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Capital Markets - Question 1

Generally, there is no simple relationship between interest rates and exchange rates. But they influence each other in important ways. It is indicated by the higher interest rate, that the currency of the country is more valuable. From the point of view of a foreign investor, he has the potential to get better returns through national savings and investments. Thus, it increases the demand for the currency of that country. At the time of increasing the demands for a currency vis-à-vis another currency (or currencies), it is said to strengthen or appreciate. At the time of happening this, the rate of exchange improved as well. For the importers, a strong exchange rate of currency is good while for the exporters it is bad. When the rate of interest of a country is low, the country is considered less valuable, and this is why demand in terms of foreign rate of exchange decreases. As foreign capital is attracted by higher interest rates, exchange rate will be increase as well. In addition, an opposite relation is also there, exchange rate will decrease if there is low interest rate. For instances, in the year 2018, on the month of September, a huge depression was there in terms of the Indian Rupee against the US Dollar. This is why Indian Rupee becomes weaker in compare to US Dollar. Consequently, various items which are transported from America become more expensive (Ahmad, et al., 2010).

Capital Markets - Question 2

It is stated by the Market Segmentation Theory (MST) that there is no correlation between bond markets with different maturities and interest rates and affects the supply and demand for bonds. MST helps investors and Oro holders to prioritize fixed yields when investing in bonds. These choices shift the supply and demand forces of each market to individual smaller markets. In addition, MST desires to elucidate the size of the yield curve for bonds of equal credit value and bonds with different maturities are not interchangeable. Thus, the yield curve is formed by the supply and demand factor in each maturing period.

As per the rule of MST, the demand and supply of bonds at each mature stage are based on current interest rates and future expectations of interest rates. Bond markets are generally divided into three main categories on the basis of maturity that is short term, medium term as well as for long term. The division of the bond market is due to the fact that investors and. Customers have hedged their assets with bonds for a period similar to their maturity and liability. For example, the demand and supply of short-term government and corporate bonds depend on acceptable, short-term asset business needs such as asset. The supply and demand for medium and long-term bonds depends on the expansion of corporate capital. Fixed income market segments work independently with each other as investors and borrowers try to hedge their exposure based on maturity (Goyat,

References for Capital Markets

Ahmad, M.I., Rehman, R. and Raoof, A., 2010. Do interest rate, exchange rate effect stock returns? A Pakistani perspective. International Research Journal of Finance and Economics, 50, pp.146-150.

Goyat, S., 2011. The basis of market segmentation: a critical review of literature. European Journal of Business and Management, 3(9), pp.45-54.

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