Marketing Assignment Help Study Question??
I have to prepare a five minutes presentation. the topic is “using internet and other sources. explain whether subprime mortgage market crisis includes a speculative bubble crash?
Answer the question frame is:
Yes, the subprime mortgage crisis does include a speculative bubble crash. During the time of the crash the total subprime mortgage market was somewhere in the around $1 trillion .Added to this the securitized papers that referred to these mortgages we could form a few more billion dollars.
The entire crisis can be explained from the perspective of the Black-Schools equations gives us a very logical and reasonable way to understand the entire problem.
Anyone who has seen the crisis will understand that it was in fact that the actual economy of commodities and businesses was being replaced through highly complex financial instruments also known as derivatives. Interestingly derivatives were not goods neither money. They were truly a concept of investments in investments, as in bets about bets. Derivatives fantastically helped to create a growing global economy, however on the down side they created the evil of turbulent markets, the unfortunate credit crunch, and of course yes the complete collapse of the banking system leading to the economic slump.
The equation itself was not the origin of the problem. It had its limitations being clearly stated. It helped to provide important industry formulae to fathom the approximate financial value of a financial derivative. Thus the instrument derivatives can be traded before they even mature. However the said formula wavers if the market conditions were not correctly found out before the application of the formula. The biggest problem was its potential for abuse. It gave a free hand to derivatives to become commodities that could be traded in their own way. It caught the attention of being a magic Midas Formula that could turn everything turn to gold .Black-Schools helped to promote massive economic growth. Around the year 2007, the financial system of the world was trading with derivatives which was valued to be around at 1 quadrillion dollars per year. This was about 10 times the worth ,even after adjusting for inflation, of almost all of the products made by the entire lot of world’s manufacturing industries ,spread over the last century. The downside was pretty scary, it led to the the invention of increasingly more complex instruments of finance whose value and risk were becoming increasingly opaque. Thus in order to understand the opacity companies started hiring mathematically talented analysts to develop similar formulas, helping them understand the risk and reward associated with these instruments. However, rather ominously, they somehow forgot to ask the most important of all questions that is how reliable the answers can be if the entire market conditions changed.
The popularity of the instruments was so huge almost all important financial institutions were soon found to be trading in amazingly complex derivatives like credit default swaps. Having being priced they became assets . Thus they could be used as security for other purchases. With everything starting to get more and more complex, the models used to determine risk and value further started getting deviated from reality. Somewhere beneath all these was actual real property, and thus the markets with all alacrity believed that value of property will keep on rising for ever, making these investments risk-free. Thus, this was the fatal error.
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