Category: Economics 2707

Introduction

The security market is surrounded by a number of factors that may impede the performance of actively sold and traded securities. If firms are to be successful, they need to consider these factors while designing their capital acquisition strategies. Securities are instruments used by firms to raise capital and increase the investment base. Securities are initially floated to the public through the primary market by an underwriting syndicate of investment bankers acting on behalf of the firms. Academic studies have identified managerial issues surrounding the initial public offerings (IPO) of securities with significant implications to performance (Chan, Cooney, Kim, Singh 45). Among these, the firms public perception, underwriters reputation, investors outlook on the performance of stocks in the secondary market, listing requirements and legal framework for the chosen market, timely release given the prevailing market conditions. Firms interested in improving IPO performance can employ active investment-management strategies such as identifying mispriced securities, or by timing broad asset classes during the early bookbuilding period (Bodie). For the purposes of this term paper, management of security offers refers to the issues related to the public offering of securities (issuance and selling) in a firms attempts to raise capital.

Types of Securities

Stocks and bonds are the common securities utilized by firms to boost their capital base. In both cases, the securities involve primary and secondary markets. Stocks are issued to the public as investment tools of partial ownership and may either be initial public offers (IPOs) or seasoned equity, with the former referring to the form of stock offered by a private company the first time it goes public. The intent is to raise capital and expand the capital base. Seasoned equity offerings are offered by firms that have already floated equity. Once stocks are issued in the primary market, the sale and transfer of ownership may be done in the secondary market. Still there are factors that will influence the performance of securities in the secondary market.

The issuance of bonds is categorized as private placement or public offering. When issued to a few institutional investors, they are held to maturity. The issuance of bonds to the general public for the purpose of trading in the secondary market as an investment option is referred to as public offering. An important point to note is that both the stocks and bonds follow similar major processes; i.e. public offers and secondary market trading. The managerial issues discussed in this paper relate to these cases with the exception of bond private placement offers which are not sold in the secondary market.

Managerial Issues in Securities Offers

Historically, IPOs have been considered poor long-term investments. Despite dramatic initial investment performance, the year-by-year underperformance suggests that the investing public is too optimistic about a given firms prospects and/or that there may be systematic errors on the part of the underwriting investment managers (Bodie 58). Since managerial issues touch upon every aspect of security offers, they play a key role in the firms success. With the ultimate goal of all offers being to increase the capital of a firm, the firm must willing to scrutinize the many factors involved in advance in order to manufacture the best results possible. The demands of the market-place, who to offer the securities to-private or public, time of offer, time of sale, and what types of post-sale controls to have, are just a few of the factors that must be considered in order for a firms offer to be successful. Of particular interest is the understanding of how underwriters of low reputation, discretionary accruals and venture capital backing may influence the performance of IPOs in the long run, and how managers must accommodate for these instances (Chan, Cooney, Kim, Singh, 47).

Managers of companies wishing to go public for the first time may be faced with a need to raise capital and desire to do it by then issuing an IPO. First, their strategy must determine which markets they are willing to venture into because there are options. Some markets such as NASDAQ may require scrutinizing the management of the firm and its directors, and that before the company is listed in this market, there should be a minimum of three investment bankers agreeing to act as market makers for the company. Next, there are other regulatory issues that affect the financiers of the company before the IPO, such as the period within which they may recover their investment and receive their gains, stipulated in the escrow period. Finally, other regulations relates the disclosure of financial and other company information and the legal processes that the company must complete before going public, such as tax and accounting matters, will all affect where, and if, managers should issue an IPO.

Companies are required to follow particular legal guidelines when seeking to go public in a given market. The legal framework within which companies must conduct public offering of securities must also be followed. These legal frameworks can vary widely, depending on the different market specializations, and refers to firm registration with the market, on the type and size of the company desired in the marketplace, and the role the company may be expected to play in the IPO marketplace. The companies are required to meet certain conditions before issuing an IPO in the United States. These legal frameworks are an indication of the preparedness of a company to perform and handle market IPOs in a number of ways. Options exists regarding what markets to venture into, but the options should be widely explored and never be guided by legal framework alone. Within these individual frameworks, however, are easier guidelines which may offer a particular company less financial strain and more incentives than another framework. For example, in the United States, there are different options for the listing of companies; this includes the major markets which are the National Association of Securities Dealers Automated Quotation System (NASDAQ), New York Stock Exchange (NYSE) and TSE. Within these markets, listing requirements differ relating to the assets of the firm, amount of public float, pretax income and minimum financial requirements (SME Financing Data Initiative para #2 &3).

Another important aspect touching IPOs and other public offerings is the issue of time management. The issue of timing arises partly because of the legal issues involved and their timely completion, when the public is likely to buy the stocks. In addition, the individual investor companies are more interested with the duration of time they may have to earn benefits, sometimes more than the investment itself because these are their gains. Although the company is going to the market through the investment bankers, the latter are aware of the dangers that may impede the likelihood that they will make profit, and may be tempted to pass the burden to the company. The company may have to make a decision whether to make a best-efforts type of agreement with the underwriters where the latter are not obliged to purchase any shares at their own risks, or choose the firm-commitment agreement where the underwriters are obliged to buy any remaining shares after selling the minimum agreed amount. Thus, the company may have to analyze the possibilities for best performance in the two situations so as to gain.

The importance of understanding the reputation and competence of underwriters can not be underestimated since some may influence the price so as to reduce the risk of remaining with unsold shares (Reber, Barry, & Toms, 42). Thus the firm may incur the burden as a result of under pricing, and to avoid this, informed forecast may become necessary to the management. The reputation of the underwriter also influences the return by Asset Managers Affiliated (AMAs) with the underwriter in addition to the information environment for the IPO (Johnson & Marietta-Westberg; 706). This is not an easy task considering that the underwriters may be more experienced than the company. Investors are weighing the alternatives of investment between companies and therefore the involved company must seek to understand their needs and meet them, ideally to benefits both the issuer of the IPO, the underwriter as well as the investor. Other issues touching the public offerings such as the initial offers regard the managerial decision on the type of market to be ventured into. These decisions are guided on the attainment of advantages associated with entry into more specialized and larger (and famous) and developed markets, but the disadvantages accruing to these entries such as high legal risks, higher costs of the process (Nemirowsky, & Wright), and different valuations among others must be considered.

On the underground, whether the company is going for an IPO or second or preceding release of stock or bonds, the management of the firm will play an important role in the public perception and the commitment of the institutional investors owing to their confidence and trust in this management. In fact, institutional investors influence the success of the offer of securities and would consider the competence of the management in terms of financial projections and business plans. The institutional investors may act in advice of experts as relating to the competence of the firm. Therefore, the management of the firm not only relating to issuance of securities but over a wide range of other issues will influence the performance of the issue. The impact of information management after IPOs may control or encourage insider trading which may impact on the performance of shares in the market place (Jaffee; cited in Bodie).

