Running Head: Global Financial Markets

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Global financial markets are faced with numerous problems. Following the turmoil experienced in global financial markets in summer of 2007, most financial institutions operating in the global markets failed. Majority of them faced funding problems and were forced to reduce the size of their balance sheets and stop any further expansion. Through such economic experiences, importance of global management of financial institutions came to light. Critically, management of financial institutions globally helps avert financial risks which can result in closure of these firms. Sufficient capital base guarantees economic stability of firm hence promoting growth and development. The complexity of financial institutions operating in the global market has also necessitated for effective risk management in order to protect financial position for future prosperity. Cost leadership is one of the management strategies that have been embraced by the key players in the global financial markets. Broadly speaking, financial firms have adopted vast range of risks management risks.

Virtual banks have failed in the global financial markets. The success of a firm depends on its ability to realize profits for sustainable growth. However, this was not the case for the virtual banks. Research indicates that there exist disparity between the non-interest income and non-interest expense of progressing banks and the failed banks. Basically, the failure of virtual banks is associated with high non-interest expense (NIE). These banks have not managed to control cost burden.

A Central Bank promotes monetary stability in a country by regulating money supply and controlling interest rates. It oversees the commercial banking system within national borders. During the times of economic recession, the bank lowers the interest rates to enable private investors to borrow money from the commercial financial institutions. By doing so, the investors will be acquire funds for investment thus reinstating country’s economic position. Under situation of high inflation, the bank increases rates of interests to inhibit borrowing ability of the investors. This lowers spending power of the consumers thus reducing the inflation rate.

Trade creates value for the trading countries even though one has ability of producing all goods with lesser costs than the others. International trade enhances distribution of scarce resources evenly. This is because some countries are better producing certain products or services than the other but can acquire the products which it cannot produce at less cost.

Debates have surfaced offshore outsourcing. Some have argued against it whereas others have supported it. Those against it have argued that the system has adverse effects on the quality of customer service and technical support provided to customers by the firms. Because of the numerous side effects cited by critics, offshore outsourcing is likely to be abolished.

Off-shoring outsourcing has resulted in disparity in the services accessed by employees in business firms. In order to avert these effects on employees, corporations ought to adopt laws and regulations that govern benefits and privileges of employees to ensure equal and fair treatment of the entire workforce.

Purchasing power parity (PPP) is a concept that entails creation of long term equilibrium exchange rates while considering the relative price levels as it occurs in two states or countries. It is an extension of Adam Smith’s theory of market equilibrium. The concept stipulates that the value of currency ought to be determined the supply and demand forces in the market setting as opposed to intervention by government or any other interested groups. In this concept, parity is used to refer to equality or equilibrium of value in reference to goods that can be purchased.

The purchasing power parity (PPP) can only exist where there identical goods or services are offered at identical prices in two different markets. The conversion of the value of the currency should occur using the current exchange rate. In addition, there should be no transportation costs and no degree of difference taxes is applied. In other cases, PPP can exist if no arbitrage opportunities exist.

The fluctuation of the real exchange rate occurs due to different rates of inflation between countries. Basically, purchasing power parity finds goods available for purchase in both currencies thus deducing exchange rate. PPP also deduces exchange rates by comparing the total costs of the goods available for purchase using each currency.

Interest rate parity theory holds that the differences between the interest rates on two currencies ought to be similar to the differences between the forward rate and spot rate.

Numerical example

Covered Interest rate parity occurs when the arbitrage opportunity does not exist. Using the US dollars and pounds sterling, the covered interest rate parity would be:

(1 + r£)/ (1+r$) = (£/$f)/(£/$s)

Where r£ refers to sterling interest rate, r$ is the dollar interest rate,£/$f is the forward sterling to dollar rate,£/$s is the spot sterling to dollar rate.

Interest rate parity has direct implication on the Foreign Exchange Markets because it acts as a link between spot exchange rates, foreign exchange rates and the interests

Basically, auction is paramount because it reduces inefficiencies that are associated with other forms of selling security. It minimizes the common under-pricing that underwriters have been nurturing. Auction is the optimal method because it threatens large fees that are incurred in other forms of selling.

Auction enables the seller to attract very good offers on debatable prices. Auctions work best for the seller. The biggest drawback of auction selling is that the expense of auctioning off the property can be overlooked and may be more than whatever it profits the seller. In as much as it can work in favor of the seller, auction can be disaster since the market value of the product or service is virtually decided on the spot.

There are numerous benefits that a buyer can derive from auction selling of products and services. Auction assures buyer of a clean title at closing with no back taxes. The buyers are presented with opportunities to name their prices i.e. bid whatever level they wish. In addition, auction enables a buyer to inspect properties. One of the drawbacks to the buyers is that auctions are usually accompanied by emotions especially when there is competition hence can result in soaring of prices. Most corporations do not sell their all their properties using auction method because of significant inefficiencies associated with it does it can result in great loss. The e-bay and the price line have been successfully in internet auctions because of their ability to pay great attentions to keywords. Keywords are valued by the online buyers and eBay has been able to continuously.