PART 2: SCENARIO ANALYSIS
Please submit your final assessment under submission point 3
You are a financial advisor who regularly educates new clients about how to market and economic systems work to take the mystery and fear out of investing.
You have found that when clients understand how things work behind the scenes, they feel more confident in continuing to invest throughout their lives, regardless of the doom and gloom that they may see or hear in the news. In this report, you are asked to address questions that your new client Jay has and help him to have a better understanding of financial markets.
1. Understanding Different Asset Classes
a) There are many ways to invest money. Suppose that Joe wonders what investment options he can choose from. In the following table there are different assets, chose three of them and fill in related columns. You should also provide an example for each of them.
b) The development bank of Singapore Limited (DBS) offers a bill facility to corporate clients. The bank website explains the terms and conditions of Bills of Exchange.
Use a diagram to describe the structure of a bank bill. In your explanation, clearly distinguish the roles of the parties associated with the bill issue.
c) In June 2020, Singapore Airlines Limited undertook a renounceable rights issue of new ordinary shares in the capital of the company and mandatory convertible bonds to entitled shareholders.
• Explain the renounceable rights issue of ordinary shares and discuss the
advantages and disadvantages.
• Explain to Jay what is convertible bonds and why would Singapore Airlines
undertake mandatory convertible bonds to entitled shareholders?
2. Central Banks, Monetary Policy and Interest Rates
a) Market participants, including financial institutions, fund managers and corporations, must understand monetary policy setting impacts on economic activity and the business cycle. A central bank will typically implement monetary policy settings in order to achieve certain economic outcomes over a business cycle. Choose two countries from the list below, describe the intermediate target for monetary policy, and explain the implementation process of the monetary policy in the two countries you selected. Give examples of different economic indicators that may give an insight into
the future stages of a business cycle.
• the United States
• New Zealand
b) The Federal Reserve raised the target range for the fed funds rate by 75bps to 2.25%- 2.5% during its July 2022 meeting, the fourth consecutive rate hike, and pushing borrowing costs to the highest level since 2019. Fed fund futures implied investors were pricing in a more than 81% chance of another supersized 75 basis-point interest rate hike in September. Explain to Jay the potential economic forces behind the Fed rate hike and the impact of interest rate changes on the overall economy.
c) Obtain monthly data from Fred (https://fred.stlouisfed.org/) and plot the interest rates on 3-month Treasury bill (TB3MS) and 10-year Government bond yield (IRLTLT01USM156N) from August 2017. Determine the shape of the yield curve by using one of the interest rate theories you know and share your opinion on whether the Australian economy is heading for a boom or for a recession. Explain your choice.
3. Derivative Securities
a) Jay knows that a futures contract’s primary purpose is managing risk exposures. Use Singapore Airlines as an example to further explain how a futures contract achieves this risk management function.
b) Jay is holding some Tesla shares (NASDAQ: TSLA) and The TSLA stocks are currently trading at $985 on the Nasdaq. Given TSLA stocks are very volatile, Jaleel wishes to protect the value of his investments. He seeks your advice on using option contracts and presents a list of options for you to choose from. Assume the number of underlying shares per contract is 100 shares.
(i) Please specify the moneyness of the above options. Are they in the money, at the money, or out of the money?
(ii) Explain the type of risk that Jay is facing and which option is your suggestion to control his risk, provide your reason and explain it.
4. Fund Management
a) Managed funds are often categorised by the type of investments purchased by the fund. These include capital stable funds, balanced growth funds and managed capital growth funds. For each of these funds, discuss the types of investments the fund might accumulate and explain the purpose of the investment strategies. If Jay is identified as a risk-averse investor, which type of fund would you recommend Jay to consider investing in?
b) The risk-free rate in Australia in Jun 2022 was 3.37%. Based on the following information for three different funds A, B and C in Australia. Calculate the Coefficient of variation, Sharpe and Jensen Indices of performance for these funds and interpret the results.
c) Obtain information on the following two funds:
• Colonial First State Developing Companies Fund
• Vanguard Australian Shares High Yield Fund
Compare the risks to investors presented by each of these funds and identify the types of investors that would favour these funds.
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