BAFI1005: You are a senior financial analyst and have been asked to examine whether the global  financial crisis and the COVID-19 affect financial and non-financial: Financial Markets Assignment, RMIT, Singapore

QUESTION 1 (THE INTEREST RATES)

a) You are a senior financial analyst and have been asked to examine whether the global financial crisis and the COVID-19 affect financial and non-financial firms to the same extent? For the period beginning in 2006, plot the interest rates on three-month nonfinancial commercial paper (FRED code: CPN3M), three-month financial commercial paper (FRED code: CPF3M), and Treasury bills (FRED code: TB3MS). Compare the evolution of these interest rates.

b) 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. In order to forecast future economic conditions and business activity, business managers, therefore, need to understand the business cycle. Briefly describe the principal monetary policy objective of the Federal Reserve and give examples of different economic indicators that may give an insight into the future stages of a business cycle.

QUESTION 1 (continued)

c) Calculate the market price of each bond on 23rd April 2021 issued by AAA Ltd.,  using the data provided in the table below. What is the current total value of minimum application?

QUESTION 2  (DERIVATIVE SECURITIES)

a) A fund manager has been monitoring the performance of Virgin Galactic
Corporation shares (NYSE: SPCE). The shares are currently trading at $34.8 on the  New York stock exchange. The fund manager predicts that SPEC shares might rise  in value over the next few months. He checked the market and found the related  information on the options with a maturity of two months as below. Assume the number of underlying shares per contract is 100 shares.

(i) Please specify the moneyness of the following options. Are they in the money, at the money or out of the money?

ii) Which option would you suggest the fund manager to purchase? Why?

(iii) How much would it cost if the fund manager purchases options in ii that cover 1,000,000 shares (ii)?

b) Company A agrees to enter into an FRA agreement with Company B in which  Company A borrows $ 50,000,000 in 6-month time for a period of 9 months, and  Company B invests $ 50,000,000 in 6-month time for a period of 9 months. The 6- month interest rate is 0.75% per annum and the 9-month interest rate is 0.90% per  annum.

(i). What is the interest rate that both companies agreed upon

(ii). Suppose that at the expiry date of the FRA, the 6-month interest rate is 0.81% per annum and the 9-month interest rate is 0.96% per annum, calculate the compensatory payment and which party receives it?

QUESTION 2 (continued)

c) An Australian mining company exports iron ore to other countries, such as China,  South Korea and Japan. Its annual report states that the company is exposed to the  risk of falling oil prices, increasing interest rates and exchange rates fluctuations  of various foreign currencies. Discuss derivative products that can be used to hedge these risks?

QUESTION 3 (CONTEMPORARY ISSUES IN FMs AND FUND MANAGEMENT)

a) On April 7th, 2020, Fitch Ratings Inc. downgrades Australia’s four biggest banks credit  ratings. How does this affect borrowers, lenders, and financial institutions? What are  the implications of this downgrade to the health of the financial system?

b) The following information on the performance of three funds A, B and C in Australia.

(i) Use the data provided on Canvas to calculate the average annual return of the market (ASX/S&P200). Find a proxy for the risk free rate in Australia and explain your reasoning.

(ii) 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 Imputation
• Vanguard Emerging Markets Shares Index Fund
Compare the risks to investors presented by each of these funds and identify the types of investors that would favor these funds.

QUESTION 4 (EQUITY CAPITAL MARKETS)

a) Bharti Airtel plans to expand its network and prepare for the launch of 5G services. The board had approved raising up to ₹21,000 crore by issuing additional ordinary shares to its existing shareholders on a pro-rata basis of one new share for each fourteen equity shares of Bharti Airtel. The financial advisers to the corporation have recommended the use of an underwriting facility. Using this information, answer these questions.

(i) What type of issue is Bharti Airtel making to its shareholders? What are the features of this type of issue?

(ii) What is an underwriting facility, and why might Bharti Airtel use such a facility?

b) Rio Tinto Limited has decided to sell its shale coal part of the business by establishing a new limited liability company to be known as Shoal Limited. Shoal Limited will be a  listed corporation on the ASX. Rio Tinto and Shoal decide to issue the new shares at $2.65.

(i) Shoal Limited will be a limited liability company. What are the rights and financial obligations of shareholders that purchase shares in the company?

(ii) One year later, Shoal Limited plans to expand its operations and seek to raise capital to do so. The company advisers recommend that the board of directors choose between a private placement or an initial public offering. Explain each of these funding alternatives and discuss the advantages and disadvantages of each alternative.