Professional Documents
Culture Documents
BAFI 3182
FINANCIAL MARKETS
Essay Questions
Topic 1:
Markets in which financial assets are first created, e.g. Facebook IPO
Markets in which funds flow from surplus economic units to deficit economic units
Secondary markets:
6. Select two different financial assets and distinguish between them in terms of:
Bond
(a)
Return: interest / coupon
(b)
Risk: bankruptcy of issuer
(c)
Liquidity: can be sold/purchased for cash
(d)
time pattern of return: interest each term, principal at the maturity date
Share
(a) Return: dividend, capital gain
(b)
Risk: bankruptcy of issuer, decrease of share price
(c)
Liquidity: can be sold/purchased for cash
(d)
time pattern of return: year-end, interim dividend
7. From the perspective of both surplus (lenders) and deficit (borrowers) economic units, clearly
distinguish between debt and equity instruments.
Debt:
Represent an obligation on the part of the borrower to repay principal and interest. Eg.
a. Bank deposits and loans
b. Contractual savings eg. Life insurance savings
c. Discount securities
d. Fixed interest securities
Equity:
Represent an ownership claim over the profits and assets of a business. Eg.
Ordinary shares in a company
8. What is the importance of an efficiently operating secondary market to the corresponding primary
market?
Trading of stock on the secondary market frees investors to sell when the need arises while allowing
companies to continue using the money to finance growth over longer periods of time.
The ease of selling stock on the secondary market affects the willingness of investors to buy stock on
the primary market
A company may implement controls to stop the devaluing of its stock, which could affect future
investment in the company. Companies consider secondary market stock prices when making
management decisions about growth and expansion.
9. What is the role of investment and merchant banks and commercial banks? Give example of each of
them in Australia?
Commercial banks:
The core business of banks is often described as the gathering of savings (deposits) in order to provide
loans for investment.
They also provide a wide range of off-balance-sheet transactions such a underwriting, issue of
derivatives or execute Fx transactions.
Commonwealth Bank
Investment and merchant banks:
Mainly provide advisory services to support corporate and government clients, e.g.:
advice on mergers and acquisitions, portfolio restructuring, finance and risk management
May also provide some loans to clients but are more likely to advise on raising funds directly in capital
markets.
Morgan Stanley
Essay Questions
Topic 2:
structure
of
interest rates?
interest
If so,
Explain the loanable funds theory of interest rates, outlining the main determinants of
for and supply of loanable funds.
rates.
how?
the demand
7. Distinguish between the pure expectations theory, the liquidity premium theory and the market
segmentation theory of determining the shape of the yield curve. How do these theories differ in terms
of their underlying assumptions?
8. With reference to the Australian Flow of Funds - Sectoral Balances, recent years, describe recent
changes to the pattern of surplus and deficit sectors
9. Why banks are the big winners when the yield spreads widen?
Essay Questions
Topic 3:
1. You are the owner of a small business in need of short term financing of less than $100,000. The
funds are to be used to fund ongoing costs and accounts payable. What are the borrowing options
available to you?
2. You are the treasurer of a large corporation in need of short term domestic financing over the next 6
months. Funding is required both on a daily basis and for 3 and 6 month periods. What are your
borrowing options?
3.
(a) Explain the role of the following parties to a commercial bill: drawer, acceptor and discounter.
(b) Which of the above parties is the surplus economic unit and which party is the deficit economic
unit?
(c) Which of the roles listed in a above does a bank perform?
4.
5.
A corporation calls Bank X and Y for their 30 day bank bills rate.
Bank X quotes: 7.00/6.95
Bank Y quotes: 6.98/6.93
(a) At what rate is bank Y willing to buy 30 day bills?
(b) Which bid is the most attractive?
(c) Which offer is the most attractive?
6.
You are a corporation with $50m to invest in 90 day bank bills and receive the following quotes.
Which one do you accept?
A. 7.04/6.99
B. 7.06/7.01
C. 7.05/7.00
7. What are the Eurocurrency markets? In what ways are they similar and in what ways different from the
domestic money markets?
