Globalization and efficient markets | Applied Sciences homework help

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From the e-Activity, analyze how national exchanges around the world are linked and suggest which exchange most significantly impacts the U.S. markets. Explain your rationale.

If you put, businesses with global interests are linked globally and depend greatly on the currency exchange rates of the countries in which they do business with globally.  Large global businesses exert economic forces in the countries in which they do business.  For example, if my company manufactures smartphones, there’s a strong probability that I use component suppliers from China and Korea.  Therefore, a lower value of the Korean and Chinese currency as compared to the USD benefits me because the supplies will be cheaper.  In another example, a large global corporation may provide significant jobs and revenue in several countries, impacting each of the countries’ currency valuation.  Exchange rate values depend on upon the basic economic law of supply and demand.  If a certain country’s currency demand rises, the value of that currency will also rise to a point at which supply can no longer sustain.  Governments often attempt to control demand by, for example, lowering interest rates to attract investors.  The chart below, obtained from OANDA.com, displays the currency exchange rates of major global currencies for the past five years, the Euro (EUR), Canadian dollar (CAD), Great Britain Pound (GBP), the Australia dollar (AUD) and China’s Renminbi yuan (CNY):

For this reason, I choose the Chinese yuan as the currency rate that most significantly impacts the U.S. markets.  A U.S. congressional report prepared in January of 2011 clearly identifies the reason for the Chinese yuan’s resistance to global forces: The Chinese government strictly controls their currency’s rate, avoiding open capital operations with foreign investors, thereby avoiding the normal supply and demand fluctuations (Morrison & Labonte, 2011).  In short, the Chinese yuan’s value today is lower than what it was in 1994.  The Chinese government has kept the value low intentionally, keeping foreign purchases of their products at a very high rate to continue their economic growth.  As you can imagine, countries like the U.S. blame this strict control on the continuing trade deficit with China.  It makes sense; a weaker Chinese yuan will continue to attract consuming nations like the U.S.  While this occurs, the U.S. dollar will continue to be weaker than its true potential because the higher value detracts foreign countries from purchasing U.S. product, pointing them to China.

 Analyze the most significant driver in an efficient market and whether or not you would characterize the U.S. markets as efficient. Provide support for your position.

According to Reilly and Brown (2012), define an efficient market or ‘informationally’ efficient market as “one in which security prices adjust rapidly to the arrival of new information, and, therefore, the current prices of securities reflect all information about the security.”  Under this efficient market, it assumed that information presented randomly and that a large number of participants who seek to make a profit analyze and place a value on securities.  Furthermore, it assumed that the security prices adjust rapidly, based upon the buying and selling decisions of those investors.  In an efficient market, the current price and expected return should reflect the risk.  This information is used to form the Efficient Market Hypothesis (EMH) that categorized in previous studies as 1) weak-form, 2) semi-strong-form, and 3) strong form (Reilly & Brown, 2012).

  1. The weak-form assumes that the current stock price reflects all security information, including all historical performance data.  Because of this, it implies that you should gain very little from this data since the price has already captured it.
  2. The semi-strong form assumes that prices adjust quickly to all publicly available information.  Therefore, since the information is public, the investor should not receive “above-average risk-adjusted profits” because the price should rapidly reflect the new public information.
  3. The strong-form assumes that all stock prices reflect both public and private information.  This information is cost-free and available to anyone simultaneously.  Again, because the information is rapidly and freely available and reflected in the price, an investor shouldn’t be expected to gain massive high-risk returns.

With lower trading costs due to global connectivity through the use of information technology, studies have found that ‘momentum’ is still a viable source of gains.  However, study results mixed when testing the EMH hypothesis.  With a basic understanding of each EMH hypothesis, I would have to characterize the U.S. markets under the ‘semi-strong-form EMH.’  I say this because I am certain that all private information is not freely available, thus the label ‘private’, and therefore not the ‘strong form.’  U.S. markets now have historical stock information freely available to anyone interested, obtainable with the click of a mouse or tap of a screen.  With the passing of the Sarbanes-Oxley Act and SEC regulation, there is also a considerable amount of publicly available information that includes financial statements and future corporation strategies.

Morrison, W. & Labonte, M. (2011). China’s Currency: An Analysis of the Economic Issues. Retrieved from the Congressional Research Service website: http://fpc.state.gov/documents/organization/155620.pdf

Reilly, F., & Brown, K. (2012). Investment Analysis & Portfolio Management (10th ed.). Mason, OH: South-Western Cengage Learning.

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