AcF 304 Financial Markets

Revision Session & Exam Structure Review:

Session Code: 968564
Register below 👇 (Thursday 27th April at LT1 12:00-14:30 GMT)

https://amplifyme.com/society-booking?uid=d333702d
 🚨 We are excited to announce Lancaster Investment & Finance Society’s new
partnership with AmplifyME 🚨 

 AmplifyME uses simulation technology to help students get hired based on their

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On Thursday 27th April at 12:00-14:30 GMT we will be running the flagship

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and Asset Management 📈

The session will be held in-person in LT1 from 12 until 3pm on Thursday  
Top performers will have the opportunity to be fast-tracked to Amplify’s partner
clients, including global sponsors Morgan Stanley 🌏

The session will provide you with a unique practical experience, helping you find
the role which is right for you💡 and is a good addition to any CV 
Register below 👇 (Thursday 27th April at 12:00-14:30 GMT)

https://amplifyme.com/society-booking?uid=d333702d
 OUTLINE
1) Financial Markets and Financial System Overview
2) Why Do Financial Crisis Occur and Why Are They So
Damaging to the Economy - Part 1?
3) Why Do Financial Crisis Occur and Why Are They So
Damaging to the Economy - Part 2?
4) Central Banks and the Conduct of Monetary Policy
5) The Foreign Exchange Market
6) The Money Markets
7) Bond Markets 1 –The Term Structure of Interest
Rates
8) Bond Markets 2 – The Bond Markets
9) The Stock Market & Asset Management
10) Financial Derivatives & Commodities 4
 1.Function of Financial Markets

• Function of Financial Markets

• Structure of Financial Markets
• Internationalisation of Financial Markets
• Function of Financial Intermediaries: Indirect
Finance
 2. Why Do Financial Financial Crises Occur and Why Are They So
Damaging to the Economy – Part 1

• Financial Crisis History

• Theory of Financial Crisis
• Dynamics of Financial Crises in Advanced Economies (Stage 1,
2 & 3)
• Great Depression
• Why did the 2008 financial crisis occur? Detoured into
Mortgage Backed Securities
• The European Sovereign Debt Crisis
 3. Why Do Financial Financial Crises Occur and Why Are They So
Damaging to the Economy – Part 2

• Covid-19 Financial Crisis

2. Why Do Financial Financial Crises Occur and Why Are They So Damaging to the Economy-Part 2?

US Jobless Claims
2. Why Do Financial Financial Crises Occur and Why Are They So Damaging to the Economy – Part 2 ?

S & P 500 Equity Index

 3. Why Do Financial Financial Crises Occur and Why Are They So
Damaging to the Economy – Part 2

• Covid-19 Financial Crisis

• Regulatory Response to Financial Crisis – Dodd Frank / MiFID2
/ Basle 3
• Corporate Bond Liquidity Problem
• Appendix – VIX Volatility Index
 4.Central Banks & Conduct of Monetary Policy

• Review FOMC Meetings.

• How Fed Actions Affect Reserves in the Banking System inc.
‘Fed Funds’
• The Market for Reserves and the Federal Funds Rate
• Conventional Monetary Policy Tools (Open Market
Operations, REPO, Discount Lending)
• Nonconventional Monetary Policy Tools and Quantitative
Easing
• The Price Stability Goal and other goals of monetary policy
(Fed’s Dual Mandate) versus ECB sole mandate
• Fed’s Balance Sheet
https://www.investopedia.com/articles/economics/10/understanding-the-fed-
balance-sheet.asp
 5. The Foreign Exchange Market
• Basic theory behind Exchange Rates in the Short Run and Long
Run (but not the theoretical depth in the text book so
concentrate on lecture and seminar slides)
• Spot, Forward Transactions & FX Swaps
• Currency appreciation and depreciation and impact on
imports/exports
• USD (previous) strength and also its impact in Emerging
Markets
• Why FX exists – trade, hedge, speculate
• Spot quotation methods
• Identifying the best spot price
 6. Money Markets
• Definition (Short-Term) & Purpose (to warehouse funds)
• T-Bills, Commercial Paper, REPO, Certificates of Deposit
• Calculating T-Bill Investment & Discount Rates
• Eurocurrencies inc. Eurodollar Deposits and the birth of this
market
• Deposit Bid & Offer Prices – identifying the best price
• LIBOR (Money Markets in Practise)
 7. Bond Markets 1
Term Structure of Interest Rates