8. Outline the main features of the different types of finance available in the short term Euromarkets.
9. How investment banks participate in the Money Market?
Mixed Question
(Topic 2 & 3)
1. Compare the yield of the following discount securities with Bank Accepted Bills? Please explain the
reason if their yields are different from each other.
Treasury Notes, Bank Endorsed Bills, Promissory Notes, Certificate of Deposits.
At what price would the same bill sell in the secondary market if it had only 30 days to maturity were
trading at a yield of 9.5% pa.?
At what price would the bill in (b) sell if the yield was 11% pa. rather than 9.5% pa.?
At what price would the bill in (b) sell if the yield on comparable bills was 8% pa. rather than 9.5%
pa.?
What is the yield on a 180 day bill, which has 45 days to maturity, if it is selling at $99 100 and has a
face value of $100 000?
Essay Questions
Topic 4A:
1. Name the commodity (unit) currency, the terms currency, the bid offer rates, and the spread in each of
the following quotes:
(a)
USD/EUR 0.7475-85
(b)
AUD/JPY 92.10-20
(c)
GBP/USD 1.4350-60
2. In the following quotes, what will the bid and the offer mean to the price-maker and the price-taker?
(a)
USD/EUR 0.7475-85
(b)
AUD/USD 0.9725-35
(c)
AUD/EUR 0.7425-50
3.
(a)
(b)
If Bank ABC is quoting a spot rate of AUD/USD 0.9765/68 at what rate will Corporation XYZ
buy spot Australian dollars?
If bank ABC is quoting a spot rate of AUD/USD .9751/56 at what rate will Corporation XYZ
sell spot Australian dollars?
4.
Consider the following two spot rates for AUD/HKD that are quoted by two market makers.
Bank A:
6.5422-32
Bank B:
6.5423-33
(a) If you wanted to buy HKD what rate will you accept?
(b) If you wanted to sell HKD what rate will you accept?
5.
In the previous question suppose you are Bank A and you were hit on the left hand side of your quote.
Then which of the following are true statements?
(a) You have sold AUD
(b) You have bought HKD
(c) You have sold HKD
(d) You have bought AUD
(e) You have undertaken a. and b.
(f) You have undertaken c. and d.
(g) You have undertaken b. and d.
(h) You have undertaken a. and c.
6.
You are an Australian Bank and market maker that has provided the following quote to a calling bank:
AUD/USD = .9723-28
and the calling bank has hit you on the right side of your quote for the AUD 5 million. Assuming you
wish to square your position which way should you move your quote for the next prospective caller?
Fully explain your reasoning.
7. Using the above example in question 6, assume the calling bank has hit you on the left hand side of
your quote for AUD 10 million. What would your next quote be and why?
Essay Questions
Topic 4B:
If interest rates in the USA are 5.55% for 92 days and interest rates in Australia 4.95% for 92 days,
calculate the 92 day forward outright rate given a spot rate AUD/USD of .9755. (Your answer should
show your calculations).
10.
If interest rates in Australia are higher than those in other countries, would you expect the Australian
dollar to appreciate or depreciate? Explain your answer.
11. Explain the purchasing power parity hypothesis of exchange rate determination. Using this
hypothesis, explain the implication for Australias exchange rate if Australia were to experience higher
inflation than its main trading partners.
12. Outline and explain the reasons why an Australian company may borrow funds offshore rather than
domestically.
13. From what you know and looking at the graph below, what has been the behaviour of the Australian
dollar against the United States dollar since 2000? Could you explain what have been some of the
drivers of this behaviour?
Mixed Questions
Topic 4
1. Briefly explain the impact of changes in inflation, relative interest rates, relative national income
growth and government intervention on foreign exchange market?
2.
3.
If Bank ABC is quoting a spot rate of AUD/USD .9789/94 at what rate will Corporation XYZ sell
spot US dollars?
If Bank ABC is quoting a spot rate of USD/YEN 99.70/80 at what rate will Corporation XYZ buy
spot YEN?