For example, stock performance has been found to be poor when insider sellers exceed insider buyers whereas an abnormal return of about 5% was witnessed in the 8 months following months when there were more (up to three or more than) insider purchasers than insider sellers (Jaffee; cited in Bodie). This is an indicator that the buyers and sellers were relying on the insider information to control their decisions. In addition the impact of expected or unexpected high volatility on interests of large hedgers and speculators in the market needs to be understood well. In particular, regulators have been influenced by price volatility and degree of market participation of traders, to come up with regulations that may impact business (Chang, Chou, & Nelling, 107). Managers must be willing to understand the implications of stock exchange such as response of regulation to current practices such as the false financial reporting, and circuit breakers (Bodie). There have been interests in the study of how managers react and make decisions in the focus of the information asymmetries between them and the investors which influence financial and control structures (Milgrorn & Roberts, 482; cited in Boehmer & Netter, 693).

Conclusion

The management issues touching the floating and offering of securities include the time of offer, the major customer-either public individual or private group investor, legal framework provided by the market, the market which to enter-the advantages and disadvantages, the current and desired financial base among others. In this paper, the legal framework and the issue of time when the floating is to be carried have been considered more than other issues. The management of the firm will determine the type of underwriters to choose, the time of the floating; the market which offers the best alternative and requirements that best suit the firm, among other issues. These will all impact on the performance of the security in the market, whether at the IPO stage or after that.

Works Cited

Boehmer, Ekkehart and Jeffry Netter. Management Optimism and Corporate Acquisitions: Evidence from Insider Trading. Managerial and Decision Economics. 18 (1997): 693708.

Brav, Alon, Christopher Geczy, and Paul Gompers, Is the Abnormal Return Following Equity Issuances Anomalous? Journal of Financial Economics. 56 (2000): 20949.

Chang, Eric, Ray Chou, and Edward Nelling. Market Volatility and The Demand for Hedging in Stock Index Futures. Journal of Futures Markets. 20. 2 (2000):105-125.

Chan, Konan, John Cooney, Joonghyuk Kim. and Ajai K. Singh. The IPO Derby: Are There Consistent Losers and Winners on This Track? Financial Management. Spring. (2008): 45  79.

Jaffee, Jeffrey. (1974). Special Information and Insider Trading. Journal of Business. 47 (1974).

Johnson, William and Jenniffer Marietta-Westberg. Universal Banking, Asset Management, and Stock Underwriting. European Financial Management. 15, 4 (2009): 703732.

Nemirowsky, Hugo and Jesse Wright. (2007). Issues Surrounding Security Regulation in Latin America and the Caribbean. Inter-American Development Bank. Web.

Reber, Beat, Bob Berry, and Steve Toms. Predicting Mispricing of Initial Public Offerings. Intelligent Systems in Accounting Finance and Management. 13 (2005): 4159.

SME Financing Data Initiative, (2008). Issues Surrounding Venture Capital, Initial Public Offering (IPO) and Post-IPO Equity Financing for Canadian SMEs Overview of IPO Markets in Canada and the U.S. Web.

Introduction

NFL lockout may be regarded as one of the most prominent economic events in the world of sports in 2011. The reasons for the lockout are analyzed from various perspectives, and the economic consequences of these events are serious enough. The economic theory that may be applied for the NFL lockout is the concept of the economic demand effect. Other theories are also touched upon, however, the demand effect is the most evident and demonstrable. Hence, the paper aims to analyze the demand effect caused by the NFL lockout and consider the assessment of the economic consequences caused by the lockout.

Analysis

The Sherman Antitrust Act is regarded as the key reason for the lockout. This is closely associated with the monopolistic trade activity, and NFL was accused in the attempt to monopolize the industry, and fix the prices. This caused the lockout, when NFL refused to deal with its employees, as well as players. Hence, 32 teams of the NFL are not allowed to train in the stadiums, and in accordance with the data provided by the trade union, the lockout caused the 12% pay cut for all the employees. In general 115 000 jobs are affected by these events. The total costs of the lockout are approximately $ 160 million for each NFL city. Barndt (2004) claims that if a football season is rescinded, the costs for team owners will increase essentially. This will inevitably influence salaries, the infrastructure maintenance and development, as well as a decrease in demand in this sphere.

In accordance with the general economic principles, the increase of the losses in a particular sphere causes the lowering of the consuming capability among workers who are engaged in this sphere. Therefore, 115 000 workers jointly with team players, and team owners will get lower incomes that would inevitably cause the decreased demand.

From the theoretic perspective, the actual value of the lockout may be explained by the fact of stimulating the economic barrier development. Since such an amount of workers, players and owners will get lower incomes, and some of them will be fired, the consumption capacity of this part of the working population will fall. In accordance with the economic principles, the demand for the consumer goods will be decreased, hence, the US economy will experience lesser income. In accordance with the research by Lai et.al. (2008, p. 341):

The negative slope of the demand curve is due to the substitution and income effects. If the relative price of a good falls consumers will substitute that good for more expensive goods that will buy more of the good whose relative price has fallen and less of the other goods. This is the substitution effect. When the relative price of a good falls, the consumer can buy the same bundle of goods as before the price decline and have some money left over.

In the light of this fact, it should be emphasized that the actual significance of demand decrease is explained by the fact that the money gained by the state economy as a result of the demand revenues, is often used for increasing the number of consumption goods. The income effect fully defines the income power.

By the graph, the decrease in the demand will cause the growth of prices, as well as the shift of the supply curve. This is explained by the fact that the decreased demand makes the companies increase prices. As a consequence, this step decreases the consumption capacity of the population.

In accordance with the statement by Boe (2009), since the overall money market is regarded as the strict supply and demand system, the NFL lockout is closely associated with the fact that owners and employees will have to shorten their expenses. The supply that is influenced by the deceased demand is featured with the vertical curve. Therefore, if the supply and demand are fixed, the interest rates, as well as the prices for consumer goods will be inelastic. On the other hand, the elasticity of the supply may be defined by the actual demand and income levels.

Considering the opportunity of the demand decrease, the notion given by Boe (2009l, p. 138) should be stated:

Demand and supply relations in a market can be statistically estimated from price, quantity, and other data with sufficient information in the model. This can be done with simultaneous-equation methods of estimation in econometrics. Such methods allow solving for the model-relevant structural coefficients, the estimated algebraic counterparts of the theory. The Parameter identification problem is a common issue in structural estimation. Typically, data on exogenous variables (that is, variables other than price and quantity, both of which are endogenous variables) are needed to perform such estimation.

Since the lockout is closely associated with the matters of the simultaneous equation of the incomes and losses, the general value of this process may be explained from the perspective of structural estimation of the overall sports sector of the economic system. Additionally, the aggregate demand market is analyzed from the perspective of the number of the consumers goods demanded. The function of price also requires the supply data; however, the aggregate demand function is often used to reveal the consuming capacity of the population, which, in its turn, is used to formulate prices. The equilibrium may be achieved by analyzing the losses of the team owners, and employees of the NFL.

