Question

1. What do financial markets sell? 2. Write an expression for the present value of the future damage from climate change. What happens to the present value if the discount rate is higher? Does this explain why some ignore the dangers of climate change?

Answer 1

1. What do financial markets sell?

Financial market can be defined as a place where the securities are traded. This includes equities, bonds, derivatives etc. some financial markets are very small and there are large markets like new York stock exchange and forex markets that buy and sell trillions of dollar worth of securities every day.

The stock market is a financial market that buys and sells shares of publicly traded companies. There are two types of markets namely primary and secondary market. Primary market is the place where the shares of the company are issued for the first time and the secondary market goes for subsequent issue of shares.

1. The present value of future change:

The present value of future change can be expressed as:

D = 1/1+r

Here D gives the value of one unit in the future in present value terms

And r is the rate at which the future value is discounted.

What happens to present value if discount rate is higher?

An increase in the discount rate decreases the present value factor and the present value.This is because if the interest rate is higher we have to keep separately today to earn some specified amount in the future. A reduction in time period increases the present value factor and the present value. This is because if there is less time, then we have to save separately today to earn more in the future.

Does this explain why some ignore the dangers of climate change?

Yes. The above explanation very well explains the concept and this is the reasons any people ignore climate change. As it fluctuates the amount to be saved every time for better returns in the future.