The core idea of the Capital Asset Pricing Model (CAPM) is that on the assumption of homogeneous expectation on financial markets, a security’s return is related linearly with beta, which is sensitivity of the capital asset to market return of equilibrium.The CAPM is developed by Sharpe W F., Lintner J., Mossin J. respectively. Sharpe published… Continue reading Capital Asset Pricing Model(CAPM)
Author: rocker8942
Discuss why corporate bonds with the same maturity may offer different returns
The main reason why the rate of corporate bonds with the same maturity is different is default risk. The difference between safe bond (government bond) and risky bond is called default premium.Well known institutions like Moody’s, Standard & Poor’s and Fitch show us a classification scheme how much risky the bond is, depending on a… Continue reading Discuss why corporate bonds with the same maturity may offer different returns
Evaluate the explanations for the term structure of interest rates
There are four theories that explain term structure of interest rates. These are1. Segmented market theory2. Expectations theory3. Liquidity premium theory4. Preferred habitat theoryWe can see the term structure by plotting a yield curve at a point in time. The general characteristics are determined as ascending, descending, or flat. (1)1. Segmented market theoryBasic notion of… Continue reading Evaluate the explanations for the term structure of interest rates
Currency Hedge
Using derivatives for hedging currency volatility risk.Hedging currency risk.Hedge is the way to reduce risk or volatility. Formally, hedging can be expressed as the taking of a position, acquiring a cash flow, an asset, or a contract that will rise in value and offset a fall in the value of an existing position. (Eiteman, David… Continue reading Currency Hedge
Exchange Rate Regime and Theory
Exchange Rate RegimesExchange rate regimes are divided into 7 categories according to IMF’s classification. These are as follows.- Exchange arrangements with no separate legal tender; EU,- Currency board arrangements- Other conventional fixed peg arrangements- Pegged exchange rates within horizontal bands- Crawling pegs- Exchange rates within crawling bands- Managed floating with no predetermined path for the… Continue reading Exchange Rate Regime and Theory