The factor of mass production is often used for the proper assumption of the supply and demand levels as this is one of the most independent and not subjected to supply and demand restrictions. The price response appears to be valid, however, the demand curve will not be. As it has been already stated, the decreased demand causes the increased price, as the incremental costs are dependent on the average costs. If there is excess capacity, the prices of most goods will not be changed significantly. Therefore, business cycles should be considered, and if the prices reach their maximum level, the consuming capacity expansion will cause the necessary efficiency level, and the demand shift will be compensated by the increased effectiveness.

Conclusion

The NFL lockout is mainly regarded as an event of an economic nature, and the economic theories that apply to this case are mainly associated with demand levels. Therefore, the decreased incomes and increased losses within the entire industry will cause changes in the prices of consumers goods. Hence, the lockout that affects 115 000 workers will have to be considered from the perspective of aggregate demand and supply.

Reference List

Barndt, W. D. (2004). User-Directed Competitive Intelligence: Closing the Gap between Supply and Demand. Westport, CT: Quorum Books.

Boe, E. E. (2009). Long-Term Trends in the National Demand, Supply and Shortage of Special Education Teachers. Journal of Special Education, 40(3), 138.

Lai, L. W., & Yu, B. T. (2008). The Power of Supply and Demand: Thinking Tools and Case Studies for Students and Professionals. Hong Kong: Hong Kong University Press.

The article defines hyperinflation as an economic issue associated with a sudden increase in the prices of goods and services, causing pressure to the national budget. The author mentions some factors that lead to this phenomenon, including wars and post-war crisis, the collapse of export markets, and sociopolitical disturbances, among others. The article highlights that a sharp decline in income taxes and incapacity or reluctance to seek foreign aid can give rise to hyperinflation (Chambers, 2020). The author articulates the understanding of economic dynamics that have resulted from increased demand for social and medical services globally by providing an international issue that has led to hyperinflation.

A picture-perfect example included in the article is the dramatic changes that have resulted from the emergence of the Covid-19 pandemic, leading to the shutdown of global markets. The great lockdown is the worst economic scenario since the great depression in the 1930s. The novel virus has resulted in the loss of many lives across the globe despite efforts to control its spread through quarantine and social distancing measures. The effects of the current pandemic are far-reaching and are feared to collapse the international market in a few months. Keeping the global economy on track is becoming a daunting task as countries fight with the increased demand for limited therapeutic resources. Hyperinflation has been felt all over the world as governments strive to avail essential medical supplies and services to its citizens.

The article articulates the use of economic theories to explain hyperinflation. The author accentuates the importance of the new monetary theory as a novel convention in controlling taxes. Chambers (2020) attests that putting this economic model into practice helps in curtailing inflation. The author needs to explain this practice further using more theories such as the conventional demand-pull inflation model as it will provide the reader with more knowledge about the factors that lead to hyperinflation and approaches to maintain economic stability.

The author feels that the goal of the government is to try and smooth a process that would otherwise be very rough and to minimize the damage (Chambers, 2020, par. 4). While this statement may be true, the author needs to discuss primary roles that the government should play to actualize deflation processes in a bit to normalize the economy. For instance, a key point missing in the article is an examination of how an inflation gap or excess demand should be corrected through improved taxes and reduced national expenditure. However, this scenario should be handled with caution to avoid deflation, which may slow economic growth due to decreased consumer spending. Nonetheless, taxes can be improved through contradictory monetary policies aimed at reducing bond prices and increasing interest tariffs. This approach is a sure way of cutting spending in a bid to halt economic growth.

For instance, banks may increase interest rates to discourage people from borrowing money. This move results in decreased spending and plummeting prices, which slows down the rate of inflation. Overall, the article presents an outstanding discussion on the occurrence of hyperinflation. The phenomenon is not an ordinary economic slump but is a rare singularity that results from sharp monthly upsurges in the prices of commodities. With the current unforgiving Covid-19 pandemic, countries should expect more sapping of tax revenues, shuttering businesses, increased unemployment rate, and the effects of the increased cost of living.

Reference

Chambers, C. (2020). Hyperinflation: Will America dodge the bullet? Forbes. Web.

Supply chain management processes play a crucial role in the profitability of a company. The supply chain procedures are associated with logistics costs and must be reduced by appropriate handling of goods. Managing the supply chain costs to low levels is crucial in maximizing profits of a company. As such, identifying factors influencing the distribution and transportation of goods is the key in ascertaining a companys financial success.

Factors Influencing Supply Chain Processes

Several factors influence the transportation and distribution of an organizations product. High global demand level of a product requires faster transportation and delivery of goods. The service level also impacts the selection of the mode of distribution and storage of goods. The need to fulfill customer satisfaction may force a company to consider a sound transportation system that offers quicker delivery while maintaining product quality (Jafari et al., 2020). A products characteristics also influence the choice for the shelf space during the transportation and storage of goods. Finally, the logistics costs affect these options for a product. High distribution costs force corporate managers to adopt such strategies as an in-house storage of goods.

Impacts of Global Trade on Supply Chain Processes of a Product

Global trade affects the supply chain processes of a product. For instance, greater access to the worldwide market increases a companys product demand, forcing it to engage in bulk production and quick means of transportation. Global firms also adopt standard service levels in meeting customers satisfaction (Khan & Wisner, 2019). They must produce goods that meet customer needs. International companies face legal barriers creating stiff market competition. To become a market leader, a company must adopt unique strategies, such as engaging only its personnel in producing and distributing goods to maintain low logistic costs.

Effects of COVID-19 on the Distribution Chain of the Automotive Industry

Covid-19 has negatively impacted the automotive industrys distribution chain, ranging from the interrupted shipment of the cars across the global regions and the suspension of normal operations of different firms to high costs of managing distribution processes (Guan et al., 2020). The current multinational companies experience inefficient inbound logistic processes attributable to the delayed delivery of goods. These organizations cannot meet the required level of customer service. Therefore, the trend of demand, product characteristics, logistic costs, and service levels of a product are vital in creating effective supply chain management.

References

Guan, D., Wang, D., Hallegatte, S., Davis, S. J., Huo, J., Li, S., Bai, Y., Lei, T., Xue, Q., Coffman, D., Cheng, D., Chen, P., Liang, X., Xu, B., Lu, X., Wang, S., Hubacek, K., Gong, P. (2020). Global supply-chain effects of COVID-19 control measures. Nature Human Behaviour, 4, 577-587.

Jafari pour, Z., Sajadi, S. M., & Hajimolana, S. M. (2020). An optimal two-level supply chain model for small and medium-sized enterprises with a rework for new products and price-dependent demand. Scientia Iranica.

Khan, H., Wisner, J. D. (2019). Supply chain integration, learning, and agility: Effects on performance. Journal of Operations and Supply Chain Management, 12(1), 14-23.

Financial plans are long-range road-maps aimed at increasing return on investment, market share, and dealing with foreseeable problems. A financial plan is basic to risk management. Financial plans are prepared in order to establish a viable risk management strategy (Hisrich, Peters and Shepherd, 2013, p. 21). The preparation of financial plans involves the analysis of risks involved in future events. Planning enables an organization to establish the various types of risks it is exposed to. Financial plans are also prepared to avert investment pitfalls. Financial plans give an organization a long-range focus and keep it on track. Financial plans are essential when assessing the viability of investment options. They provide a platform for evaluating investment alternatives. Plans enable an entrepreneur to put into consideration many facets of an investment, rather than focusing on return alone (Hisrich, Peters and Shepherd, 2013, p. 45).

