Exam 3 Extra Credit

What role did the financial markets play in global trade?
Financial markets and those involved in them are constantly looking to expand them, either to amass greater gains than those they had before, or to find something new to exploit and be among the first so that they would have the greatest initial share and reap the long-term benefits. Both of these benefit by expanding global trade and exploring new lands in order to exploit and expand their financial markets. As seen in the video, the two Scotsmen found an opium market in Kowloon, China, and after the British gunboats came in, they were able to diversify into breweries, cotton mills, insurance, and railways, all of which expands their own assets, and expanded the individual markets by having new consumers to sell to and requiring capital which others would benefit from.

Why do you think that the financial markets are inherently unstable, that is what took a generation to build, was destroyed in a matter of few weeks?
As seen in the video, the arrival of World War 1 resulted in the inability to engage in liquidity. Furthermore, borders were closed, trading among borders was limited due to military activity, and international waters were unsafe and unable to move through. International markets are unstable because they require a lot of different countries and factors to work together, and when one of them ceases or refuses to be involved, then it can have a chain reaction that results in everything being shut down.

Explain the role of International Monetary Fund and World Bank in stabilizing global financial markets.
The role of the IMF is to loan money in order to keep a country's economy stable, therefore securing and stabilizing the financial markets that are either centered or have a share in that country.
The World Bank's role is to provide funds to countries with emerging and developing markets in order to nurture further growth in the future, which will open up new financial markets and opportunities local to those countries.

Explain the emergence of the new financial markets lead by hedge funds and its impact on the financial markets.
The nature of the hedge fund is to greatly increase the nature of risk in order to further increase the reward, resulting in massive gains after essentially betting a huge amount of assets.  As seen in the video, the dollars that had been bet were made massively more valuable when the british pound had been made more valuable, and had netted the investor a billion dollars. The effect on financial markets that this has can only really be seen when the reward fails, and as a result, massive losses occur instead.

Explain the theory of reflexivity.
Financial markets cannot be perfectly efficient due to biases of the consumer, and markets are bound to booming and busting.

Explain how options work in financial markets?
Options allow an investor to purchase a stock at a particular time where they calculate that it is more valuable than it is in the present day. If it is more valuable, then they enjoy the acquisition of the asset and the ability to now sell it at a greater price. If it is as valuable or less valuable, then they don't have any real losses, because they essentially purchased it at the price it was when they first speculated its value.
What is a quant or a blackbox in explaining an option?
'Quant' is a nickname for quantitative speculators, a kind of speculator that uses a formula to enable options and make large gains.
The 'blackbox' is a formula that allows quants to calculate the future value of an option.

Explain the financial interdependence called “CHIMERICA”.
China's massive financial growth as of late has led to Chinese dollar-millionaires and billionaires, and most direct investments from foreigners have been physical assets like factories and equipment. America's loaning of money from China has created a bond between the two in the form of money, and at this point the rapid growth of China is an asset to America, though not one that they own, and are actually in debt to. America is regularly buying less expensive products from China, as well, in addition to borrowing from them, forming a symbiotic relationship where America is continually consuming Chinese products.