If Bank ABC is quoting a spot rate of USD/YEN 99.70/80 at what rate will Corporation XYZ sell
spot US dollars?
If Bank ABC is quoting a spot rate of AUD/YEN 88.97/07 at what rate will they sell spot
Australian Dollars to Bank DEF?
If Bank ABC is quoting a spot rate of AUD/YEN 88.97/07 at what rate will Corporation XYZ buy
spot Australian Dollars?
Cross Rate Exercises:
(a) Given the spot rates USD/EUR 0.7475/85
and
USD/GBP 0.6342/65
Calculate the spot GBP/EUR rate
(a) Given the spot rates AUD/USD
and
GBP/USD 1.5760/70
0.9705/40 Calculate the spot rate
GBP/AUD
Quotes:
(a)
If Bank ABC is quoting a spot rate of AUD/USD .9777/82 at what rate will they sell spot
Australian dollars to Corporation XYZ?
(b)
If Bank ABC is quoting a rate of AUD/USD .9777/82 at what rate will they sell spot Australian
dollars to Bank DEF?
Essay Questions
Topic 5:
1.
Given that a company can raise funds through short-term or long-term finance, what is the main
criterion it should use in making this decision?
2.
Given that a company can raise funds through the issue of either equity or debt, what factors explain
the debt/equity ratio the firm will adopt?
3.
What is the present value of a four year bond with a face value of $1000 which pays an annual coupon
of 7.5% but is currently trading at 8%? Is the bond trading at a premium or a discount?
4.
Explain the main determinants of the type(s) of debt instruments (financial assets) a corporation will
sell in order to raise funds.
5.
Explain the meaning of the concepts of securitisation and disintermediation with respect to the
corporation debt market.
6.
Select three different financial instruments sold by corporations to raise medium term to long term
finance. For each of these instruments:
7.
(a)
(b)
Distinguish between them, from the perspective of the buyers, in terms of risk, return, liquidity
and time pattern of returns.
Distinguish between:
Domestic bonds
Foreign bonds
Eurobonds
International bonds
8.
9.
What is the underlying reason for the bonds in the two below sentences?
If yield > Coupon rate, then Price < Face Value"
If Yield < Coupon rate, then price > Face value
10.
Firm ABC is short of fund and need to decide whether to access funds from the money market or
capital market, how can ABC management make this decision?
Mixed Questions
1.
(a) The bond with a face value of 1000$ and 2 years to maturity, paying annual coupons of 10% and
currently trading at the yield of 10%. Calculate the price of the bond?
(b) `If the interest rate (market yield) unexpectedly rises to 12 %, at what price investor can sell the
bond?
(c) Is the bond now trading at a premium, discount or par? Explain
2.
Commercial bill with face value of 80000$ and the yield of 7 % with 60 days to maturity.
(b)
3.
The bond with the face value of 100000$ and 5 years to maturity, paying annual coupons of 7
% and currently trading at a yield of 5%?
News analysis
Topic 5
1. What is the underlying reason for the spike in the yield of government bonds in the following countries?
Essay Questions
Topic 6:
1. (a)
What are the role and objectives of Australian Stock Exchange?
(b)
What methods does it adopt to achieve these objectives?
2. Clearly distinguish between the primary and secondary share markets. Explain why liquidity in the
secondary market is important to both shareholders and corporations.
3.
4.
Distinguish between
(a)
Ordinary shares and preference shares.
(b)
Share options and warrants.
(a)
(b)
Explain the difference between a private placement, a public issue and a rights issue.
What is the function of a prospectus?
5. Given that companies can use both debt and equity finance to raise funds, explain why a corporation
would prefer to use equity finance.
6.
(a)
(b)
7.
What is the difference between limited liability by shares and liability by guarantee?
8.
Mixed Questions
(Topic 1, 2, 3, 4, 5)
1.
2.
1. Use the following information from 2012- 10K Annual reports of Apple and
Nokia .
(i) Calculate the ROE Return on Equity for Apple and Nokia in 2012. What does ROE
measure? Which company provides a higher return to shareholders?
