Category: Economics

Derivatives are toxic weapons of financial mass destruction?

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Derivatives are an integral part of modern financial markets.  Simply stated, a derivative instrument is a contract between two entities that specifies the values, dates, notional amounts and other conditions under which the transaction between them is to take place (usually at a future date).  Derivates play an important role in streamlining economic activity, as well as to facilitate liquidity in the markets.  Credit derivatives are an especially sought after instrument due to the legal exemptions afforded it.  On the flip side, the inherent complexity and speculative element in derivatives make them a high-risk option.  In the context of financial market booms and busts, derivatives are often criticized for artificially (yet inevitably) creating these cycles.  For this reason, it is not unreasonable to claim that ‘derivatives are toxic instruments of financial mass destruction’, although they have their utility when employed prudently.

The role played by . . . Read More

A Critique of Efficient Market Hypothesis

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“When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rational…in fact market prices are frequently nonsensical.”

The Efficient Market Hypothesis has been praised by some security analysts as an enduring truth about financial markets. Ever since Eugene Fama coined the theory of the efficient markets in 1970, it has held a prominent position in investment theory. According to him, “in an efficient market any new information would be immediately and fully reflected in equity prices. Consequently, a financial market quickly, if not instantaneously, discounts all available information. Therefore, in an efficient market, investors should expect an asset price to reflect its true fundamental value at all times.” (Stanley & Samuelson, 2009, . . . Read More

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Article summary: Beware Those ‘Beta Traps by Ben Levisohn

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The article chosen for this exercise is titled ‘Beware Those ‘Beta Traps’’. Written by Ben Levisohn, it appeared in the Wall Street Journal on 29th October, 2011.  The article cautions investors about the dangers of those stocks whose prices tend to behave with high volatility.  The volatility of a stock’s price movement is mathematically represented by the Beta value.  A Beta value of 1 indicates near synchronous alignment with the market index such as Dow Jones Industrial Average or NASDAQ.  A value less than 1 is a sign of stability whereas a stock’s Beta value that has deviated much higher than the median 1 tends to be very volatile.

During a bull run, high-beta stocks tend to be an investor’s best friend, as the positive market momentum tends to push up the prices of these counters high.  For example, during the market rally of October, the top 100 highest-beta stocks in the S&P 500 list have risen 12.4 % more than the index as a . . . Read More

Pirates of Globalization: An overview of Intellectual Property Rights

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Intellectual property theft is one of the major concerns for global business leaders.  In an era of globalization and fast dissemination of information, fraudulent manufacturers employ sophisticated means of acquiring patented information and exploit it for commercial gain.  As Catherine Holahan notes in her article for Business Week, pirated goods now account for nearly 7 percent of all commercial activity across the world.  Developing economies such as India, China, Brazil and Russia are proving to be hotbeds for this trend as Intellectual Property laws are either vague or poorly developed here.  Moreover, in the era of the Internet, online commercial transactions across borders are especially difficult to bring under the purview of cyber law, as there is no consensus between different participant nations.  It is due to this reason that Digital Rights Management (DRM) has been conceived and implemented. (Holahan, 2008) The rest of this essay will look into some of the . . . Read More

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Impact of the Atlantic Array North Devon England wind farm on Tourism, Environment & Jobs

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The Atlantic Array North Devon Wind Farm is a key renewable energy project in the region. It is likely to affect tourism, environment and also the economy of the North Devon area. The project is a culmination of pressure on the government to switch to renewable sources of energy, as a shrinking global crude oil reserve is bound to tell upon oil prices eventually. Moreover, energy industry is also recognizing the unsustainable nature of fossil fuel consumption and are exploring alternative energy sources like wind, hydro and solar energy.

