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FIN301e End-of-Course Assessment - January Semester 2017 Financial Instruments, Institutions and Markets __________________________________________________________________________________________ INSTRUCTIONS TO STUDENTS: 1. This End-of-Course Assessment paper comprises EIGHT (8) pages (including the cover page). 2. You are to include the following particulars in your submission: Title, Your PI, Your Name, and Submission Date. 3. Late submission will be subjected to mark-deduction scheme by the University. IMPORTANT NOTE ECA Submission Deadline: 7 March 2017, 12 noon FIN301e Copyright 2017 SIM University ECA - January Semester 2017 Page 1 of 8 ECA Submission Guidelines Please follow the submission instructions stated below: A - What Must Be Submitted You are required to submit the following THREE (3) items for marking and grading: A Report (you should submit this item first as it carries the highest weightage). A Video Presentation: o UniSIM conducts Hands-on workshop on how to record ECA video presentation for SBIZ students every semester. Students will receive an invite to the workshop via Student Portal, Canvas as well as email, a month before the ECA cut-off date. o The ECA video recording and submission guides are also available as an external links/downloads in the invite. The set of PowerPoint slides, converted to PDF, upon which the video presentation is based. Please verify your submissions after you have submitted the above THREE (3) items. B - Submission Deadline The THREE (3) items of Report, Video and Presentation Summary are to be submitted by 12 noon on the submission deadline. You are allowed multiple submissions till the cut-off date for each of the THREE (3) items. Late submission of any of the THREE (3) items will be subjected to mark-deduction scheme by the University. Please refer to Section 5.2 Para 2.4 of the Student Handbook. C - How the (3) Items Should Be Submitted The Report: submit online to Canvas via TurnItIn (for plagiarism detection) The Video: submit online to Canvas (refer to workshop invite for the user guide) The Presentation Summary: o submit online to Canvas via TurnItIn (PPT must be converted to PDF and submission is in PDF only) o The PPT must contain at least 20 words o Refer to workshop invite for the user guide FIN301e Copyright 2017 SIM University ECA - January Semester 2017 Page 2 of 8 Avoid using a public WiFi connection for submitting large video files. If you are using public wireless (WiFi) connection (e.g. SG Wireless at public areas), you might encounter a break in the connection when sending large files. D - Additional guidelines on file formatting are given as follows: 1. Report 2. Video Please ensure that your Microsoft Word document is generated by Microsoft Word 2007 or higher. The report must be saved in .docx format. Showing your PowerPoint projection in the background is NOT required. Time Duration: a minimum of 3 minutes and a maximum of 6 minutes There are two methods for ECA video assignment submission; either Record Media or Upload Media. For Record Media Video can be recorded via Canvas through desktop/laptop with builtin webcam and microphone or through Canvas mobile app. For Upload Media Video can be recorded using other recording devices and uploaded as a media file. Do ensure that your video file conforms to these requirements: a) File Format: .mp4 b) File Size: No more than 500MB Note: You will receive an invite to the ECA Hands-On workshop via Student Portal, Canvas as well as email, a month before the ECA cutoff date. The invite will allow you to register for the workshop as well as download a copy of the user guide. 3. Presentation Summary Your PowerPoint presentation must contain at least 20 words. Please ensure that your PowerPoint presentation is converted to PDF format before you submit. The maximum number of slides is fifteen (15). Please do NOT download and use PowerPoint slide design templates from the Internet. FIN301e Copyright 2017 SIM University ECA - January Semester 2017 Page 3 of 8 E - Please be Aware of the Following: Submission in hardcopy or any other means not given in the above guidelines will not be accepted. You do not need to submit any other forms or cover sheets (e.g. form ET3) with your ECA. You are reminded that electronic transmission is not immediate. The network traffic may be particularly heavy on the date of submission deadline and connections to the system cannot be guaranteed. Hence, you are advised to submit your work early. Canvas will allow you to submit your work late but your work will be subjected to the mark-deduction scheme. You should therefore not jeopardise your course result by submitting your ECA at the last minute. It is your responsibility to check and ensure that your files are successfully submitted to Canvas. F - Plagiarism and Collusion Plagiarism and collusion are forms of cheating and are not acceptable in any form in a student's work, including this ECA. Plagiarism and collusion are taking work done by others or work done together with others respectively and passing it off as your own. You can avoid plagiarism by giving appropriate references when you use other people's ideas, words or pictures (including diagrams). Refer to the APA Manual if you need reminding about quoting and referencing. You can avoid collusion by ensuring that your submission is based on your own individual effort. The electronic submission of your ECA will be screened by plagiarism detection software. For more information about plagiarism and collusion, you should refer to the Student Handbook (Section 5.2.1.3). You are reminded that UniSIM takes a tough stance against plagiarism or collusion. Serious cases will normally result in the student being referred to UniSIM's Student Disciplinary Group. For other cases, significant mark penalties or expulsion from the course will be imposed. FIN301e Copyright 2017 SIM University ECA - January Semester 2017 Page 4 of 8 Video Presentation Evaluation Criteria Note: Students will be assessed on the quality of the presentation and not the quality of the video recording. However, the recording is expected to have video and audio clarity. Showing your PowerPoint projection in the background is NOT required. Organisation of Presentation /8 Logical flow of presentation Posture & Body Language Posture: Standing, straight back etc... Body language: /5 - Hand gestures supporting oral arguments, etc... Eye-Contact /5 Looking at the video camera No reading of slides or notes