Explain how prices of u.s. money market securities

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As a personal financial planner, one of your tasks is to prescribe the allocation of available funds across money market securities, bonds, and mortgages. Your philosophy is to take positions in securities that will benefit most from your forecasted changes in economic conditions. As a result of recent event in Japan, you expect that in the next month Japanese investors will reduce their investment in U.S. Treasury securities and shift most of their funds into Japanese securities. You expect that this shift in funds will persist for at least a few years. You believe this single event will have a major effect on economic factors in the U.S. such as interest rates, exchange rates, and economic growth in the next month. Because the prices of securities in the U.S. are affected by these economic factors, you must determine how to revise your prescribed allocations of funds across securities.

Assume that day-to-day exchange rate movements are dictated primarily by the flow of funds between countries, especially international bond and money market transactions. How will exchange rates be affected by possible changes in the international flow of funds that are caused by the event?

Explain how prices of U.S. money market securities, bonds, and mortgages will be affected.

Assess the impact on security prices. Would prices of risky securities be affected more or less than those of risk-free securities with a similar maturity? Why?

 

Reference no: EM13298349

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