Financial plans are prepared for the purposes of coordination and control. Different functions in an enterprise require for smooth running. Financial plans ensure that adequate funds are available when needed. Financial plans such as budgets are prepared for control purposes. Entrepreneurs cannot spend funds beyond the budgeted limits. Financial plans are used to monitor an enterprises revenue and expenditure (Hisrich, Peters and Shepherd, 2013, p. 15).

The onus of preparing a financial plan is determined by the size of the organization. Large corporations have finance departments headed by financial managers. The financial manager prepares financial plans in collaboration with the heads of other sections. In a small start-up, the entrepreneur prepares his or her ventures business plan including the financial plan. Where the entrepreneurs skills in financial planning are limited he or she can employ financial planning experts (Lasher, 2013, p. 33).

A financial plan is characterized as a failure when it misses achieving organizational objectives. A failed plan is evidenced by under performance, or even cessation of an enterprise. One of the major causes of financial plans failure is making unrealistic expectations (Lasher, 2013, p. 93). Some entrepreneurs erroneously assume that businesses will succeed and will yield returns promptly. Unfortunately, this is hardly the case. Most enterprises take some time before they break even and payoff. At inception, an entrepreneurs aim should be to earn back the invested funds. The money earned at the inception stage should be reinvested in the enterprise. Undoubtedly, the entrepreneur should rely on other sources of finance for his or her sustenance when the investment is at introduction stage (Lasher, 2013, p. 93).

Poor planning also accounts for the failure of financial plans. Some entrepreneurs fail to study the market to establish the nature of demand for their products (Greenwood, 2002, p. 47). In addition, some plans fail to factor in administrative costs. The amount of effort committed to ensuring smooth implementation of a financial plan influences its success. Where the entrepreneur is not committed to implementing a financial plan, the outcome is usually unpleasant. Commitment and discipline are essential for the success of a financial plan particularly at the start-up stage (Greenwood, 2002, p. 47).

Inadequacy of funds is also responsible for the failure of many financial plans (Lasher, 2013, p. 93). Many of entrepreneurs make unrealistic assumptions on the amount of funds required to initiate or run a business. Some entrepreneurs hope to finance their activities through external finance, which is hard to obtain. Unless an entrepreneur has a substantial portion of personal funds, the venture is exposed to financial constraints. Other factors that may lead to the failure of a financial plan include poor debt management, over borrowing, poor market research, poor financial planning skills and poor coordination (Hisrich, Peters and Shepherd, 2013, p. 86).

References

Greenwood, R. P. (2002). Handbook of financial planning and control. Burlington: Gower Publishing Ltd.

Hisrich, R. D., Peters, M. P. and Shepherd, D. A. (2013). Entrepreneurship (9th ed.). Boston, MA: McGraw-Hill Irwin.

Lasher, W. R. (2013). Practical financial management. Stamford, CT: Cengage Learning.

Nowadays, America can boast one of the most developed economies in the world. The service sector is an important source of the countrys budget; the U.S. is also a world leader in many spheres of industry. However, the history of the U.S. success is complicated; the country went through periods of rapid industrial development and decrease, which were followed by both positive and negative outcomes. In this paper, certain examples will be discussed in detail to analyze the processes that took place in the country and how they influenced its overall performance.

The period of economic rise in the U.S. economy is usually associated with industrialization. Many researchers describe industrialization as the process of technological development and the positive changes in the organization of production and labor (Vigezzi, 2019). Such changes, both economic and social, led America from an agrarian to an industrial society. In the U.S., industrialization took place in the nineteenth century, before and after the Civil War.

The changes that happened to the U.S. economy in the past are mostly connected with its unstable economic situation. From the end of the Civil War to the beginning of the twentieth century, America suffered from economic inequality and devastation (Ward & Himes, 2019). The Gilded Age is an example of how economic and social growth was supposed to solve the emerged problems. The main feature of the Gilded Age was the rapid growth of cities and industries; building railroads also is a significant development of that period. The West of the country was based on farming and mining, while the South remained a devastated area. As for the countrys political and social changes, labor unions became very widespread (Ward & Himes, 2019). These communities were concerned with current social and economic issues, such as child labor and non-standardized working day.

At the same time, industrial growth led to certain negative consequences. The Gilded Age demonstrated a high level of class inequality, which was also connected with the influx of migrants to the country. According to Piketty, at the end of the nineteenth century, the richest Americans could own up to 50 % of the wealth (as cited in Ward & Himes, p. 120). The majority of workers savings were spent on basic needs; the class gap became apparent. As a result, during the 1880s and 1890s, there were numerous strikes among workers because of inappropriate living and working conditions. The unrest led to more efforts focused on managing the labor issue; for example, one of the measures was to boost domestic production, decrease imports, and regulate workers wages.

As it is possible to see, the results of industrialization turned out to be ambiguous. The period before the end of the nineteenth century was characterized by the rapid growth of the domestic industry and the overall wealth. At the same time, the rapid economic increase became a cause of multiple social problems like wage inequality, poor working conditions, rising rates of migration, and the concentration of wealth in certain regions. Therefore, certain measures were needed to cope with the economic crisis and to stabilize the political and social situations.

In the second half of the twentieth century, the American economy went through another important process opposite to industrialization. Deindustrialization is often described as the reduction of industrial activity of a country (Rycroft, 2017). It is believed that this process started in 1947 when the discussion of the current economic issues took place, and the goal to reach harmonious international economic relations was defined (Rycroft, 2017, p. 112). At that time, the American economy was based on its large-scale automobile industry and steel production. However, the increasing industrial success of other countries, like Japan, Russia, and Germany, led to a decrease in the American industry.

Deindustrialization in the U.S. is often associated with the decline in its automotive industry. The bright illustration of this process is the manufactory shrinking of Rust Belt, a region around the Great Lakes that was once a powerful and developed area. Rycroft (2017) draws an example of Detroit that was dragged into bankruptcy as industrial taxes and philanthropy disappeared (p. 113). According to the statistics, at the peak of its success in the 1960s, Detroit had about 290,000 jobs in the manufacturing sector, while by 2009, this number had decreased to 27,000 (Rycroft, 2017, p. 113). At the same time, the industrial decline was followed by the growing service sector, including transport, communication, healthcare, and other spheres. These positive changes, however, could not fully replace the negative outcomes, such as loss of jobs, significant federal spending, and growth of imports. However, it would be fair to say that despite the deindustrialization-related problems, the Rust Belt remains one of the most important industrial areas of the country.

