory is as follows.
Harry Markowitz theory: It is used for analyzing the various portfolios with a given number of securities and it helps for the selection of the most efficient and best portfolio. It is considered the variance in expected returns from investments and the relation of each other for the construction of portfolios. It is the framework used for the analysis of risk-return options. Decisions are based on the ‘Efficient portfolios” concept.
Efficient portfolios are used to yield the highest return and to decrease the level of risk accepted. An effective portfolio combined with the smallest variance.
Assumptions of modern portfolio theory are discussed below :
- i) Markets are efficient
- ii) Assets return are normally distributed with random variables.
iii) investors based their decisions on the variance of returns and expected returns.
- iv) Investors prefer high levels of returns with low levels of risk, from the risk level.
- v) based on the variability of expected returns, investors estimate risk.
An explanation of Modern portfolio theory is shown in the table :
| Portfolio No. | Expected Return % | Standard Return % |
| 1 | 5 | 4 |
| 2 | 8 | 6 |
| 3 | 9 | 7 |
| 4 | 10 | 8 |
| 5 | 12 | 8 |
| 6 | 12 | 9 |
| 7 | 13 | 11 |
| 8 | 13 | 12 |
| 9 | 16 | 13 |
| 10 | 17 | 13 |
From the above table, it was observed that in portfolios no. 4 and 5, the standard deviation is the same but returns are different. The investors would prefer to select portfolio 5 if given choice between 4 and 5. Similarly, in the case of portfolios no. 7 and 8, the standard deviations are different but the returns are the same. Given a choice for selection, investors would prefer to go with portfolio no. 7.The graph is based on the table that is discussed above.
Critically discuss the concept of Modern Portfolio Theory :
According to the report, investors do not always behave logically, the concept of intelligent investors is being challenged by behavioral economists.
The Efficient Market Hypothesis is growing as being challenged because of the existence of insider trading, information symmetry, etc.
As assumed by the theory, it is quickly observed that the returns in equity or shares and other markets are not normally distributed.
Since all the assets carry some amount of inherent risk, there is no concept of risk-free assets in the real world.
Determine the investment risk, Foreign currency valuation, and equity and bond markets
According to the accounting concepts, foreign currency valuation, the process by which a company converts the value of its foreign currency transactions into its functional currency in every accounting period.
Risk in investing in the bond market, there is a balance between potential return and risk that is offered to all investments. The risk in all the money is invested, the chance that the money will lose and there is no chance to get back the invested money. As a general rule, for earning a greater profit, the chances of risk are also greater in the market, as the lowest returns have lower risk investment.
According to the rule, bonds are considered with less risk than stocks for various reasons :
- i) Stocks sometimes pay dividends, but their issuers have no problem making these payments to shareholders. Most of the bonds pay investors a fixed rate of interest income that is also by a promise for the issuers.
- ii) Stocks have no such promise from their issuers, but bonds carry the promise of their issuers to return the face value of the security to the holder at maturity.
iii) As for the stock, the price swings are much unstable in the stock market, but in the bond market, the price of the bonds is less vulnerable.
- iv) Historically, the average stock market return is unstable, as the average returns from the bond investment are much stable.
- Impact of Exchange Rate Volatility and Market Risk on the Investment Portfolio
Effect on exchanging rate
Harry Markowitz advanced the beginning stage of the great level portfolio hypothesis in 1952. One of Markowitz’s urgent suspicions is that the financial ally in time zero is confronted with two clashing protests; to grow the customary return and limit the danger. The average return is just the weighted customary of the regular returns of every individual security in the portfolio. If money-related support is expected to develop expected return, the individual would essentially hold one security, which was relied on to create the most respect. The clashing targets expected by Markowitz cause the financial sponsor to extend by purchasing more than one security, which could diminish the danger of the portfolio. The entire considered structure of a portfolio is to develop the danger of the theory. This is conceivable because not all protections react correspondingly to changes keeping watch, for example, advance charges, oil costs, or basic characteristic market issues. They are viewed as having various betas, for example, having specific market affectability. A gigantic segment of protection returns, when attempting to decrease risk, is their affiliation. It isn’t difficult to say that tolerant they were not notwithstanding related, advancement could shed risk. If all affirmations were completely looked at, growing couldn’t feasibly dispose of hazards. Most protections are associated, at any rate not totally related, concludes that redesign could diminish a portfolio’s risk, yet not dispose of it. Let’s go to the general field for portfolio choice. It could both lead to reduced portfolio eccentrics because of low association between’s general business territories yet additionally to stretched out freedoms to make benefits if the money related supporter is dynamic in his or hers portfolio the bosses. The arrangement of protections and markets to examine increments could offer prospects that the nearby market cannot.
