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Quarter 2 2017 Financial Institutions and Markets

Final Exam structure related information


It would be a 3 hours exam including reading time.

Closed book exam.

Worth 50% of the total mark of the unit.

Non-alphanumeric electronic calculators are allowed.

3 parts exam

Number of Questions: 20 Multiple Choice;

4 Analytical: Choose any Three (3); and

2 Essay questions: Choose any ONE (1)

Part A

Answer all 20 questions. Each question is worth 0.5 marks. Total mark
for this section is 10 (20*0.5) marks.

Example:

1. If the forward points are _______at a specific date, the base currency
is at a _______.

A. rising; forward discount


B. falling; forward discount
C. rising; forward loss
D. falling; forward gain

Correct answer is B.

Part B

Choose any Three (3) analytical questions from this section. All
questions in this section have equal marks. Each answer is worth of 10
marks. Total mark for this section is 30 (3*10) marks.
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Part C

Choose any ONE (1) essay question from this section. All questions in
this section have equal marks. Each answer is worth of 10 marks.
Total mark for this section is 10 (1*10) marks.

Sample MC question in Part A

1. BD Enterprises Limited needs to raise additional funding to expand


its manufacturing operations. The company decides to issue $5 million
in debentures over the next three months. The paper will be issued into
the:

A. Wholesale markets

B. Secondary markets

C. Short-term money market

D. Capital market

C is the correct answer.

2. An option that gives the option buyer the right to buy the commodity
or financial instrument specified in the contact at the exercise price is
called:

A. an American option

B. a European option

C. a call option

D. a put option

D is the correct answer.

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Topics:

Financial mathematics: price, face value of short and long term


instruments, discount securities

Corporate debt markets: debenture, Commercial bill, Bill of Exchange,


Promissory notes,

Money market, capital market, wholesale market, primary market,


secondary market

Other medium and short term funding arrangement, Trade credit,


commitment, loan covenants, right issue, bonus issue,

Government debt markets: monetary policy, cash rate, exchange


settlement account,

Foreign exchange markets: appreciation, depreciation, quotation of


exchange rates, finding cross rates, forward rate

Derivative markets: Call option, put option, long position, short position,
American option, European option

Part B:

Example:
A superannuation fund is holding a large number of National Bank Limited shares in an
investment portfolio and wishes to protect the value of the investment. The National Bank
Limited shares currently trade at $34.49. The superannuation fund buys a put option with
an exercise price of $34.00 per share and a premium of $0.95 per share.

(a) What is a call option? What is a put option? (2 marks)

(b) By entering into this option strategy, explain whether the superannuation fund will
exercise the option if the spot price is above or below the exercise price. (2 marks)

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(c) Explain the differences between American-type options and European-type options.
(2 marks)

(d) Draw a fully labelled diagram of the put option showing the profit and loss
profile of the option buyer and the writer of the option (including the break-
even price). (4 marks)

Topics:

1. Calculation: short and long term instruments, discount securities,


instalment payment, CD, Trade credit and the opportunity cost of
paying earlier.
2. Calculation: cross rate between two currencies (given they are
quoted directly, forward rate, forward points, indirectly or one is
quoted directly and another indirectly), forward rate instalment
payment, CD, Trade credit and the opportunity cost of paying
earlier.

4. Calculating the price of debentures: and the price in the secondary


market if they are sold before the maturity date. Value of
debenture, reason for value of debentures to rise or fall.

5. Define option and explain the premium and the exercise price

profit and loss profile of call and put option both from buyers and
sellers point of view.

minimum stock price will the option buyer exercise

Part C

Example:

Explain how a government’s borrowing requirement arises and outline


the relevance of significant deficit spending during and after Global
Financial Crisis. In this respect, also define and discuss the current
direction of monetary policy in Australia. (10 marks)

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Topics:

 Government expenditure, Global Financial Crisis (GFC),


Monetary policy
 Post GFC regulatory reform domestically and globally.
 Relevance of the matching principle for Government’s
borrowing requirement.
 Government policies associated with Financial and economic
crisis and the policy implications for the supply of
government paper in the markets.