In conclusion, the processes of industrialization and deindustrialization played a vital role in shaping the modern economy of America. Although the outcomes of industrialization are considered the basis of todays economy, the social turmoil of the 1880s and 1890s proved that all spheres of life need to be regulated equally. The industrial crisis of the Rust Belt caused a significant decrease in domestic production, and although many of the industries are no longer dominant in the world market, America has a developed service sector. In conclusion, such challenges demonstrate that economic growth is a complicated process that demands careful and integrated measures. The U.S. proved that careful and thoughtful economic measures lead to a balanced economy and the overall success of the country.

References

1. Rycroft, R.S. (2017). The American middle class: An economic encyclopedia of progress and poverty (Vols. 1-2). ABC-CLIO.
2. Vigezzi, M. (2019). World industrialization: Shared inventions, competitive innovations, and social dynamics. John Wiley & Sons.
3. Ward, K., & Himes, K. (2019). Growing apart: Religious reflection on the rise of economic inequality. MDPI.

Introduction

In comparison, the number of defined contribution plans has grown in the past few years as opposed to the traditionally defined benefit plans. Additionally, many defined benefits plans have been converted to hybrid plans that incorporate aspects of both the defined contribution and defined benefit (Gale et al, 1999; Campbell, 1996). his transformation of the private pension system has led to the rise of a new ensemble of risks and opportunities as well as a vigorous debate regarding the benefits or shortcomings of either one of the systems.

This paper seeks to explain the differences between the defined benefit and the defined contribution plans. Additionally, it will attempt to trace the evolution of the private pension sector and speculate on the possible future directions that the sector may take.

Defined Benefit Plans

This is a more traditional form of pension plan than the defined contribution and the hybrid plans. In this plan, the employer promises to pay a certain amount of money at retirement as an annual pension; this amount is determined by a formula that factors in the number of years served in the firm and the average size of the salary during the closing years of the retirees employment (Kruse, 1995). Consequently, the amount of money the person gets is not determined by the return to investment on any contribution to a kitty funding the pension; on the contrary, the retirees benefits tend to get back-loaded significantly (Gale et al, 1999).

In the united states, the regulations that govern the defined benefit plans are the 26 U.S.C. § 414(j); this defines a defined benefit plan as a plan that is not a defined contribution plan; where the latter means a plan where each retiree has an individual account.

Historically, these plans have been used by institutions that are designated specifically for the function, by big firms, for civil servants, or by the government agencies (as a benefit for the citizens) (Kruse, 1995). Primarily, the defined benefit plans assumed a final salary plan structure where workers were paid pension calculated as per the number of years in the workplace, multiplied by compensation size at retirement, times accrual rate (specially formulated). The final figure attained was awarded to the retiree either as a single payment or as a monthly allotment.

Today, the formulae used have to take into account the salary, the years of service, the age at retirement among other factors that may differ from plan to plan. Among the most common defined benefit plans in the US is the Final Average Pay (FAP) plan; this applies the average sum of money remunerated in the final year of service in the formula to establish how much benefits the retiree will get.

In the United Kingdom, the law demands that all registered schemes to index their benefits for inflation; this is called the Retail Prices Index (RPI). This is aimed at countering the effects of inevitable inflation that tends to lower the purchasing power of retirees who get a fixed pension every year (that is not as dynamic as inflation). Therefore, the amount of pension is increased every year at the rate of inflation (but limited to 5% inflation in any given year) thus cushioning a pensioner from a devaluation of their pension.

If an employee opts to take early retirement, then this means if he or she were to be paid at the same rate as the one taking the retirement after attaining the age, s/he would receive a larger amount of money in the long run; to prevent this, the payments made to such a retiree are reduced at the rate that will ensure that they get an equal amount in the long run. Generally, the salary of an employee tends to increase with the period of service (due to experience, increased range of responsibilities or expertise) and younger employees tend to be paid less than their older counterparts in the same job situation. In view of this, many firms opt to hire younger staff at lower costs rather than retain older staff; consequently, many defined benefit plans have an early retirement provision to encourage the older spectrum of employees to leave the employment. Some of the incentives offered by the companies for taking an early retirement involve additional or temporary benefits that mature when the pensioner attains a certain age that is usually before the retirement age (about 65 years).

Arguably, the pensioner is less at risk of losing out on pension since the amount given is predetermined and not pegged on the number of contributions made to such a fund; it transfers all the risk of investing retirement funds to the body holding (them) and paying the pensioner. On the other hand, the pensioner cannot reap the maximum benefits of investment of such funds since any surplus is owned by the investing body.

Funding of Defined benefit plans

The money to pay such pensioners has to come from somewhere; defined benefit plans can therefore be categorized as either being funded or unfunded.

Unfunded defined benefit plans

The employer or other pension payee has no asset that is generating money to pay the pensioner; as such, this body pays when they receive the money themselves. In most countries that have one form or the other of a state-sponsored pension scheme, the unfunded model is prevalent; with such agencies paying the pensioner from contributions of the current workforce (for example in form of social security contributions) and directly from public coffers. This model of financing is commonly referred to as Pay-as-you-go (PAYGO). A good example of this model is the social security system in the United States. In some European countries such as Sweden, some private entities also utilize the PAYGO system for their pension schemes.

Funded defined benefit plans

In this case, a fund built from contributions from the employer or sponsoring body (and sometimes even the members of the plan) is invested with the aim of generating income to finance the pension payments to the members. In this case, there is no guarantee that an investment will result in an outcome that will be sufficient to pay the pensions of the member at the required time. Consequently, the contributions which such sponsors are to pay are reviewed regularly after the valuation of the assets and liabilities of the investment and the determination of their ability to meet future payment obligations; as such, if the assets cannot meet the obligations, then the sponsor is forced to increase the number of contributions to cover this deficit (Gale et al. 1999).

It is clear therefore that all the risk emanating from the investment is borne by the sponsor and that the pensioner will receive his/her pension regardless of whether the investment paid off or not. In the same breath, any reward emanating from such investment can only be enjoyed by the sponsor.

Government policies regarding defined benefit pension schemes tend to favor funded systems through giving tax incentives with the aim of ensuring uninterrupted payment of pensioners in their respective countries. However, in order to cushion the pensioners from the effects of a failed investment, the United States government requires private pension plans to remit premiums similar to insurance payments to the Pension Benefit Guaranty Corporation which is the government agency that will move in and meet these obligations in the short term as such a sponsor recovers from the loss of investment.

Shortcomings of defined benefit plans

As mentioned before, many pensioners are opting for defined contribution schemes and converting their defined benefit plans into hybrid plans. This has been driven by real or perceived shortcomings of the traditional DB plans and an attempt to move to more favorable systems.

First of all, the defined benefits plan has an age bias. Consequently, it is more expensive to fund the benefits of an older worker than that of a younger one stemming from the fact that the present benefit value tends to increase modestly during the early parts of employment and then accelerates as the worker comes to the middle sections of the career resulting in a J-shaped accrual pattern. All this stems from the effects of a flat accrual rate and the fact that as employees approach the age of retirement there is a reduction in the period the time for interest discounting reduces (Gale et al. 1999).

