Financial Markets

FINANCIAL MARKETS

Q1.)
a) Yield rates in Europe have been negative and that of US have been positive. Positive yield
on treasury bonds signify that there has been a positive return on investment. However, it
may not be the case always as the central bank of US Fed does not cut rates below zero as its
policy rate is to stay positive. Yields on Treasury bonds going negative means there is a
supply crunch where cash is needed by companies and as US auction rules prevent rates
going below zero, the treasury bills can generate negative yields if traded in secondary
markets.
b) Coupon rate = central government bond yield + 1.86 p.a.
Central government bond yield rate for four year’s maturity = -0.74
Rate of coupon = -0.74 + 1.86 = 1.12% p.a.
Annual payment = 1000 * 1.12% = 11.2
Current market price of a bond = (2.3 / 1+4.5)1 + (11.2 / 1+4.5%)2 + (11.2 / 1+4.5%)3 +(11.2
/ 1+4.5%)4 + (8.4/1+4.5%)5
=35109.66
c) Change in demand for capital and Loanable funds market
It shows how an increase in demand by companies for capital can influence the market of
loanable funds. An increase in the technical improvement can increase the capital’s marginal
product, changing the capital’s demand curve. Firms are to give money for increase in capital
acquisition by asking for funds which are loanable and leading to rise in rate of interest. Thus, in
market capital’s demand is greater leading to higher interest rates (Guo and et.al.,. 2018).
Change in loanable funds market of loanable funds and capital demand
Second example can be when events in the market affect the capital firms hold. If customer
increase consumption which supplies less of funds at any rate of interest. Consumer preferences’
change affects the loanable funds’ supply.
d) Changes in rate of interest are to affect likely the rate of exchange as rate of interest, inflation
and exchange rates are highly related with each other. On manipulation of rate of interest, central
bank may influence over inflation and rate of exchange and interest rate change can affect

currency values. Higher interest rate give lenders a high return comparing with other countries. If
rate of interest is high, it can bring in foreign capital and increase the exchange rates. Impact of
interest rate being high is slowed if inflation in the country is high, comparing to others.
Opposite relation is existing for decrease in rates of interest which is lower rate of interest
influence to decrease rate of exchange.
Q2.)
i) It can be seen that Australia and New Zealand Banking Group have interest rate as 0.75%
which is on daily compounding basis. Thus, calculating the same, we get
Time period= 4 years= 4*365= 1460
Rate of interest=0.75%
Interest on one day= 0.75% of 15000= 112.5
Interest on whole time period= 112.5*1460= 164250
Total sum earned= 15000+164250=179250.00.
ii) If the interest is earned frequently in each year, it will add up to the investment horizon. This
is true that if interest is earned at a compounding rate of interest then it will add up to the amount
because at simple rate of interest one cannot get the amount as it is done only on the principal
and not the interest. In compounding rate of return, money will be compounded on the interest
earned daily and thus it will help in increasing the yield amount after the time period
(Macapinlac, 2018).
c) In this question, Compound Interest method can be used to calculate which option should be
suitable.
Formula for Amount= Principal*(1+r/100)^n
Here, Principal= Cash flow or earnings
R= compounding rate of interest
N= time period
Amount Calculation

Year 1 Cash flow Amount
1 700000 917557
2 750000 918782
3 800000 915920
4 850000 909500
Total=3661759
Computation has been done in the manner:
For year 1, amount=700000*(1+7/100)^4=917557
For year 2, amount=750000*(1+7/100)^3=918782
This implies that time period decreases as year pass on. Same has been followed in other
computations.
Amount
Year Cash flow Amount
1 800000 1048636
2 800000 980034
3 750000 858675
4 700000 749000
Total= 3636345
Amount
Year Cash flow Amount
1 750000 983097
2 775000 949408
3 775000 887297
4 775000 829250
Total= 3649052

These are all the amount value computation keeping in mind the interest on money and using rate
of interest as 7% being the factor to find the total value of money. It can be seen that Richmond
football club has the highest amount value and thus the correct option.
Q3.)
(A)
(1)
Moneyness contains three different options. All options contain different call premium
and the put premium. Every individual contain its own individual significance and benefit of
approaching the option. The first option contain the 30 as a strike value and contain 3.05 as a call
premium and the 2.33 as a put premium. The second option is 34.5 of strike carry 3.9 as a call
premium and 4.5 as a put premium. The third one is 38 as a strike, 3.2 as a call premium and the
7 as a put premium. All three options carry different situations. The option should be approached
that can provide the best level of financial outcome to the entity. Among all the option the
financial outcome is almost similar but the third option carry the maximum possible opportunity
to earn financial gain in the respective market (Xue and et.al., 2018). This option has a bright
possibility of earning potential return against making up investment. Every company seek such
investment option that carries the both long term and short term growth or profit making
opportunities in the respective market. This is stated as the best possible outcome against making
or taking up the investment decision in the market.
(2)
Moneyness has been suggested to go for the third option contains a 38 as a strike value.
This option or the choice carries the best possible opportunity to gain the financial gain against
taking up the investment decision. This option carry the 38 as a strike value and also the
difference between the call premium and the put premium is effective that make this option as a
most favourable among all other option (Tao and et.al., 2021). The aim of the investor is always
to choose or select an investment choice that can provide the best possible financial outcome or
benefits against taking up the investment decision in the market. This option would allow the
best possible investment opportunity that can provide the both long term and short term financial
growth or the profit making opportunity.