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

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Put premium per contract $60.00
Number of contracts 200.00
Total premium cost $12,000.00
The information in the above table states about the measures, which could be used for
minimising the level of losses for the portfolio to a mere 2%. The put option of the index
could be bought at the strike of 1372, where the overall premium of the contract is at $24,
which makes the premium for each contract the level of $60. Hence, total premium cost for
the contract is at $12,000, which is less than 2% of the portfolio value. The negative price
movement would have a loss less than 2% of the polio value.
c) Indicating the ways in which different measures could be used for covering the cost of
purchasing the options:
Particulars Value
Number of contracts 200.00
Selling call option with strike price $1,428.00
Priced multiplication $2.50
Call premium $24.00
Call premium per contract $60.00
Total premium income $12,000.00
The information in the above table states about the calculations, where income could
be generated from the sale of Options on the S&P Index Futures. The trajectory of the index
directly indicates about a weak movement that would be conducted during the next 3 months.
Hence, the call option could be sold for the next three months to generate appropriate
premium income. The calculation suggests that 200 Call options with a strike price of $1,428
could be sold, where a premium of $60 could be earned on each contract. This makes the
overall income from the premium to be at the levels of $12,000.

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Assignment Three:
a) Identifying the additional measures that need to be imposed for regulating such
institutions:
The banks were the main promoters of the financial crisis of 2008, which partially
destroyed the financial sector of the world. The lack of appropriate rules and regulations that
was imposed on the banking system was the main reason behind the huge manipulations that
was conducted by both the banks and other institutions. Therefore, certain regulations related
to transparency in their financial books and disclosure of each activity would be appropriate,
as it would help in minimising the occurrence of frauds and shady transactions. The second
regulation should be based on the risk symmetric, which needs to be followed by the banks
for securing the loans and other advances. This would help in minimising the level of risk
that is taken for earnings relevant income from their operations. Regulating the financial
books and the risk systematic would eventually help the banking regulation to curb the level
of problems that might have negative impact on their performance (Schneider et al. 2017).
b) Indicating whether the regulations, where sufficient capital to protect solvency:
The focus of the regulation needs to be on both the conduct of the banks and the
maintenance of sufficient capital to protect solvency, as the combination would be required
for efficiently regulating the banking system. The regulations for the conduct of the business
are required, as it would ensure that the banks are not conducting any shady actions that
might lead to problems and unsecure the customer deposits in the long run. Therefore, the
conduct of the banks needs to be appropriate, where all the investments is secured, as it
would help in strengthening their financial conditions. Thus, the presence of sufficient capital
would eventually allow the banks to reduce the occurrence of insolvency during the time of
cash crunch, as financial institutions have obligations towards their depositors (Yeoh 2018).

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c) Indicating whether there is emphasis capital adequacy and controlling risk:
Banking regulations such as Basel III and Basel IV Accord mainly focuses upon
controlling risk and capital adequacy of a financial institution, as it is essential for reducing
the possibility of insolvency conditions. Therefore, there is sufficient emphasis on the
relevant risk controls after the financial crisis of 2008. However, additional controlling
measure needs to be stabilised for minimising the possibility of higher risk trades or actions
that could be taken by the banks to boost their revenue.
d) Stating relevant regulations for addressing the “to big to fail” problem:
The regulations that are currently being imposed on the banking sector cannot secure
for the possibility of ‘too big to fail’ problem. The regulations are not able to provide
appropriate shielding for the manipulations that could be used for alternating the financial
performance of bank. Therefore, implementation of different regulations needs to be diligent
on the banking sector, as scandals and manipulations are prone in the company’s due to the
desire to generate higher revenues from their operations (Isepy 2015).
e) Stating whether commercial and investment banking should be separated:
The investment and commercial banking should not be separated, as it would have
problems for the financial institutions to generate appropriate income in the process. The
combination of the business would support each banking system to support customers
demand.
f) Stating whether shadow banking and even entry by the Tech giants (Alibaba,
Amazon, Google) be allowed:
Shadow banking should not be allowed in the banking system, as it hamper the
purpose the overall sector. However, the entry of tech giants like google, Amazon and
Alibaba is welcomed, as they would ease the process of the banking sectors and provide

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additional revenue streams. However, the laws of the financial institutions would also apply
to the new entrants such as the Tech giants, as they act as a financial intermediary for the
banking sector (Atik 2014).
g) Stating whether “risk-weighting” of assets, the correct approach or does it have
unintended consequences:
The risk-weighting of assets is the correct approach, as it allow the companies to
understand the level of risk associated with each investment. Hence, risk weighting would
enumerate investment options, which could be used by banking companies for lowering the
risk attributes of their investments. Hence, the risk weighting approach is correct and needs to
be used by banking companies to segregate investment options, while making strategic
investment decisions (Sutorova and Teply 2014).
h) Stating whether minimum capital requirements, promoting market discipline and
supervisory review:
Yes, the mix between minimum capital requirements, supervisory review and
promoting market discipline appropriate, as it would force the banking companies to make
adjustments to their operations and reduce the possibility of insolvency. The minimum capital
requirements would allow the companies to maintain appropriate capital for their operations,
which could reduce the excess lending process that might be conducted by banks to increase
their interest income. In the similar process, the implementation of supervisory review and
promoting market discipline would mainly ensure the ethical actions that would be taken by
the banks while making investment decisions, which would not lead to corruption or
manipulation.

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i) Stating whether the supervisor regulation and prudential regulation correct:
Basel III and IV are an adequate way forward, where minor changes could be required
in future due to the changes in the dynamics of the banking sector (Parillo 2019). The current
regulations are appropriate for the present era, as the overall process of the improvement
increases; additional measures could be added to support the current standards and
regulations of the banking companies.

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References:
Atik, J., 2014. EU Implementation of Basel III in the Shadow of Euro Crisis. Review of
Banking and Financial Law, 38, p.287.
Isépy, T., 2015. Basel III: Rethinking liquidity and leverage. Society and Economy, 37(1),
pp.89-107.
Parillo, F., 2019. From Basel III to Basel IV: Recent innovations introduced by Basel
Accords. In Право и современная экономика: новые вызовы и перспективы (pp. 105-
109).
Schneider, S., Schröck, G., Koch, S. and Schneider, R., 2017. Basel “IV”: What’s next for
banks. Implications of Intermediate Results of New Regulatory Rules for European Banks.
McKinsey Global Risk Practice Paper.
Šútorová, B. and Teplý, P., 2014. The level of capital and the value of EU banks under Basel
III. Prague Economic Papers, 23(2), pp.143-161.
Yeoh, P., 2018. Basel IV: International Bank Capital Regulation Solution or the Beginnings
of a Solution?. Business Law Review, 39(5), pp.176-183.