In his book, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, Bookstaber talks about financial risk management (Bradstreet, 2006). He analyses the life-cycle of financial crisis and complexities, which are involved. This is because that an additional business environment has been conditioned just like commodities (Bookstaber, 2011). The book indicates that most stakeholders in the investment market are forced to move up-market. They do this by establishing relationship-type enterprises such as investment banking.It is seen that the financial innovation has far reaching consequences. The innovations enhance market operations, but they come with unforeseen risks, which are difficult to solve.
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There are several unseen challenges in financial market operation.However, the people may have a big conviction in the capability of the marketplace to allocate resources.This belief is tied on the assumptions that the market structure and efficiency can work well.Real markets in a normal business environment operate differently.The efficiency calls for free flow of information based on innovations in financial instruments and their use.First, complex structures that are strongly put can generate challenges in the financial market, hence reducing the essence of market risk management.The book,A Demon of Our Own Design illustrates an episode of human’s attempt to control market risk and what it has shaped. In the process of illustrating what has happened in the market, Bookstaber explains what the future will look like in the global capitalist market place.
The big question posed by this insightful book is that why the financial crisis persist despite the continuous innovation in both financial sector and many other areas. The other question is that what makes the market to be so much volatile and prone to crisis? The benefits of technology have been achieved through a high price. This price includes the complexities, which come up with conditional and nonlinear benefits. It is noted that when there is a market shake up, it is difficult to predict how technology will respond to it. The economic difficulty is that one market can have a propensity to affect the other market condition. This concept has resulted in stiff coupling. It is noted that tight coupling result in higher market business liquidity and enhance the collateral of the securities. Tight market coupling together with complexity is a remedy for normal market accidents (Bradstreet, 2006).
Key assumptions of the article
v The article assumes that financial risk management is an illusive subject, which involves different challenge.
v There are several unseen challenges in financial market operation
v Financial innovation and instruments do little to solve risk management problems.
v Market players engage in crazy activities all the time, yet the competent market condition presumes that investors have all information and make decisions so fast and rationally (Bradstreet, 2006)
Validity of these assumptions
The assumption made in this article is valid since the same sentiments and explanation raised have been supported by other financial measurement authors. The authors underscore the dynamic nature of financial instrument in risk management.
Market challenges are normally caused by economic situation or natural disasters (Bradstreet, 2006). The instruments of the market environment can be distorted by a small financial ripple. The strongest man tries to follow the ideal, thereby, increasing complexity and more strong coupling the activities of the market condition. This leads to several frequent crises in the market. There are attempts to guarantee safety criteria, to put on rules and controls (Bradstreet, 2006). These rules increase more complexity of the market situation and increase accidents more frequent. It is noted that when a problem occurs in the future it is guaranteed that the main aim is normally directed improperly. Financial risks become higher since the market situation always assumes a mathematical rationality, which do not really show the actual state (Christoffersen, 2011). Market players engage in acrazy activities all the time, yet the competent market condition presumes that investors have all information and make decisions so fast and rationally (Bradstreet, 2006). The global market scenario is not well explained by the emerging innovative instruments.
Economic growth and development remain one of the core responsibilities of all governments. In creating opportunities for many people across the globe, the free trade is critical since it increases sales, profit margins, and market share for companies. Companies across the globe stand a better chance through entering a new market sector. In international trade, competition and ability to attract foreign direct investment based on cost of capital are critical and important. However, in the quest to make a country reap from comparative advantage, a number of economic issues must be put in place. These issues include, interest rate, cost of capital, factor cost among other economic variables. This calls for a free market economy, which eliminates many trade barriers and increase competitions among firms.
There is a heated debate on whether the free market is the most efficient way to increase economic growth and reduce financial risk. In this interesting and complex discourse of free market economy, several of financial issues arise. To start with, capitalism is the foundation upon which a business prosperity rests. The free market is a major breakthrough in the global trade aspect. It is critical to note that free market policies have placed a level of competition in the current open market that promotes continual innovation and leads to better products. In addition, better-paying jobs, new markets, increased savings, and investment. Free market helps to spread the value of financial freedom, reinforce the rule of law, and encourage economic development business. The national debate over trade-related issues too often ignores these important benefits.Information technology plays a critical role in business growth and development. The adoption and use of technology in businesses have become more ubiquitous over the last decade as business settings become increasingly transformed. The advances in technology and its subsequent incorporation in these firms is grounded in the framework of transforming business into world class companies that are in tandem with the fast changing technological world (Bradstreet, 2006). The reasons for this are not particularly hard to get given the myriad of benefits that have been associated with the adoption of such technologies. Technological development and information innovation have come with several improvements in the running of the business enterprises in the global market. The advent of computer and computer software has further precipitated the efficient running and development process of businesses.
Countries that adopt and practice free trade strategies create their own economic dynamism by enhancing freedom, opportunity, and prosperity that benefits their citizen. In recent times, America has demonstrated the power of free trade principles. Free trade helps in breaking the cycle of poverty and goes a long way. It can enable even the most impoverished countries to start creating their own economic prosperity. Nevertheless, despite all the facts, to the contrary, the free trade critics claim that employment opportunities created by globalization are often less sustaining than the livelihoods eliminated by it. This claim assumes that some kind of agrarian utopia formerly existed in less developed countries and towards this; their citizens may not gain the benefits of economic development. The Industrial Revolution has set a firm ground for free market and increased opportunity to all economic levels globally. In addition, free trade has laid a stage for social and democratic progress of a magnitude that would have been impossible earlier. Although, history stipulates that this current era of free trade and market globalization may be facing challenges, solutions once again will depend on the power of innovation and technological development.
There is a heated debate on whether free trade is the most effective way to increase economic growth and global prosperity. In this interesting and complex discourse of free trade, a number of economic issues arise. To start with, international trade is the foundation upon which a country’s prosperity rests. The free market is a major breakthrough in the aspect international trade. It is critical to note that free trade policies have placed a level of competition in the current open market that promotes continual innovation and leads to better products (Dunkley, 2004). In addition, better-paying jobs, new markets, increased savings and investment. Moreover, the advantages of free trade extend well beyond households. Free trade helps to spread the value of freedom, reinforce the rule of law, and foster economic development in both poor and rich countries (Maddison, 2001). The national debate over trade-related issues too often ignores these important benefits.
In conclusion, risk management is very important in business management. However, there are several problems, which are encountered. In this regard, people should be fully informed about the financial market.
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