• Factors affecting yield i.e. Default /Liquidity risk

• Credit Ratings
• Yield Curve
• Expectations/Liquidity Premium/Market Segmentation
theories
• Yield Curve shirts – how certain factors/events affected the YC
• What trades you should put on in anticipation of a YC shift
• Followed shape of the US Treasury Yield Curve
• Commercial Awareness: Sharp rise in bond yields over last 18
months to fight runaway inflation
 8. Bond Markets 2

• Bonds Intro
• Bond Instruments a) Zeros, FRNs, US STRIPS, US TIPS
• Bond Instruments b) Corporate Bonds, Ratings, Convertibles,
Corporate Bond Liquidity, Electronic Trading
• Bond Overview
• Accrued Interest
• Duration
 9a. The Stock Market

• Equities Long Term Performance (US & Non-US)

• Stock Market Indexes
• Buying Foreign Stocks (ADRs)
• Investing in Stocks (Exchanges,OTC, ECNs)
• Computing the Price of Common Stock (PEs) /Gordon
Growth Model
• Mechanics of an IPO
• IPO Underpricing & ‘Money Left On The Table’
 9b. Investment Management Trends & Challenges

• Growth of Investment Management

• Active vs Passive Investment
• Exchange Traded Funds
• ‘Closet’ Index Funds
• Fees
• Regulation
• FinTech – Robo Advisors & Blockchain
 10. Financial Derivatives & Commodities

• Hedging (Long/Short trading positions)

• Forward Markets (normally FX!)
• Financial Futures Markets (Pro’s /Con’s v
Forwards) –
• Marked-to-Market
• Interest Rate Swaps (Mechanics, Motivations)
• Credit Default Swaps (Protection Buyer/Seller.
Recovery Rate)
 10. Financial Derivatives & Commodities

1. OIL
• OPEC and its role
• Fracking

2. GOLD
• ‘Safe Haven’ investment
• How Gold behaved in 2020 crisis
• Gold and $ - why an inverse price relationship
 Commercial Awareness

Followed

• US Treasury Yield Curve (Yield movements and

shape)
• US Inflation
• NON-FARM PAYROLL
• GameStop
• DEBT/GDP Ratios by country
• ‘Yen Carry Trade’

21
EXAM LAYOUT – Last year’s exam on Moodle
EXAM LAYOUT – Last year’s exam on Moodle
NO change in 2023 exam structure:

The exam consists of four sections:

• Section A (30 marks): Thirty multiple choice questions each worth

1 marks. Each question contains 4 possible answers A, B, C, D.
There is no penalty for blank answers. No negative marking.

• Section B (40 marks): Contains ten questions of which eight need

to be answered. Each question is worth 5 marks.

• Section C (15 marks): Contains nine questions. All of which must

be answered.Questions are worth 1 or 2 marks.

• Section D (15 marks): Contains four questions of which three

must be answered. Each question is worth 5 marks.
STYLE OF QUESTION
The exam consists of four sections:
• Section A (30 marks): MCQ same style as End-term test and
broadly same difficultly as End Term Test.

• Section B (40 marks): 8 from 10 questions: Explain concepts with

many relating to the ‘real world’ just as we have practised
Section B questions at Workshops.

• With each question worth 5 marks we’re looking for a relatively

substantial answer i.e. approx. 8 - 10 written lines making 6 or 7
points if possible. NOT bullet pointed.
• Many of these questions have 6 possible points to be scored
although a maximum mark is 5 for any question.
STYLE OF QUESTION

The exam consists of four sections:

• Section C (15 marks): 9 questions (from 9!) . A number of them

will directly relate to a chart, table with data, news article asking
for your interpretation. A number of questions will not directly
relate to data but relate to the concepts being asked.

Note:
Section B: 40 marks: 8 questions (which you must choose from 10)
Section C: 15 marks: 9 questions
This has significant time and length of answer implications for you!
Section C answers should be 1, 2, 3 or 4 written lines only!
Section C - you will be instructed to provided ‘very concise
answers’.
STYLE OF QUESTION

The exam consists of four sections:

• Section D (15 marks): 3 questions from 4:

In a couple of paragraphs explain 3 out of the 4 concepts and questions below.

e.g. Fixed Income Liquidity Risk and implications for investors

• At 5 marks each a length of answer similar to Section B answers

is required – 2 paragraphs….approx. 8 - 12 TOTAL lines of
information. NOT bullet pointed.
 SECTION A (30 marks)
 
 Section A consists of 30 MCQ (Multiple Choice Questions) worth 1 mark each.
 Answer all questions. Choose only one answer for each question.
 Two or more answers provided, illegible answers, are considered as incorrect answers.
 There are no marks deducted for an incorrect answer.
 
