Financial Regulatory Reform and Economic Policy

This assignment is focused on understanding the significance of financial regulatory reform, monetary policy actions, and economic policies in maintaining a stable economy. It examines the role of interest rates, government bond purchases, and flexible exchange rates in influencing the housing market and overall economic performance. The assignment also evaluates the impact of government interventions in the banking sector and assesses the transmission of monetary policy using dynamic factor models.

Money Banking and
Finance Assessment

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY ..................................................................................................................................1
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................1
QUESTION 3...................................................................................................................................2
QUESTION 4...................................................................................................................................4
CONCLUSION .............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Money banking consists of the credit that banks extend their deposits. Translations made
using checks drawn on deposits held at banks includes the use of bank money. To manage the
finance is important so that higher returns can be generated and it is beneficial for the growth.
Banks are the financial institution who manage the money and also control the activities which
are associated with it. In this report, there are following topics are covered such as: to produce a
set of minimum variance & efficient portfolios with & without shorting selling by using 20
stocks, investment objectives and policy and analyse risk and return performance against an
appropriate benchmark. Apart from this it discuss about long and short portfolio constructions
techniques, motivation to control interest rate, inflation targeting, foreign currency derivatives &
swaps and currency forward agreement.
MAIN BODY
QUESTION 1
Effective portfolio: Effective portfolio is that which involves the different number of
assets and they are combine together with effective combination which minimize the chances of
risk. The factors which have high risk they are not taken so that chances of looseness can be
reduce.
Risk and return: The risk is involved in the every business and if a person takes more risk
than there are chances of higher return. Without risk there is no return and risk is assumed to be
measurable by the variability around the expected value of the probability distribution of return.
Two risky assets portfolio: It is that portfolio in which more risk because of lack of
analysis. The degree to which a two-risky-assets portfolio reduces variance of returns depends on
the degree of correlation between the returns of the securities.
Efficient frontier: The possible of assets combination in which risk and return are plotted
and the line along the upper edge of this area can be called efficient frontier (Chauhan, 2015).
QUESTION 2
An investment objective in regards to financial planning is the reason behind investing. It
defines how mutual fund invests its portfolio. Depending on the risk appetite of investor, there
are three main objective of investment: safety, growth and income.
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Risk profile is important for determining a proper investment asset allocation for portfolio. Here
in this report TESCO is showing the highest PE ratio which state that risk used here is also high.
Company with the lowest PE ratio is only taken here as the benchmark as company with low PE
is considered to be valued stock. Calculating PE ratio for 61 month would be a quite lengthy
process so here average of 5 years are taken and on this basis PE ratio is calculated ( Singh,
2012).
Explanation of the rationale behind the portfolio construction
The rationale behind the construction of portfolio is that different kinds of investment
yield different returns and may pose a low or high risk which can easily be found within the
portfolio.
Characteristics and composition of portfolio
One of the main characteristics of portfolio is that there must be minimum level of risk
and return involved and must be cost efficient. Quality of portfolio depends upon the return to be
expected. Risk efficiency is achieved by properly diversifying the portfolio. In the above
question portfolio is structure according to 5 years from 2014 to 2018 and then average for every
year is calculated for better understanding.
Analyse your risk/return performance against an appropriate benchmark
Benchmark taken here is Low PE ration of the stock. Here CCL is the one showing the
lowest PE ratio which means the risk involve here is also low (Korobilis, 2013).
QUESTION 3
Market Neutral Strategy
This strategy refers to group of investment strategy that pursues to nullify certain marketing
risk by taking short and long position in instrument with actual or theoretical relationship. It
also provides other sources of return when used as an part of overall investment strategy. It
is not a single strategy it includes strategy like convertible arbitrage, equity hedge, merger
arbitrage statistical arbitrage and many more. Market neutrality can be achieved either at
individual instruments level or at the portfolio level.
Portable Alpha Strategy
It is the strategy in which portfolio managers separate alpha from beta by investing in
securities that are not in the market index from which their beta is derived. This portfolio
return comes from two sources one is systematic source, which is referred as Beta. The
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second source is idiosyncratic which is represented by alpha. Portable alpha strategies is
most popular among pension funds and investors. A portfolio manager can achieve portable
alpha by investing in securities that are not related with beta. Here goal is to achieve alpha
without affecting the beta of overall portfolio (Hryckiewicz, 2014).
