5th blog

If the market was perfectly fair, There would be no arbitrage in the market. This is an additional return for no additional risk. There is only small pockets of opportunities for arbitrage, as the market corrects itself. So economists need to have constant knowledge of the stock market to evaluate risk and opportunities. Also trading has to be done in true exchange rates. The true exchange rates are set by supply an demand. You need to be concerned about the Euro,Dollars,Yen,etc, As exchange rates fluctuate. This will cause risk exposures for companies trading internationally. Strong currency could deter exporters but low currency could encourage exporters. Transaction,Translation and Economic exposures could add to the risk mix.

An example of an indirect economic exposure that is happening in the world today, is the catastrophic natural disaster in Japan. There has been an adverse change in the stock market, quoted in the Telegraph(Thursday 17th March 2011)-"The FTSE 100 edged higher on the hopes that the G7 will act to calm financial markets after the esculating crisis at Japans earthquake-damage nuclear plant sent the Yen soaring to a post-war high and shares falling". This is going to damage Japans exporters which may push them further into crisis. Fears of leakages at the nuclear plant has wiped billions of dollars off the stock market. To conclude, There will be a knock on affect to the global stock market in coming months because of this disaster and other political conflicts in the world. Governments and companies may need to internally hedge so to spread the risk of any investments drying up because of cash flow due to the stock market, so they are reducing the costs related to financial distress. I will keep an eye on what happens in the coming weeks.