 
 
1) Suppose NetCorp Inc. was trading at $18.50 per share. At that time it pays an annual
dividend of $0.82 per share, and analysts have set a 1-year target price of $26.00 per
share.What is the expected return on the stock?
 
A) 44.97%
B) 40.54%
C) 43.24%.
D) 42.24%
 Section B (40 marks)

Answer only 8 out of 10 questions.

 
5 marks per question

e.g.
 
1) What are ‘Closet Index Funds’and why are they a concern for regulators?
 Section B (40 marks)

Answer only 8 out of 10 questions.

 
5 marks per question (but six points that could have scored you the 5 marks)

8)What does it mean when a bond is referred to as a convertible bond?Would a convertible

bond be more or less attractive to a bond holder than a non-convertible bond?
 
Convertible bonds are bonds that may be exchanged for another security of the issuing
firm such as common stock at the discretion of the bond holder. 1 mark If the market
value of the securities the bond holder receives with the conversion exceeds the market
value of the bonds, the bond holder will return the bonds to the issuer in exchange for the
new securities and make a profit. 1 mark If the price of the underlying equity goes up, ‘all
other things being equal’, the price of the convertible bond will also increase. 1 mark
Convertible bonds gives investors an investment opportunity that is not available with non-
convertible bonds in allowing bondholders to gain exposure to equity investments. 1 mark
As a result, the yield on a convertible bond is lower than a non-convertible bond. 1 mark
A Fixed Income Fund Manager may or may not have the authority to buy such bonds. 1
mark
 Section C (15 marks)

Based on the above, provide answers to ALL the following questions:

 
 
a) Why would ...?
1 marks
  
b) What would happen if...?
2 marks
  
c) What was the reason for ...?
4 marks
  
d) How does XXX affect ...?
1 marks
 Section C (15 marks)

Based on the above, provide answers to ALL the following questions:

 
 
a) What would would happen to the gold price if US Treasury bond yields rise and why? 2 marks

Gold prices would fall 1 mark

This is because gold is a non-interest bearing asset and bonds would therefore become more attractive from a yield/interest
perspective 1 mark

SECTION C – CONCISE ANSWERS

 
 Section C (15 marks)

Some questions not relating to table/chart/story but on the same subject.

 

SECTION C – CONCISE ANSWERS

 
 Section D (15 marks)

a) Fixed Income Liquidity Risk and implications for investors.

ONE PARAGRAPH
It is the risk that an investor will have to sell the bond below its market value. 1 mark
The primary measure of liquidity is the size of the bid-offer spread. 1 mark Corporate
Bonds are more likely to be more illiquid than Government Bonds. 1 mark
 
ONE PARAGRAPH
Investors dealing in large size trades may be more attracted to Government bonds than
Corporate bonds due to the larger size and more liquid Government bond issues. 1 mark .
Since Govt bonds are more liquid than Corporate bonds, investors will find it easier to trade
Govt bonds electronically 1 mark Even with Corporate Bonds investors will choose larger
size issues rather than smaller size issues die to the better liquidity they offer 1 mark

Note: Some Section D questions will ask you to relate the topic to the real world e.g. how
did 2020/Covid affect the issue?

 
 Section B and D (5 mark questions)

a) Define any concept asked about

b) Give an example

If there is a question about Floating Rate Notes

a) Define what they are e.g A Floating Rate Note has a variable coupon…

b) Give an example how the coupon works e.g. if the FRN pays 6-month $ LIBOR +1% and
LIBOR is 2% the coupon payment will be 3% until the coupon resets in 6 months time.

…then go on to answer the question being asked.

Give me an excuse to give you marks!

 
Time

Allocation important

• Section A – 30 marks
• Section B – 40 marks
• Section C – 15 marks
• Section D – 15 marks

TIME

• The Exam is quite a lot of material and it is unlikely that you will have
spare time
 BEST OF LUCK!

*These slides will be put on Moodle