Secondly, the defined benefits plan carries an open-ended risk to the sponsor; this risk stems from the fact that the sponsor bears all the risk of investment and the pensioner none at all. Additionally, the sponsor also carries the risk of having a pensioner outlive their retirement income. This factor has been attributed as one of the several that are motivating private firms to change to a defined contribution scheme.

Thirdly, the defined benefit plans have a significantly reduced portability compared to their contribution counterparts. Even though arrangements can be made to have the payment made in one installment, most plans make pension payments in form of an annuity. These three shortcomings render defined benefits plans less suitable for firms whose staff is small and mobile; and more suited for large firms and the civil service (which always has an option of digging into public coffers to cover any deficits in funds available to finance pension payments).

Defined Contribution Plans

As opposed to the defined benefits plans, in defined contribution plans, the contributions are made directly into the workers individual account. The funds in the account are then invested in conventional sectors such as the stock market and the returns of the venture are credited to such account (Gale et al. 1999; Papke, 1999). When the employee attains retirement age, the funds in the account are used to finance the pension payment. The contributions to the fund are made either by the employee through salary deductions; or by the employer as part of the employment package.

There has been a radical shift in the recent past from defined benefits to defined contribution plans in the recent past; in many countries, the latter has attained a dominant position as the plan of choice in many private pension schemes. In the United States, many firms are opting to avoid signing their workforce into DB schemes with the aim of reducing their expenditure on worker benefits and transferring the risk of investing such funds to the worker.

The defined contribution plans have solved the issue of lack of portability raised with the defined benefits contemporary. As defined by regulation, the two plans have a similar amount of portability; however, for all practical purposes, it is much easier to compute the liability of the member without having to procure the services of an actuary in the defined contribution plan.

In a defined contribution plan, the individual (that is the employee waiting for retirement) assumes all the risk of investment; such also benefits from the rewards of such a venture. Upon attainment of the retirement age, most countries require a retiree to purchase an annuity; however, this is not mandatory and the pensioner thus bears an additional risk of outliving his/her assets. In order to mitigate some of this risk, some countries for example the United Kingdom require a pensioner to use a large portion of the money to purchase an annuity.

A worker who is not directly involved in financial markets may not have the know-how on the best investment at the time; giving complete freedom to such an employee to make under-informed decisions would be putting such funds into an unreasonable amount of risk. Under normal circumstances, the employee/sponsor retains a significant amount of power in determining how such funds will be invested; and in selecting the best financial management provider to carry out the task in the best interest of the employee.

Examples of defined benefit plans in the United States include Individual retirement accounts and 401(k) plans (Papke, 1999).

Hybrid Pension Schemes

These are designed with the aim of reaping the benefits of both the defined benefits and the defined contributions plans; and as vehicles to transition pensioners in the former to the latter. A good example of this is the Cash balance plan and Target benefit plans (Campbell, 1996).

These plans have been shown to increase the portability of the defined benefits plan due to easier computation of the benefit value; however, such calculations still require the services of an actuary.

Trends in Pension Schemes

As mentioned before, there has been a major shift in the outlook of the retirement benefits sector; in the last approximately quarter of a century, there has been a sustained change from defined benefits to defined contribution plans (Gale et al 1999; Gustman and Steinmeier, 1992). Additionally, even within the latter, there has been a sustained preference for 401(k) plans. There also has been a change from the traditional DB plans to hybrid plans (Papke, 1999).

These trends can be attributed to changes in the economy including tax regimes, regulations, increased mobility of workers, financial considerations among others (Bernheim and Garret, 1995). With an increasingly volatile economy, many firms are seeking to minimize the amount of risk they enter into at any one time; the shift from DB to DC has offered these firms a perfect opportunity to do so by transferring this risk to the employee.

Additionally, the financial situation has led to reduced job security in almost all economies; the increased portability of DC compared to DB makes it, therefore, more attractive to the employees in general. In the future, this trend is therefore likely to continue.

References

1. Bernheim B. Douglas and Daniel M. Garret (1995): The determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households: Mimeo, Stanford University
2. Campbell S. (1996): Hybrid Retirement Plans: The Retirement income System continues to Evolve: EBRI Special Report and Issue Brief No. 171. Washington D. C
3. Gale W. G., Leslie E. P., VanDerhei J. (1999): Understanding the Shift From Defined Benefit To Defined Contribution Plans: Paper Submitted At The ERISA After 25: A Framework For Evaluating Pension Schemes. 1999.
4. Gustman A. L and Steinmeier T. L. (1992): The Stampede towards Defined Contribution plans: Fact or Fiction? Industrial Relations 31(2): 361-69
5. Kruse D. L (1995): Pension Substitution In The 1980s: Why The Shift Towards Defined Contribution Plans? Industrial Relations 34(2): 218-241
6. Papke L. E. (1999): Are 401(k) Plans Replacing Other Employer-Provided Pensions? Evidence from Panel Data: Journal of Human Resources 34(2): 346-368

Introduction

Mrs. DMaggio owns two sets of supermarkets with the same demography, under the name Dmetto. However one of the supermarkets Dmetto Main and is in a developed but residential small town, while the other one Dmetto Supper is in a developing and agricultural location. SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is an important strategy to identify the position of the business and the possible options for improvement and analysis of how to act on the information, (SAMHSA, 2010). SWOT analysis focuses on the contexts that affect a business internally (Strengths and Weaknesses) and externally (opportunities and threats), (Valentin, 2005)

Though the two supermarkets share the same business model and sell to the same demographic, their location creates a difference in the results and expectations. I will put these differences in a SWOT analysis below.

Strengths

Dmetto Main is in a developed town has the advantages that come with a developed town, strong communication lines which makes it possible for deliveries of supplies to be requested over the telephone or online. Being part of Dmetto Super has its advantages. Dmetto is able to provide fresh vegetables and fruits from the same suppliers as the sister supermarket. Buying in bulk comes with the advantages of the economies of scale in buying. Dmetto has the advantage of fresh farm produce at a more affordable cost than other supermarkets in this location (SAHMSA, 2010). The advantage that Dmetto Supper has is the availability of fresh vegetables and affordable labor from the young population. Dmetto Supper has the advantage of exclusivity being the only supermarket in this growing town.

Weaknesses

Dmetto Main has a problem in getting affordable labor. With ready competition, it is not possible to add this cost to the products since this may push the customers away. The cost has therefore to be absorbed reducing the supermarkets profitability. This leads to an increase in cost in this particular supermarket. Again there are two other supermarkets offering almost similar services. Dmetto Supper has poor infrastructure. The source of energy is unreliable. Means of communication are limited as the telephone lines are not very clear. As such sales are only done through direct contact. Supplies are sometimes late to arrive especially when the communication lines are down. This affects the business as customers will complain of the restaurants unreliability.

Opportunity

Dmetto Main is in a developed area with opportunities of providing online services to clients. The idea of loyalty points is catching up and Dmetto is planning to introduce the loyalty cards for the customers. This will be available in both supermarkets. Dmetto Supper has prospective growth opportunities. Being located in a developing area and having the exclusivity advantage, there are high prospects of successful expansion. The population is likely to increase, infrastructure will improve and is the only supermarket in the area it will be way ahead of possible new entrants.

