BAFI1002 Final Assessment Semester 1 2022
Submission Instruction:
•
You will be given three submission points for the final submission.
Submission point 1: COVERSHEET
Submission point 2: Certificate of academic integrity completion
Submission point 3: Final Assessment
PART 1: ACADEMIC INTEGRITY MODULE (3 marks)
Complete the Academic integrity micro-credential: https://www.rmit.edu.au/studywith-us/levels-of-study/short-courses/academic-integrity-awareness
You will receive a certificate when you complete the micro-credential and Submit
the certificate under submission point 2.
PART 2: SCENARIO ANALYSIS (47 marks)
Please submit your final assessment under submission point 3
You are a financial advisor who regularly educates new clients about how 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 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 Jaleel has and help him to have a better
understanding of financial markets.
BAFI 1002 Financial Markets, Semester 1, 2022
Page 1 of 5
1. Understanding Different Asset Classes
(TOTAL 15 MARKS)
a) There are many ways to invest money. Jaleel wonders what investment options he
can choose from. Choose three asset classes from the list below and help Jaleel to
have a closer look at each of them. You are expected to explain the unique
characteristics of the asset class, their associated risks and potential returns. For
each asset class, you should use one or two examples to support your explanation.
(6 marks)
Asset Class
Characteristics
Risk
Potential Returns
Example
Cash Products
Fixed Income
Equities
Currencies
Derivatives
b) the Australia and New Zealand Banking Group Limited (ANZ) offers a bill facility to
corporate clients. The bank website explains the terms and conditions of Bills of
Exchange. https://www.anz.com/documents/FXOnline/Bbills123.pdf
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.
(5 marks)
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 renounceable rights issue of ordinary shares and discuss the
advantages and disadvantages.
•
(2 marks)
Explain to Jaleel what is convertible bonds and why would Singapore
Airlines undertake mandatory convertible bonds to entitled shareholders?
(2 marks)
BAFI 1002 Financial Markets, Semester 1, 2022
Page 2 of 5
2. Central Banks, Monetary Policy and Interest Rates
(TOTAL 14 MARKS)
a) Market participants, including financial institutions, fund managers and corporations,
must understand monetary policy setting impacts on economic activity and 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
•
Australia
•
Singapore
•
China
•
Russia
•
New Zealand
(6 marks)
b) On the 3rd May the RBA increased the official cash rate by 0.25%. The current official
cash rate as determined by the Reserve Bank of Australia (RBA) is 0.35%. Explain to
Jaleel What are the channels through which the cash rate influences Monetary policy
and how does the monetary policy transmit to the overall economy?
(4 marks)
c) Obtain weekly data from Refinitiv Eikon and plot the interest rates (bid and ask midrate) on 2-year commonwealth government bond (AU2Y-TBOND) and 10 year
commonwealth government bond (au 10Y-TBOND) from January 2020. 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.
(4 marks)
BAFI 1002 Financial Markets, Semester 1, 2022
Page 3 of 5
3. Derivative Securities
(TOTAL 8 MARKS)
a) Jaleel knows that the primary purpose of a futures contract is the management of
risk exposures. Use Qantas Airlines as an example to further explain how a futures
contract achieves this risk management function.
(2 marks)
b) Jaleel 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.
Strike
Call premium
$975
$10.01
$0.01
$980
$4.45
$0.04
$985
$0.63
$0.99
$1005
$0.05
$20.48
(i)
Moneyness
Put premium
Moneyness
Please specify the moneyness of the above options. Are they in the money, at
the money, or out of the money?
(3 marks)
(ii)
Identify what kind of risk Jaleel is facing and to hedge this risk, which option
would you suggest that Jaleel should purchase? Why?
(3 marks)
BAFI 1002 Financial Markets, Semester 1, 2022
Page 4 of 5
4. Fund Management
(TOTAL 10 MARKS)
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 Jaleel is
identified as a risk-averse investor, which type of fund would you recommend Jaleel
to consider investing in?
(4 marks)
b) The following information on the performance of three 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.
(4 marks)
Average
return
Standard
deviation (%)
(%)
Fund
Beta
Market
4.95
–
–
Risk-free rate
1.64
–
–
Fund A
9.50
10.75
0.873
Fund B
8.65
14.82
1.251
Fund C
5.70
12.33
1.005
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 favor these funds.
(2 marks)
(TOTAL 15+14+8+10 = 45 MARKS)
BAFI 1002 Financial Markets, Semester 1, 2022
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