The project is initiated by Channel Energy Limited (CEL) – a wholly owned subsidiary of RWE Npower Renewables Limited. The place chosen for this project is the North Devon area. Since longitudinal and empirical data for wind farms across England are not easily available, the Atlantic Array North Devon project’s likely impact on local economy and ecology is a matter of predictions and projections. It is believed that the construction . . . Read More

Freedom Writers and the Economics of Race and Gender

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The movie Freedom Writers is one of the most touching to have come out of Hollywood in recent years. Starring Hilary Swank in a lead role, the movie takes up a subject that is at the heart of American culture, namely juvenile delinquency and ways of dealing with it.  It also touches upon the economics of race and gender.  On a cursory viewing the story looks deceptively simple.  But when the storyline, screenplay and other nuances in the film are observed, numerous interpretations are made available. Embedded within it are themes of economics, especially that applying to race and gender.  Moreover, what comes through the narrative is the strength of character and commitment shown by Erin Gruwell as she undertakes to set right a challenging group of students. For example,

“She encounters a diverse but segregated community so racially charged, hostile and potentially combustible that she likens it to Nazi Germany. Without the support of her administrators . . . Read More

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Why have principles of free trade failed to become the norm across polities

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Free trade is a buzzing concept in modern times, with most governments across the world proclaiming to promote it.  Indeed, the last thirty years or so of global economic integration is based on free trade principles – also referred to as laissez-faire capitalism.  Definitely, there are many advantages to be availed as a result of free trade arrangements.  At the same time, it also has its own set of drawbacks.  One should also make discernment in what exactly ‘free trade’ means.  This is because, often, politicians use the term for its rhetoric appeal while implementing policies that are protectionist.  So, while free trade is beneficent in its purest form, modern policymakers have hijacked the concept to serve the interests of select private businesses at the cost of smaller business enterprises and the majority of the electorate. (Dunkley, 2004, p.53)  The rest of this essay will look into how free trade, despite strong arguments in its favor, has not always been . . . Read More

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The pros and cons of using development assistance/foreign aid to promote democratization and good governance

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The granting of foreign aid/ development assistance to developing and underdeveloped countries can often is a challenging task.  While these countries definitely need assistance from the developed world, charitable intentions doesn’t necessarily translate into desired outcomes.  That is why the decision makers in government and other international financial institutions will have to weigh the pros and cons of each grant and come to a conclusion based on individual cases.  The rest of this essay will elaborate the positive and negative factors that facilitate or thwart foreign aid issuance.

Firstly, citizens in donor nations often think of their aid to developing countries as a humanitarian cause.  Their intention is to do the morally correct thing and to demonstrate goodwill toward disadvantaged people of the world.  Whether this intention is manifest as private philanthrophic aid or government sanctioned aid, it is often regarded as a “gift or a way of acting on . . . Read More

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Distinction between Money and Capital markets

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The total sum of funds represented by the financial markets can be classified under different segments, based on the characteristics of financial claims being traded and the imperatives of different participants. At a broad level, the financial system can be classified under money markets and capital markets. There are quite a few differences between the money and capital markets, but the primary difference is the maturity period of the securities traded in them. Money markets encompass a broad assortment of institutions and procedures that are related to and transact in short-term debt instruments (which have maturity periods of less than a year). These instruments are usually issued by borrowers that boast of high credit ratings. Good examples of instruments traded in money markets are U.S. Treasury bills, many federal agency securities, bankers’ acceptances, commercial paper and negotiable certificates of deposit. Common equities or shares of publically traded companies do not . . . Read More

Why and how was neo-liberalism able to establish itself as the dominant paradigm in the 1980s?

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By the start of 1980s, currents of change were detected in the global economic order, with nationalism and protectionism being replaced by neo-liberalism and free flow of capital. Even as elites from the West promoted this new economic order, the process was facilitated by respective business leaders from nations across the world. (Tyvela, 2004, p.156) Even Communist China was at the forefront of the global neo-liberal program, making it only a matter of time before other countries joined the system. And this is precisely what had happened in the 1980s and continues to this day. With the collapse of the Soviet Union in the late 1980s and the shift in policy framework of several developing countries, the nature and complexion of geo-economics had taken a different form. Major financial institutions such as International Monetary Fund (IMF), the World Bank and the Inter- American Development Bank were the chief promoters of the neoliberal project.

The neoliberal system also . . . Read More