Hedge Strategy
Hedging is the practice of purchasing and holding securities to reduce the portfolio risk. A
put option is the classic hedging instrument. Hedging significantly reduces the amount of
capital risk in an investment. Most hostile investor often uses this strategy. By reducing the
risk in one portfolio, an investor can move its risk elsewhere. It also help to ensure that
investors can meet the future obligations. The pricing of hedging is related with the
downside risk. As the more downside risk, the purchaser of hedge seek to transfer to the
seller, which will result in expensive hedge.
To calculate the beta of security, the covariance between the return of the security and return of
market must be known as well as variance of the market return.
Beta of Lloyd is
Covarience/ varience
30.594/213.7588
=0.143
Beta of CCL is
-3.497/124.626
=-.0280
Beta of RBS
8.1809/6.268
=1.3050
Beta of TESCO
-396.50/271.122
=-1.462
Beta of STAN
-396.502/51722.31
=-.007659
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QUESTION 4
To control interest rate is important if it will be control by Bank of England than more
number of consumers will take the loan as a result purchasing power can be increase more
money can be circulated in the UK economy. And this decision of bank can affect the decisions
of Brexit. Monetary policy is maintained through actions such as modifying the interest rate,
buying or selling government bonds, and changing the amount of money banks are required to
keep in the vault. The policies which are associated to it can impact the UK economy and the
decisions which are related to it affected by Brexit. In the case when Bank of England will raise
the bast interest rate than people will take loan because they have to pay more interest. As a
result limited currency will be circulated in the UK economy and this decision can be affected by
Brexit. IS-LM is model that is for investment savings, liquidity money and it reflects that market
for economic goods which interacts with the loanable funds market which effect expansionary &
restrictive monetary policies. AD-AS model denotes price level & output through the
relationship of collective supply & demand that can influence expansionary & restrictive
monetary policies of UK economy (Calomiris and Khan, 2015).
Aggregate supply relationship curve shows the quantity of real GDP what is supplied by
the economy at distinct price levels. The assumptions which are used in based the prices of
goods remain constant. As LR means Long run and SR short run. If Bank of England will
increase the base rate than people will not prefer to take the loans from bank and for a short term
it is not affected much to economy of UK but in long run the supply of money can be reduce
which funds will not circulated. Short rum denotes the time period within the one year and long
run denotes the time period more than one year. As inflation targeting is a monetary policy
regime in that Bank of England has an explicit target inflation rate in context to medium term &
announces this to the general people. This policy is beneficial for the UK economy and the
decisions can be affected by Brexit. Taylor rule is helpful because it provide the framework to
the Bank of England that what factors are needed to be consider while alter interest rate in
context to the fluctuations in economic conditions. If economic conditions does not consider than
UK economy can be affected. The decision will not affected by Brexit.
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A no deal Brexit may impact the £ making it weaker, in this context it can be said that
government of UK has issued a bleak warning over a no deal Brexit, it has assumed that the
economy of country can be 9% weaker in the long run. It is the duty of Bank of England that
flexible exchange rate is require to be introduced (Ban and Freitas, 2016). From the impact of
Brexit there is a case arises in which government of UK has impose the trade restrictions by
forces of supply & demand. As the market efficiency denotes the degree to which market prices
reflects all available and appropriate information. The situation when market is efficient than
people will be aware about all information and data related to the prices. If market does not
efficient than UK economy can be affected. The equilibrium exchange rate is the rate in which
supply & demand of the same currency are equal. This situation reflects that prices of
exchanging two currencies will remain stabilized. The foreign exchange rate can affect the
economy of UK. A spot rate is a contract price for a transaction which is talking place on the
spot. A forward rate is the settlement price which takes in future when the transaction has
implemented. Nominal exchange rate is the relative price of currencies of two nations as an
instance, if exchange rate is £ 1 = $ 2, in that case British will exchange one pound for 2 dollars.