The normal re-appearance of a stock depends upon the public’s assumptions about the affiliation and the stock regarding future execution, advantages, and general models open. Suppose everybody, as a rule, recognizes that affiliation is barely cared about. In that case, they will begin to purchase this stock, enduring that it before long will appear at its higher “right” respect. Since the stock’s interest extends, it will begin to ascend until everyone trusts it has appeared at its genuine worth and begin to sell the stock. This is such an unavoidable outcome that is the justification why the stock is unpredictable and doesn’t remain at one worth constantly.
Change standard hazards can generously impact the hypothesis portfolio, regardless of whether they essentially hold nearby undertakings. For instance, the solid dollar generally hoses by and large premium for items as they are surveyed in dollars. These lower sales can affect advantage and valuations for nearby item makers, yet the more feeble nearby cash would ease up a piece of the negative effect.
Solid money can comparatively impact plans and benefits acquired abroad; of late, extraordinary U.S. multinationals credited a hit to the top-line and key worry, taking into account a more grounded dollar. The impact of trade rates on portfolio returns is amazing. Setting resources into protections appointed regarding money can help all out returns, while putting resources into confirmations named deteriorating cash can manage incomparable returns. For example, unique European stock archives appeared at record highs in the hidden four months of 2015 back when the dollar was supporting certainly, in any case, American financial support who had put resources into those offers would have genuinely seen their advantages reduced basically by the plunging euro.
Effect of Market Risk
Improvement can assist a financial ally with controlling danger and diminish the eccentrics of a resource’s worth unforeseen developments. Regardless, keep in mind that paying little brain to how updated the portfolio is, a hazard can never be gotten out totally.
They can lessen the danger related to specific stocks; at any rate, wide market chances sway in every practical sense. Each stock appropriately is likewise fundamental to improve among various resource classes. The key is to track down a sensible compromise among hazards and return. This guarantees they can accomplish the cash-related objections while now getting a charming evening’s rest.
The financial promoter is needed to have no information on rates of return in anybody market and, in this way, recognizes all rates of return are the same. This presumption will be removed up later in the paper. Under the thought of indistinguishable return rates across business regions, the financial advocate will collect task choices concerning chance allegorically talking. Utilizing just tenable information of market records, the financial support should close how to apportion his cash between by and large business regions to get the most diminished danger for the given time-frame of time. Month-to-month rates of return will be utilized to pick the standard deviations of multiple task prospects to audit the assessed level of risk, enduring what’s to come is expected to resemble the past. Assets will be partitioned relatively among business territories considered in every conceivable portfolio. For this development, exchange costs and other flow checks are accepted to be zero.
Notwithstanding, flawlessly horribly and unequivocally related stocks don’t happen, considering everything. Routinely, as discussed prior, stocks will be reasonably fervently related, like passing us on to the going with a theoretical portfolio. In Figure 3, there are two somewhat related stocks. AGAIN, stocks W and V have a common speed of return of 15% and a standard deviation of 22.6 percent. Since they don’t move in eminent agreeableness, they can adjust each other conceivably, accordingly when they partake in the portfolio, the standard deviation, 18.6 percent, is decreased. The danger of the portfolio isn’t the individual stocks, as requirements show the impacts of improvement. In any case, since a standard money related supporter considers market models and attempting to expect the future of market progressions, the uncertainty of indistinguishable rates of return across business regions is as of now free, in like way permitting money related support to utilize monetary components to expect contrasts in paces of return between business zones.
By then, the impacts of authentic stuns on our two nations’ securities exchange costs are dissected, utilizing trade rates as the incapacitated. As an update, certifiable falters improve the market appraisal of a firm relative to the evaluation of another firm. Trade rates are utilized considering the route that as the money cost of one nation develops relative with the other, one nation winds up being even more excessive close with the other.
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