Financial Markets and Institutes Assignment - Semester 1

This assignment delves into the core concepts of financial markets and institutions, covering a range of topics essential for understanding finance. The assignment begins with an analysis of equity valuation, examining the P/E ratio, beta, and the Capital Asset Pricing Model (CAPM) to assess investment viability. It then explores interest rate dynamics, including calculating inflation rates and analyzing yield curves, considering the impact of inflation and changing interest rate expectations. The assignment further examines the use of sensitivity analysis for financial institutions and the application of derivative instruments like futures contracts for hedging. The final section examines the regulatory environment for financial institutions, including capital adequacy, risk management, and the separation of commercial and investment banking, as well as the role of shadow banking and technology companies in the financial sector. The assignment provides detailed calculations and interpretations to support the analysis.

Running head: FINANCIAL MARKETS AND INSTITUTES
Financial Markets and Institutes
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Assignment One:........................................................................................................................4
Question 1:.................................................................................................................................4
a) Providing confirmation on the share price of Rentokil should be purchased:.......................4
b) Indicating whether investments in the organisation is viable after analysing the beta:.........4
c) Explaining whether there is a probability for the off-setting capital gains:...........................4
d) Stating the significance of financial ratios while making investment decisions and
detecting different models that could be used:...........................................................................5
Question 2:.................................................................................................................................5
a) Calculating the five-year average expected inflation rate:.....................................................5
b) Indicating the nominal yield of Central Bank of Egypt that can be offered on 5-year
Treasury Bonds:.........................................................................................................................5
c) Providing the yield curve and indicating about the maturity premium to increase sentiment
might the force:..........................................................................................................................6
d) Stating how the yield curve have shifted if the inflation rate is 10%:...................................7
e) Highlighting the sort of yield curve that would be observed if the rate falls by 10% per
year:............................................................................................................................................7
f) Explaining the impact of Pure Expectations theory may not hold and its factors:.................8
Assignment Two:.......................................................................................................................9
Question 1:.................................................................................................................................9
a) Indicating why sensitivity analysis if assets and liabilities in a financial institutions:..........9

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b) Depicting the actions that would be taken when the time-weighted value of assets is
different from that of liabilities:.................................................................................................9
c) Stating the meaning of Liquidity Matching and the important to an institution:...................9
d) Stating whether financial futures as a method of hedging should be used by Nationwide: 10
Question 2:...............................................................................................................................10
a) Stating the Index Option contracts, where it hedges the entire portfolio:............................10
b) Stating the ways in which the portfolio could be prepared, where losses are not more than
2%:...........................................................................................................................................10
c) Indicating the ways in which different measures could be used for covering the cost of
purchasing the options:............................................................................................................11
Assignment Three:...................................................................................................................12
a) Identifying the additional measures that need to be imposed for regulating such
institutions:...............................................................................................................................12
b) Indicating whether the regulations, where sufficient capital to protect solvency:...............12
c) Indicating whether there is emphasis capital adequacy and controlling risk:......................13
d) Stating relevant regulations for addressing the “to big to fail” problem:............................13
e) Stating whether commercial and investment banking should be separated:........................13
f) Stating whether shadow banking and even entry by the Tech giants (Alibaba, Amazon,
Google) be allowed:.................................................................................................................13
g) Stating whether “risk-weighting” of assets, the correct approach or does it have unintended
consequences:...........................................................................................................................14
h) Stating whether minimum capital requirements, promoting market discipline and
supervisory review:..................................................................................................................14

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i) Stating whether the supervisor regulation and prudential regulation correct:......................15
References:...............................................................................................................................16

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Assignment One:
Question 1:
a) Providing confirmation on the share price of Rentokil should be purchased:
The value of P/E for Rentokil is at the levels of 6 versus the industry average of 8,
which mainly indicates that prices of the stock could increase in future to contemplate with
the low level of P/E ratio. P/E ratio is considered as one of the major components for
detecting the valuation of the stock by dividing the level of share price with the current EPS
derived during the financial year. Therefore, the low level of P/E ratio in comparison to the
industry average mainly states that the overall share price of the company would increase in
future.
b) Indicating whether investments in the organisation is viable after analysing the beta:
Particulars Value
Market return 12%
Risk free rate 3%
Return on Equity for Bellway 12.50%
beta 1.2
CAPM 13.80%
The information in the above table states about the Capital Asset Pricing Model
(CAPM), which is used for detecting the expected return of Bellway. Hence, the calculations
have indicated that the expected return for the stock is higher in comparison to the return on
equity, which states about the undervaluation of the current stock.
c) Explaining whether there is a probability for the off-setting capital gains:
The probability of share price decline is relevantly higher, as exposure in shares
requires investors to raise the level of risk in their investment. However, the increment in the

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interest rate would attract more investors, as it would allow them to generate higher returns
and reduce the level of risk from the investment exposure. Therefore, the buying drive in the
shares would decline and might contribute towards its decline, as investors would require
capital for increasing their exposure in the higher interest rate options.
d) Stating the significance of financial ratios while making investment decisions and
detecting different models that could be used:
The significance of financial ratios such as P/E ratio only provides small information
regarding the current trend of the organisation. Moreover, other models such as dividend
discount model and FCFE approach could be used by investors to understanding the current
valuation of the company and determine whether it is undervalued or overvalued. Thus, P/E
ratio is used for confirmation, whereas DDM and FCFE is used for confirming whether the
current valuation of the company is appropriate for investment for not.
Question 2:
a) Calculating the five-year average expected inflation rate:
Year Inflation rate Inflation +1
2014 13% 1.13
2015 9% 1.09
2016 7% 1.07
2017 6% 1.06
2018 6% 1.06
Average expected inflation rate 8.1683%
b) Indicating the nominal yield of Central Bank of Egypt that can be offered on 5-year
Treasury Bonds:
Particulars Value
Real risk free rate 2.00%
Inflation in 2014 13.00%
Maturity premium 2.93%