(ii) Calculate the Price to Earnings (PE or P/E) ratio for Apple and Nokia in 2012.
(iii) Explain briefly what the PE ratio measures. What do the P/E ratios for Apple and
Nokia tell you about the share price of these two companies? Can you compare the P/E ratios
and conclude that the stock of one company is cheaper than the other?
(iv) Explain briefly what the PEG or PE/g ratio measures and why it is a better valuation
multiple than PE.
(v) Calculate the PEG (PE/g) ratio for Apple and Nokia where g = growth rate in Net
Income. Which stock would you recommend as a better buy (less expensive)? Explain clearly
your answer.
2. Suppose Microsoft, Inc. reported earnings per share around $0.75. If Microsoft is in an
industry with a ratio ranging from 30 to 40, what is a reasonable price range for Microsoft?
3. Ebay, Inc. went public in September of 1998. The following information on shares
outstanding was provided in the final prospectus filed with the SEC.
In the IPO, the Ebay issued 3,500,000 new shares. The initial price offered to the public was
$18.00 per share. The final first-day closing price was $44.88.
(i) If the investment bankers retained $1.26 per share as fees, what was the net
amount of Equity that Ebay raised?
(ii) What was the market capitalization of Ebay at the end of the first day?
Essay Questions
Topic 7:
1.
2.
(b)
(c)
(d)
3.
Forward Contracts
Futures
Swaps
Distinguish between:
(a)
Call Options and Put Options
(b)
European Options and American Options
4.
(a)
(b)
(c)
(d)
(e)
(f)
5.
If you were in the following situations, would you buy or sell futures contracts to hedge your
exposure?
(a)
A gold-mining company plans to sell gold in the future.
(b)
A jeweller plans to buy gold in the future.
(c)
An investor owns a number of blue-chip shares and wants to protect the value of his portfolio.
(d)
An investor plans to buy Treasury bonds in the future.
(e)
An investor has already bought Treasury bonds.
6.
7. What are the fundamental differences between the following derivatives, in terms of their effect on the
parties to the derivative, how they are traded and their usefulness in different situations?
(a)
Options and forward contracts.
(b)
Forwards and futures
Practical Questions
Topic 7:
The Derivatives Market
1. A US company will be going to London in June to purchase GPB 100,000 in new machinery.
The current spot and futures exchange rates are given by his bank:
Exchange Rates GBP/USD
Period
Rate
Spot
1.5342
March
1.6212
June
1.6901
September
1.7549
(ii) Describe how the company can use futures contract to fully hedge its position.
(iii) Does the company need to unwind its futures position? (
(iii) When June arrives, the actual exchange rate is GBP/USD = 1.725. Calculate how
much money the company can save if it enters into a futures contract.
2. Suppose the current GBP/USD spot rate is 1.9905 and the JPY/USD yen spot rate is
$0.00779. The following forward rates are also quoted:
Forward Rates
60 days
90 days
GBP/USD
1.9597
1.9337
JPY/USD
0.007754
0.007736
(i) Explain what someone who enters into a 60-day forward contract to deliver British
pounds is agreeing to do.
(ii) Explain what someone who enters into a 90-day forward contract to take delivery of
Japanese yen is agreeing to do.
(iii) Compare the spot and forward rates for GBP/USD and JPY/USD: what can you infer
about the relationship between U.S. and British short-term interest rates and U.S. and
Japanese short-term interest rates?
Essay Questions
Topic 8:
1.
Outline and explain the main causes of change in the financial system?
2.
Identify the four main categories of banks off-balance-sheet business and use an example to explain
each category.
3.
(a)
(b)
What are Basel 2 three pillars, explain the aim of each pillar?
What are the roles of local regulators in relation to the Basel II capital accords?
4.
(a)
(b)
5.
(a)
Referring to the recent crisis in the credit market, describe how a pool of mortgages can be
securitised?
(b) Reflecting on globalisation, explain why the U.S credit crisis had an impact on non U.S financial
institutions?
6.
(a)
(b)
7.
Explain the difference between open market operations and direct controls as methods of intervention.
Give examples of both.