Question

A financial manager in the United States should only be interested in domestic financial markets. Defend your argument with evidence. Analyze the ideas expressed in the video based on the film, Global Capital Market: Risks and Rewards

Answer 1

Advantage of trade in domestic financial markets- There is less risk in the domestic financial market, financial manager of the company can better understand the domestic market, economy, political affairs etc. He can easily calculate the impact of certain events on the domestic financial market. For example; Impact of change in Central Government, monetary policy, GDP, inflation rate etc. on the financial markets and can make the hedging and speculation strategies to minimize the risk.

Disadvantage of trade in domestic financial markets- Growth is less in domestic financial market. Lack of diversification.

Advantage of trade in Global financial markets- Trading in global financial market, provides growth opportunities and financial manager can diversify the portfolio for his clients by investing into different asset class and markets. It provides tax advantage also. Return is usually high in global financial market.

Disadvantage of trade in Global financial markets-

Global financial market has these risks:

• Exchange rate risk- Currency rate can devaluate or appreciate. It keeps fluctuating.
• Inflation risk- There may be higher inflation in other countries that will affect the interest rates.
• Monetary policy risk- Other countries' central bank may cut or increase the rates that will affect the financial markets.
• Political risk- State and Central Government can change, president and prime minister can change, these affairs affect the financial markets.
• Economic risk- Economy may be slow down, it may be in recession or boom, each economy has its own life cycle that affects the financial markets.

Conclusion- Domestic financial markets are always good to trade with good returns and low risk, investors have knowledge about their country, economy and market but as far as global financial markets are concerned, one can invest into the same if he/she seeks higher growth and can take higher risk also because high risk, high gain.