Threats

Dmetto Main is under competition threat from several other supermarkets that are present in this particular location. Dmetto Supper has a threat of losing customers as a result of late deliveries caused by the unavailability of effective telecommunication lines. These customers are working in big towns and will do their shopping within these towns on their way from work.

Works Cited

SAHMSA. Instructions for conducting a SWOT analysis. 2010. 

Valentin, Erhard. A way with SWOT Analysis: Use Defensive/Offensive Evaluation Instead 2005. 

Today the global economy is facing the worst financial crisis since the great depression in 1930s. The crisis has ruined markets across the world starting in the US from late 2007. It resulted from the failure of huge firms to manage risks and was aggravated by relaxed regulations. The housing market was the epicenter. Prices of homes continuously rose from mid 1990s to the year 2006. People thought that the prices would always be rising. Sub prime borrowers (borrowers with poor credit history or who have no proof of steady incomes) drastically increased accelerating the rise in prices. Investors became very innovative introducing new products such as the Adjustable Rate Mortgages (ARMs) which had low rates, no down payments and even the provision to postpone interests and add it to principal amounts. The rise in price was however untenable. In 2007, the bubble finally burst. Sudden uncertainty in house prices made lenders cut on lending. Highly geared banks were severely vulnerable to plummeting asset prices yet they had very low capital base. This resulted to a credit crunch as mistrust among financial institution and later extending to other business entities became apparent. The hampered flow of credit sparked an economic slowdown as firms could no longer expand businesses. Incomes plummeted as unemployment rose spreading the effects globally through export markets and falls in asset prices. This paper discusses the financial meltdown in light of various financial principles and benchmarks which govern finance. It brings out the economic and financial failures which fueled the crisis. It incorporates the case of; and identifies possible parties which are at fault.

As mentioned above the key players in the financial turmoil are finance related institutions. This is because the housing market is heavily financed though debt. The continued rise in the prices of houses made the financial institutions gain ungrounded confidence in the housing markets making them direct a larger amount of lending funds to the housing sector. Therefore the burst in housing prices first impacted on commercial funds, mortgage companies, investment banks, insurance companies, hedges funds and pension funds. The financial products affected were mortgage loans, asset backed securities (ABS), and Mortgage backed securities (MBS) and Collaterised Debt Obligations (CDO) as well as Credit-default swaps (CDS) which is a form of insurance against a company defaulting on its debts.

Both prime and sub-prime mortgages facilities were used to extend credit. Prime mortgage loans are the normal home ownership loans extended to potential home owners based on their assessed ability to repay. Full and comprehensive assessments are performed on the prospective home owners to be able to fully substantiate their credibility to access certain amounts of credit mainly based on their level of incomes. The credit histories of the eligible borrowers are also very strong. Due to the perceived lesser risk of lending to this assessed individuals, the interest rates charged by the financiers is the competitive market rate which is usually very low especially in capital rich countries such as the US. Sub prime loans are thus the opposite of prime loans. They are mortgages extended to borrowers with very weak credit histories and low incomes. This is known to increase the risk of defaulting. Therefore the sub prime mortgage loan is usually offered at a higher rate of interest than the prime mortgage to take care of the higher risk. This being the case the sub prime borrowers pay more for the loans than the prime borrowers yet they are the people who are more likely to default in payments. The preference of this form of financing in the US became common in the 1990s (Junior Achievement, 2008, Par4).

The bloated demand for houses caused by the increased access to credit drove up the housing prices to untenable levels. The prices later fell. The fall in prices lead to the imposition of tough standards for access to loans due to increased default rates. Many borrowers found it hard to refinance. Defaults and foreclosures steadily increased causing major losses for those holding mortgage backed securities (Junior Achievement, 2008, Par5).

A specific form of sub prime financing which was the first to backfire is the adjustable-rate mortgages (ARMs). ARMs have several characteristics. They have a variable rate of interest. For the first few months, the loan attracts a lower rate of interest usually several points lower than the prime mortgage rates. These low introductory rates are very enticing to the vast majority of borrowers. What is often forgotten is that the rates later adjust upwards above the prime rates and even then, they keep on varying (Blogger, 2007, Par 2).

The monthly repayments of sub prime mortgages are largely unlimited and even in instances where there exist some limits; they are way too high to accomplish any meaningful form of regulation. This means that the monthly repayment can potentially increase to unmanageable levels depending on the payout of factors under considerations in determining them. This is a potentially dangerous aspect of the sub prime loans (Blogger, 2007, Par 3).

Usually not much information on the borrowers income is required. This is probably the most irrational and unrealistic element of the sub prime mortgages. The requirement of clear documentation of incomes however small is known all over the world to be the most significant reference point in determining the credit worthiness of any borrower.

The sub prime mortgages attract significant prepayment penalties especially after the introduction period. The heavy penalties often serve to increase the repayment burden for the borrowers.

The rise in demand for both new and existing houses fueled by the factors led to a sharp rise in housing prices in response o the basic laws of supply and demand. Between the year 1997 and 2006, house prices rose by an unprecedented 124%. Sub prime loans at the time grew from 9% to above 20% portion of the mortgage finance market. Again, the irrational optimism in assessing future trends in housing markets accelerated the lending spree. Nobody anticipated a scenario where interest rates could rise or where housing prices would fall (Jon, 2008, Par4).

Banks used the opportunity to borrow money from all available sources to build securitization. They stopped relying on saved monies as security for loans given out. They continued borrowing from each other and selling the borrowed funds as securities. Investment banks saw the opportunities in the mortgage industry. The intention was to was to convert them into securities and resell them. The worst mistake came when the financial institutions rub out of customers to loan. This is because they turned to lower income groups which were previously outside the loan bracket.

The drop in prices meant some homes were worth less than what the owners owed the banks. This being the case, a high number of borrowers had to loose their homes while others even opted to just walk away to avoid the high repayment for their lowly valued houses.

According to the world economic forum, several forms of financial risks result from the crisis. Systemic financial risks have become a reality. This is risk resulting from sharp falls in asset values and economic activity. It is the spread out instability in the entire financial system affecting the real economy. Food security has also been compromised by the high inflation in for many staple foods with food riots emerging (World Economic Forum 2008 par6).

Also supply chains have increasingly become vulnerable. Disruptions especially in external supplies are becoming more regular increasing the risks of doing business. Still, the need to use safe and environmentally friendly energy has brought further uncertainties in the business world. Pressure is mounting towards reduction in greenhouse gases from energy use which is expensive (World Economic Forum 2008 par7).

A combination of these risks generally presents a volatile global economic environment which is a major impediment to international business and flow of investments. Much caution has to be applied by investors across the globe. They will only invest in countries which they think have minimal financial and political risks in a bid to avert losses. The implication of this is a slowed recovery process as more will be needed to instill confidence among investors and lenders on the viability and future prospects of businesses.

The effect of the crisis on international trade and finance has been great. Investors have developed an acute less of confidence. Confidence loss within the investing community caused a drastic fall in the stock prices all over the world. Analysts estimate that the losses made by financial firms are in the range of USD 2.8 trillion.

