Professional Documents
Culture Documents
Solution:
Segmented markets: -
Examples:
Age
Gender
Price
Interests
Market segmenting is dividing the market into groups of individual markets with
similar wants or needs that a company divides the market into distinct groups
who have distinct needs, wants, behavior or who might want different products &
services. Broadly, markets can be divided according to a number of general
criteria, such as by industry or public versus private although industrial market
segmentation is quite different from consumer market segmentation, both have
similar objectives. All of these methods of segmentation are merely proxies for
true segments, which don't always fit into convenient demographic boundaries.
Lack of liquidity:-
Business people and venture capitalists, on the other hand, caution that excess
liquidity can facilitate overspending or adversely affect the entrepreneur’s
motivation to perform. The idea that more liquidity can have a negative effect on
performance can be traced back to Plato, who in the Republic wrote that ”wealth
is the parent of luxury and indolence.
“Lack of liquidity in the market and absence of buyers and sellers have led
foreign funds to enter off-market block deals, mainly in first tier stocks,” says an
equity dealer at a larger brokerage house. He said that the launch of a leverage
product could help generate volumes and enable price discovery, which were
essential to attract offshore investor to the ready board. Several analysts
contend that the fast increasing off-market transactions carried an inherent risk
as those were not guaranteed by the KSE, like the normal trade on the ready
market.
Major foreign institutions and funds, which are around a dozen in number operate
through financially strong brokerages that are backed by reputed parties.
Analysts admit that ‘block deals’ though a major support to stabilize the market
that is in a bad bearish mood, was also a ‘double-edged’ sword. They observe
that in a situation where ‘crisis of confidence’ was created, the foreigner could
disappear as quickly as he had appeared, ditching the stocks in ‘block deals’ at
throw-away prices.
That danger lurks in foreigners’ control of bigger share of the ‘free-float’. And so,
theoretically, if the offshore funds were to dump large blocks of heavy-weight
stocks, it would sink all of the market. But many market participants argue that
foreign investors would act like a panic-prone herd only in case of ‘extra-ordinary
events’.
The exchange rate is what is used to convert one monetary unit to another.
Because of the many different currencies in circulation, having an exchange rate
among them is necessary. However, each country fixes its own exchange rate
value, and sometimes some countries fix their exchange rate value above the
market rate of their currency. In addition, they may also impose restrictions on
exchange rate transactions. The most commonly employed exchange rate
restriction is that individuals be required to obtain prior approval from the
government before engaging in transactions involving foreign currency. Yet,
when countries set high exchange rate controls, they can negatively impact both
their countries and other countries. In fact, they usually do.
First of all, at the high exchange rate, the country's goods will be extremely
expensive to foreigners so because of the expensive price, it will sell fewer goods
overseas, meaning that its exports will drop. Foreigners will purchase the goods
elsewhere for a cheaper price so the country with the high exchange rate will
have fewer exports and, consequently, less income flowing into the country. As a
result of this, the low level of exports, it will become much more difficult for the
country's domestic residents and citizens to produce the foreign currency needed
to purchase imports. Therefore, exports and imports will both suffer, affecting not
only the one country's economy but other countries' economies too.
Moreover, not only do exchange rate controls affect exports and imports, they
reduce trade and lead to black market currency exchanges. By stunting free
trade, it reduces the ability of countries to specialize in those goods that they can
produce at the lowest opportunity cost and then trade to other countries. This, in
turn, causes goods to become less affordable due to the inflated prices. And all of
this will lead to black market exchanges. In fact, a large black market premium is
a prime indicator that a country's exchange rate policy is set too high.
The growth and liberalization of financial markets in industrial countries over the
past three decades provides developing countries unprecedented access to
international capital markets, and exposes them to sometimes dramatic and
sudden swings in capital flows. The 1990s witnessed a number of economic crises
in developing countries that were accompanied by (if not precipitated by)
outflows of international capital. This recent experience with capital flow
reversals can, at least in part, explain the desire by developing countries to
decrease their dependence on international capital by accumulating foreign
reserves.
Lack of information: -
Knowledge is power. This is well known fact and knowledge comes from
information. Information can be derived from the collection of data. But in most
of the cases where portfolio diversification is not taking place, there is lack of
information, i.e. either data is not easily accessible or not available. In such case
this becomes a barrier for the diversification of portfolio.
Common Language: -
Exchange rate risk is simply the risk to which investors are exposed because
changes in exchange rates may have an effect on investments that they have
made. The most obvious exchange rate risks are those that result from buying
foreign currency denominated investments. The commonest of these are
shares listed in another country or foreign currency bonds.
However the two risks can often hedge each other. Suppose an investor in the
US buys shares in a British company. There will be a risk that the value of the
investment in dollar terms may decline if the pound falls against the dollar.
Example: -
Now suppose that a British company makes a substantial proportion of its sales
in the US and most of the rest of its sales are dollar denominated exports. This
situation is not uncommon in sectors like pharmaceuticals or IT, or any which
sell into truly global product markets.
In these circumstances a fall in the value of sterling is likely to reduce the value
of the shares of the British company in dollar terms, for a given share price in
sterling terms. However if the pound depreciates, the share price is likely to
rise as the value in pounds of its dollar denominated sales rises.
The end result is that the two types of exchange rate risk neatly hedge each
other.
This type of offsetting of risks can also be important when dealing with
investments in emerging markets (especially small emerging markets) that
often combine a volatile currency with high dependence on imports and
exports. Small economies tend to be particularly open to the global economy
because an economy that lacks technology must import many things or do
without, and because an economy that produces a small range of goods or
service in quantities that far exceed domestic demand (at reasonable prices),
must depend on exporting them.
Measuring and managing exchange rate risk exposure is important for reducing
a firm’s vulnerabilities from major exchange rate movements, which could
adversely affect profit margins and the value of assets.