Research Into The Uncertainty Within The Financial Markets Finance Essay

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The financial market environment in an economy is of strategic relevance in most of the corporate decision-making. Most of the developed and even emerging economies have market-based financial system. Instability within the stock market brings uncertainty in the financial system that adds complexity to corporate decision-making.

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The major cause of uncertainty within the financial market environment is change in structure, regulations, and market sentiments. The financial crisis 2007 further increased the uncertainty within the market and resulted in high lending rates and crisis of confidence. This uncertainty influences the investment, financing and other financial decisions of the corporate. It is argued that the managers might deploy some extra risk factors to estimate the cost of capital. Furthermore, the complexity in decision-making is briefly explained with the impact of giant mining BHP Billiton bid to take-over the fertilizer company Potash Corporation of Canada. The paper also highlights the acquisition plan of Kraft to take-over Cadbury in early 2010 influence its stock performance. Furthermore, the paper illustrates the principles to manage uncertainty and reduce complexity in decision-making.

Introduction

Uncertainty can be regarded as a situation where both future and probability of possible future is unknown whereas, risk is a state of uncertainty where the future is unknown but the probability of possible future outcome is known. However, the distinction does not have much relevance today as decisions are made on the basis of the estimates of possible probabilities. Though, it might be relevant in understanding the essay effectively. The future is always unpredictable or uncertain that adds complexity to the decision making. However, some academicians regard uncertainty as essence of business environment. “Without the element of uncertainty, the bringing off of even, the greatest business triumph would be dull, routine, and eminently unsatisfying.”James Paul Getty (https://strategicbusinessteam.com/famous-small-business-quotes/j-paul-gettys-quotes-famous-business-quotes-from-oil-billionaire-jean-paul-getty/)

Uncertainty within the financial markets

The financial market environment is the nuclei around which most of the corporate decisions revolve as it is either directly or indirectly associated with the profitability of the business. The financial market comprises of banks, building societies, stock market, money market, foreign exchange market and derivative market. Source: Oxford review of economic policy, vol.20, No. 4 The corporate are dependent on the financial market to finance their business either through equity or debt. The US financial market has a large amount of bank loans outstanding, but there is also a large stock market and bond market. The United States is also said to have a market-based financial system. The stock market value is also high in United Kingdom and Asia, although the bank loans are of greater relevance than the bond market in these countries (Brealey.A.R, Myers. C.S, & Allen. F, p.931). Currently, the global financial market reciprocates variations in the short-run along with the prominent changes in the long-run.

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