Real exchange rate denotes the relative price of goods of British & USA and it is the rate in
which Britisher will trade its own goods for those of USA. As uncovered interest parity denotes
the variation in interest rate among two nations will equal the relative fluctuation in currency
foreign exchange rates over the identical period of time. Too much variation in currency can
impact the economy of UK. Variation in exchange rate. Exchange rate is the rate in currencies of
two countries can be exchange or traded. Variation in exchange rate can be happen due to the
following reasons such as: inflation, interest rate, public debt, current account deficit, public
debt, political stability & economic performance. Demand for money is the desired holdings of
financial assets which is related to the money and there are various factors which can influence it
such as: inflation, income level etc. Hedge is done for the investment to minimise the risk of
contrary movements in price in context to an assets (Assaf and Ibiwoye, 2012).
As foreign currency derivates are the financial derivates and the pay-off is related to the
foreign exchange rate of 2 or more nations. There are mainly three types of derivates such as:
forward, future and option. Swap is a term which is used in derivate contract in which cash flow
has been exchange among two or more parties and it includes interest rate payment. Increase in
exchange rate can effect housing market because if Bank of England will increase the interest
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rate than people does not take loan for making house because they have to pay higher interest for
that. As a result individuals does not prefer to take housing loan and which affect the housing
market and it can be the reason of crises. Mortgage is the term in which person mortgage its
assets while taking the loan from the bank. Interest rate swap strategy can be made while two
parties exchange one stream of interest payments for another over a specific time duration. The
currency forward contract is an agreement which takes place among two parties to exchange
particular amount of currency for another currency at a fixed exchange rate on a fixed future date
(Asongu, 2013).
CONCLUSION
As from the above report, it has been concluded that money banking and finance are
important terms which are needed to be analysed. A portfolio can be develops in a set of
minimum variance & efficient portfolio with & without short selling restriction. There are
various factors which are related to portfolio constructions and to set the benchmark is important
because it is helpful to make the comparison. For a hedge fund manager it is important to
manage the portfolio effectively in order to minimise the risk. It is important to maintained
monetary policy actions such as: modifying the interest rate, buying and selling government
bonds etc. The exchange rate is require to be flexible so that economy of a country does not get
affected. High interest rate can influence the housing market.
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REFERENCES
Books and Journals
Asongu, S. A., 2013. Fighting consumer price inflation in Africa: What do dynamics in money,
credit, efficiency and size tell us?. Journal of Financial Economic Policy.5(1). pp.39-
60.
Assaf, A. G., Barros, C. and Ibiwoye, A., 2012. Performance assessment of Nigerian banks pre
and post consolidation: evidence from a Bayesian approach. The Service Industries
Journal.32(2). pp.215-229.
Ban, C., Seabrooke, L. and Freitas, S., 2016. Grey matter in shadow banking: international
organizations and expert strategies in global financial governance. Review of
International Political Economy.23(6). pp.1001-1033.
Calomiris, C. W. and Khan, U., 2015. An assessment of TARP assistance to financial
institutions. Journal of Economic Perspectives.29(2). pp.53-80.
Chauhan, S., 2015. Acceptance of mobile money by poor citizens of India: Integrating trust into
the technology acceptance model. Info.17(3). pp.58-68.
Duca, M. L. and Peltonen, T. A., 2013. Assessing systemic risks and predicting systemic events.
Journal of Banking & Finance.37(7). pp.2183-2195.
Duffie, D., 2017. Financial regulatory reform after the crisis: An assessment. Management
Science.64(10). pp.4835-4857.
Ghosh, S., Gonzalez del Mazo, I. and Ötker-Robe, İ., 2012. Chasing the shadows: How
significant is shadow banking in emerging markets?.
Hall, S., 2012. Geographies of money and finance II: Financialization and financial subjects.
Progress in Human Geography.36(3). pp.403-411.
Hryckiewicz, A., 2014. What do we know about the impact of government interventions in the
banking sector? An assessment of various bailout programs on bank behavior. Journal
of Banking & Finance.46. pp.246-265.
Korobilis, D., 2013. Assessing the transmission of monetary policy using time‐varying parameter
dynamic factor models. Oxford Bulletin of Economics and Statistics.75(2). pp.157-179.
Singh, A. B., 2012. Mobile banking based money order for India Post: Feasible model and
assessing demand potential. Procedia-Social and Behavioral Sciences.37.pp.466-481.
Singh, D., 2016. Banking regulation of UK and US financial markets. Routledge.
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