In mitigating the effect of the crisis, governments led by the US have spent around USD trillion of tax payers money to help shore up financial institutions. The stimulus package was structured to comprehensively deal with the various sectors affected by the crisis. It comprised of bailouts, tax cuts as well investment in infrastructure to stimulate the economy. The effect of the stimulus plans has been enormous according to analysts. Below is an illustration of the effect of the stimulus package on the recovery process.

AIG insurance company is one company which had to be bailed out by the government US government. It is the biggest insurance company in the world. Fundamentally, the basic businesses practiced by the company are sound. Problems came with the accumulation of misplaced credit default swaps. Credit swaps are similar to insurance policies. It is used by debt holders as in speculation of any defaults in repayments. It protects the defaulter from the lender from defaulting a case which can result in bankruptcy or complete disorganization of financial plans. Through a subsidiary, AIG offered protection to the tune of $447 billion in the form of CDS. However the choice of borrowers to protect was flawed. A large composition of the clients covered was those who potentially could not pay back the loans (A world to win, 2006, Par 5)

The insurance company also offered insurance in the in the form of asset backed securities. Pools of sub-prime mortgages, Alt-A mortgages, collaterized loans and prime mortgages were insured. This made the company make enormous profits. The collapse of the housing markets led to the plummeting of housing prices. Foreclosures started rising. The supply forces made the insured pools drastically fall in value making the company loose huge values. Insurance claims in the form of CDS took a toll on the companys finances. The effect was so huge that by the end of 2007 the company was feeling the pressure to fulfill obligations take a toll on the stability of the company.

It was later discovered that the company was improperly valuing its CDO liabilities and other related CDS obligations..Auditors discovered that the losses resulting from undervaluation were in the range of $20 billion. Accounting maneuvers had managed to hide these malpractices. The company posted $5.3 billion in the start of 2008 it had insured in the form of CDS contracts. This had to rise by $4.4 billions by April the same year. The onset of rating agencies hiked the value even higher by 14$ billion (Brookings, 2008, Par4).

The problem was inherent within the system. The valuation of CDOs, Asset backed securities and CDS is a daunting task. Valuing a simple CDO can take a super computer 48 hours. This necessitated the use of indexes to value them. It turned out that the system used caused massive undervaluation shih gave the company undeserved liabilities. Cash flow issues emerged. The obligations required higher levels of cash flows than inflows. This means that the company was running out of cash.

Faced with eminent collapse due to the overwhelming claims, the company had to seek help from the government. An $85 billion deal was reached at between the government and the company. This depicts the enormity of the problem. The argument was that the insurance company was too big to fail. Failure would only mean a complete restructuring of the entire financial system an exercise which would introduce excess uncertainties and a possibility of enormous losses both in monetary terms and in terms of lost employment opportunities. The bailout gave the government a 79.9% equity holding in the company. The loan would yield an interest rate of 8.5%. Security is by the firms assets as well as the profitable insurance business (World Economic Forum 2008, Par4).

As can be seen financial management calls for extreme caution. Thorough analysis has to be carried out to ensure the plausibility of lending policies in managing risks. Accumulated Improper valuations can potentially result in the outburst of a hard reality with the potential to take down the largest and strongest of financial firms.

It is clear that the government is set to recover a large portion of the money used to bailout the firms. The recovery proves is proving speedy and based on a much firm foundation than before.

References

A world to win, 2006. Global recession  local impact. [Online] Web.

Brookings, 2008. The Origins of the Financial Crisis. [Online] Web.

Junior Achievement, 2008.Understanding the Financial Crisis Origin and Impact. Web.

Jon S., 2008. Financial crisis: Reaction from around the world. Imperial Online [Internet]. Web.

Martin N., Robert E. and Matthew S., 2003. The Origins of the Financial Crisis. BROOKINGS [Online] Web.

Peter S., 2008.European reactions to the financial crisis. Covering their tracks and distancing themselves from the US. [Online]. Web.

World Economic Forum 2008: Highest levels of political and economic uncertainty for a decade [Online] Web.

World Economic Forum, 2008 Global Risks. A Global Risk Network Report. [Online] Web.

Purpose Statement

The purpose of this quantitative research paper is to develop the basis of a statistical model that can predict the relationship between the dependent variable  US Currency Exchange Rate against British Pound and three independent variables including US-UK Monthly Trade Balance, US Monthly Inflation Rate, and US Monthly Discount Rate. Therefore, the correlation between variables can be stated as the dependent variable US Currency Exchange Rate against British Pound and is determined by independent variables including US-UK Monthly Trade Balance, US Monthly Inflation Rate, and US Monthly Discount Rate.

The most important relationship is between US Currency Exchange Rate against British Pound and US-UK Monthly Trade Balance because both countries are major trade partners and the trade balance between both countries has direct implications for the level of the cross-currency exchange rate. Although, other variables also have a direct impact on the exchange rate levels, however, for the specific study of the cross-currency exchange rate the US-UK Monthly Trade Balance can be considered as the primary independent variable.

Definitions of Variables

US Currency Exchange Rate against British Pound

In simple terms, it is the price of US Dollars in terms of the British Pound. The dependent variable identified for this report can therefore be defined as the value of US Dollars that can be bought with one British Pound.

US-UK Monthly Trade Balance

This is the net amount of the exports and imports of the US to the UK. This is obtained by deducting the value of imports from exports (Koo and Kennedy). If a country has a trade deficit with its trading partners then it implies that it has to borrow to make payments in foreign currency. The demand for foreign currency will have a negative impact on the value of local currency until the balance of payments is achieved (Karl)

US Monthly Inflation Rate

A high level of inflation rate in the country hurts the exchange rate of the local currency and vice versa. This is due to the reason that rising inflation leads to currency losing its value as more local currency is required to make payments for the same level of goods and services (Dornbusch).

US Monthly Discount Rate

The interest rates prevailing in the economy have a direct relationship with the currency exchange rate. The Federal Reserve can adjust the level of interest rate to attract more investment into securities from other countries. This would create a demand for US Dollars and thus, push its value upwards and vice versa.

Data Description

Source: (Federal Reserve; InflationData.com; OANDA; US Census Bureau).

The data of both dependent and independent variables is presented in the above table for period from January 2007 to June 2011. The data has been obtained from different reliable sources such as Federal Reserve Bank and US Census Bureau website and other database portals.

Works Cited

Dornbusch, Rüdiger. Exchange rates and inflation. Massacheusts: MIT Press, 1996.

Federal Reserve. Selected Interest Rates (Daily)  H.15. 2011. Web.

InflationData.com. Historical Inflation. 2011. Web.

Karl, Case E. Principles Of Economics. New Dehli: Pearson Education India, 2007.

Koo, Won W. and P. Lynn Kennedy. International trade and agriculture. New Yoirk: John Wiley and Sons, 2005.

OANDA. Average Exchange Rates. 2011. Web.

US Census Bureau. Trade in Goods with United Kingdom. 2011. Web.