Mathematics of Finance – 2

This is part II of the article Mathematics of finance – I. Please read the first part before proceeding with this one

However, the same thing goes on in the stock markets.
We hardly notice anything like a 1% or 1.5% daily up or down price movements. But when the debacle comes, it takes along everything.

1929, was the year when Americans tasted the first setback in stock market. Individuals went bankrupt, huge job losses, economy went in deep recession – all this happened in one single day.

1987, it was the London stock exchange that crashed. More than 16 million shares were sold on London Stock exchange.

1997-98, Russian Government defaulted on its government backed bonds. South American countries like Argentina, Brazil were considered the emerging markets of the world. The default on government backed bonds from these countries lead to the collapse of the so called emerging markets, which caused a global setback. All these things happened in one single day. Finally we saw the internet bubble burst.

Investors lost their shirts, and their pants too. Companies went in losses, resulting in huge job cuts like that during the IT bubble burst of 2000-2001. Hundreds of individuals in countries (including the most developed countries like US) had no way of earning a living. Fortunately, for them, the US government had a very robust unemployment grant. Do we have any such thing in India????

If the US economy gets into a recession, it will directly impact the Indian market. Even though the IT companies claim that they are shifting focus to European countries, the truth is that we are still dependent heavily on US. Even if we focus on Europe, the world is so much dependent on each other, that it is impossible for anyone to stay shielded. Remember the recent Subprime mortgage crises? It started in US, hit Australia, then UK base northern rock bank, and then Europe. The ghost is still haunting US economy and jitters are felt all over the world.

The fact is that whatever appears to be least possible or almost impossible, it has the most shocking affect. And when things start to go bad, everything goes bad. A recession starts with lower returns or even losses from the stock market, followed by job cuts, followed by less consumer spending, no loans, strict measures in place to check for black money and unearthed income, no more luxury affordability for common man.

Every day we read in newspaper that the common man of India is rising; the middle class is rising – is it really true? The fact is that the rise is compensated (or better to say – overtaken) by the huge price rice. Majority of individuals laden with loans with commitment for 20 years. Recently all the floating loan payers got the shock of their life when their EMI was increased substantially, due to the continuous interest rate increase.

If tomorrow, the stock market crashes, and is followed by another round of side-effects of job-losses and monetary failures, can we withstand it?

Let me continue more on this in second part tomorrow. Definitely, most of the readers will NOT agree with me :- ) So, please post your comments.

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.