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Nominal yield 17.93%
The analysis states that there is low chance for the bond to default, as the government,
which makes the value risk free rate, backs it. However, the bond would be matured in 5
years, where maturity premium needs to be added.
c) Providing the yield curve and indicating about the maturity premium to increase
sentiment might the force:
Particulars Value
Real risk free rate 2.00%
Compound annual rate 10.00%
Maturity premium 2.00%
Maturity premium in year 2 2.42%
Maturity premium in year 5 3.22%
Maturity premium in year 10 5.19%
Maturity premium in year 20 13.45%
Particulars Value
Real interest rate 2.00%
Inflation expected by investors 15.00%
Yrs 2 19.42%
Yrs 5 20.22%
Yrs 10 22.19%
Yrs 20 30.45%
Yrs 2 Yrs 5 Yrs 10 Yrs 20
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
19.42%
20.22%
22.19%
30.45%
Yield Curve

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The above graph explains about the rising yield curve, which suggests that the new
government would raise the interest rate. This would increase concern for government ability
to secure the repayment of the debt, which in tur would raise the maturity premium, as market
participant will needs more protection.
d) Stating how the yield curve have shifted if the inflation rate is 10%:
Particulars Value
Real interest rate 2.00%
Inflation expected by investors 10.00%
Yrs 2 14.42%
Yrs 5 15.22%
Yrs 10 17.19%
Yrs 20 25.45%
Yrs 2 Yrs 5 Yrs 10 Yrs 20
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
14.42%
15.22%
17.19%
25.45%
Yield Curve
The shift in the yield curve is witnessed in the above graph, as the overall inflation
rate is declined from 15% to 10%. Hence, the yield curve shifted downwards portraying the
impact of inflation in curbing the projection and direction of the curve.
e) Highlighting the sort of yield curve that would be observed if the rate falls by 10%
per year:
Particulars Value
Real risk free rate 2.00%

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Compound annual rate -10.00%
Maturity premium 2.00%
Maturity premium in year 2 1.62%
Maturity premium in year 5 1.18%
Maturity premium in year 10 0.70%
Maturity premium in year 20 0.24%
Particulars Value
Real interest rate 2.00%
Inflation expected by investors 15.00%
Yrs 2 18.62%
Yrs 5 18.18%
Yrs 10 17.70%
Yrs 20 17.24%
Yrs 2 Yrs 5 Yrs 10 Yrs 20
16.50%
17.00%
17.50%
18.00%
18.50%
19.00%
18.62%
18.18%
17.70%
17.24%
Yield Curve
The downward yield curve is mainly portraying the negative growth rate on the
current iris free interest rates of the government. This would mainly indicate that the interest
rate in future would mainly decline and reduce the concern for the investors.
f) Explaining the impact of Pure Expectations theory may not hold and its factors:
The factors that have an impact on the yield curve are Economic growth, Inflation rate
and Interest rate, as it has both negative and positive on the yield curve. Therefore, investors
need to analyse all the factors to understand the investment opportunity in the bonds, which
could help in generating higher revenues in the long run.

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Assignment Two:
Question 1:
a) Indicating why sensitivity analysis if assets and liabilities in a financial institutions:
The gap between its assets and liabilities are mainly high, as the assets have 30-year
mortgage, while liabilities are 5-year Certificate of deposits. Therefore, sensitivity analysis
can be used on the interest rates, as it would help in deducing that they do not face a crunch
making it difficult for the company to repay their liabilities.
b) Depicting the actions that would be taken when the time-weighted value of assets is
different from that of liabilities:
The overall time weighted value of assets and liabilities are relevantly not same, as its
assets are 30 year and liabilities are 5 years. In addition, the firm need to conduct a duration
matching system, where the interest rate sensitivity management would be required for
keeping track of the interest rate risk.
c) Stating the meaning of Liquidity Matching and the important to an institution:
The organisation needs to develop an appropriate liquidity matching system, where
the overall assets could be used for supporting its liabilities in time of cash crunch. The
current liabilities of the company will mainly mature in 5-yaer, whereas the overall assets
could only be used after 30-years mortgage payment. Thus, the organisation needs to
maintain sufficient funds for every 5-years, as repayments would be required for the
liabilities.

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d) Stating whether financial futures as a method of hedging should be used by
Nationwide:
Derivative instrument such as future contract is mainly beneficial for fixing the losses
or fluctuations on exchange rate or purchase price. However, the overall hedging process on
the falling interest rate yield cannot be implemented, as it would not benefit the organisation.
Hence, not using the hedging process such as future contract would do better for the
organisation. Thus, for making the most out from the falling interest rate Nationwide
Building Society should not use any kind of derivative contracts.
Question 2:
a) Stating the Index Option contracts, where it hedges the entire portfolio:
Particulars Value
Priced multiplication $2.50
S&P 500 index level $1,400.00
Value of Index $3,500.00
Portfolio value $700,000.00
Number of contracts 200.00
The above calculations states that the number of contracts needed for portfolio
hedging is 200. The multiplication that is required for the calculation is mainly multiplied
with the current index value of 1,400. After which the overall values of index are mainly
divided with the portfolio value to determine the number of contracts that is required for
supporting the hedging process.
b) Stating the ways in which the portfolio could be prepared, where losses are not more
than 2%:
Particulars Value
Buying Put option with strike price 1372
Put premium $24.00
Priced multiplication $2.50