or cue cards Pace & Articulation /7 Pace: Speaks neither too fast nor too slow Articulation: Oral expression is clear and confident in the presentation. TOTAL /25 Presentation Summary Evaluation Criteria Format and Style of Slides Layout, clarity of text elements, colour blends, graphical enhancements Clarity and Coherence /4 Proper flow - title page, introduction, body, results, recommendations / discussion points, conclusion/summary; quick to understand, free from grammatical errors Creativity /3 /3 Ability to use creative elements to value-add to the presentation so as to enhance understanding and clarity of difficult concepts TOTAL FIN301e Copyright 2017 SIM University ECA - January Semester 2017 /10 Page 5 of 8 SECTION A (Total 65 marks) Question 1 When it comes to sourcing long term financial resources, a company can issue two types of securities: bonds or shares. (a) Assess the benefits and disadvantages of each of these sources of financing. (5 marks) (b) Preference shares and convertible bonds are both called \"hybrid\" instruments. Explain how they are structured, and assess the similarities between them and why they are characterised as 'hybrid\". (7 marks) (c) Discuss the impact of a rise in interest rates on bonds and shares. (5 marks) Question 2 (a) Assess the differences between a commercial bank and an investment bank. (7 marks) (b) Download the 2015 annual report of UOB and Morgan Stanley UK at the links below. Show how the differences established in part (a) are reflected in their respective balance sheets and income statements. http://www.uobgroup.com/AR2015/pdf/UOB_Annual_Report_2015.pdf https://www.morganstanley.com/about-usir/pdf/MSIP_Group_Accounts_31_December_2015.pdf (10 marks) Question 3 April 1st 2016 - As a treasurer of Bright Fortune Ltd, a Singaporean company operating in Singapore but with USD as a functional currency, you just signed a 5-year loan with DBS where you borrow 10 million USD at a rate of 1-year Libor + 200 bps (basis points). The 1year Libor rate on April 1st 2016 is 0.75%. However, since the beginning of the year, there has been persistent market expectations that the US Federal Reserve might intensify its raising of short term interest rates from their historically - and abnormal - low level. FIN301e Copyright 2017 SIM University ECA - January Semester 2017 Page 6 of 8 (a) Calculate - where possible - the amount of interest that you will pay to DBS. (2 marks) (b) Analyse the risks (or lack thereof) that the loan exposes Bright Fortune to. (5 marks) (c) Formulate a strategy using swaps to hedge this risk. (7 marks) Question 4 Ozfood Pty Ltd, a cookie manufacturing company based in Sydney, has received an order today, i.e. 7 October 2014, to sell 10,000 boxes of its best-selling product to a Japanese client. The amount to be paid by the client is 3.45 million AUD, but the invoice needs to be issued in Japanese Yen (JPY). At today's FX price of 1 AUD = 100 JPY, the amount invoiced is therefore 345 million JPY and will be payable on January 7th 2015. Laurie, Ozfood's treasurer, is considering whether to hedge her receivable or not, and has received the following quotations from her bank: AUD / JPY Options Expiry in 3 months (American options) Premium in JPY per AUD CALLS PUTS Strike (AUD Call / (AUD Put / Price JPY Put) JPY Call) 5.5 98 1.5 3.8 99 1.7 2.2 100 2.2 2 101 3.9 1.8 102 5.8 (a) AUD/JPY Forward Rates Period Bid Ask 1 Month 99.90 99.94 2 Months 99.80 99.85 3 Months 99.75 99.78 6 Months 99.55 99.59 12 Months 99.25 99.28 What is the risk for Ozfood on this transaction? (2 marks) (b) From the list of prices given above, select and describe an appropriate forward transaction and an appropriate option transaction that Laurie should enter to hedge her position. (5 marks) FIN301e Copyright 2017 SIM University ECA - January Semester 2017 Page 7 of 8 (c) Using the transaction selected above, compare the net proceeds in AUD received by Ozfood under the various hedging strategies (\"do nothing\2 BASIS FOR COMPARISON INVESTMENT BANK AND COMMERCIAL BANK Investment bank refers to a financial institution, that offers services like underwriting of securities, brokerage services while commercial bank is a bank that provides services like accepting deposits, lending money and payment on standing order .investment bank offers Customer specific service while commercial offer Standardized service.in investment banks is associated with Performance of financial market and in commercial banks Nation's economic growth and demand for credit Customer . 3 (a) Amount of interest that will be paid to DBS 200 basis points is equivalent to 2% Interest rate charged on the loan 0.75%+2% 2.75% Amount of interest to be paid in 5 years =(0.0275*10,000,000)5 Amount of interest to be paid to DBS is $ 1,375,000 (b) Risks the loan exposes Bright Fortune to; Interest Rate Risk It is evident that the Federal Reserve is likely to increase interest rates charged on short term loans and therefore this is already a risk exposure to Bright Fortune[Sau14]. If the interest rates increase, Bright Fortune will be expected to pay more on the loan as interest. If the loan was risks free, Bright Fortune would borrow 10 Million Dollars and be expected to pay back 10 Million dollars in 5 years. However because of a risk factor, Bright Fortune is expected to pay more so as to cover any risks which might occur during the loan period. The loan exposes Bright Fortune to an interest expense of $1,375,000 Translation Risk Bright Fortune is a Singaporean Company operating in Singapore. It has borrowed a loan which is in US Dollars. In order to use the loan money, it will need to convert the money to Singapore currency. In the conversion process, it will be exposed to translation risk as currencies trade at different values and therefore may not be assured of the same exact amount as that borrowed. Economic exposure Different strength of different currencies exposes a Company to economic risks. It happens due to fluctuations in currency value. If the Singapore currency weakens against the US Dollar, Bright fortune incurs an economic risk because if the loan amount is converted into Singapore currency, it will be less compared to the original amount borrowed in US dollars. Therefore the loan exposes Bright Fortune to economic risk. (C) A swap strategy to hedge against the risk There are only two swap strategies which Bright Fortune can enter into so as to militate against risk exposure; Interest rate Swap Bright has borrowed a loan which has floating interest rate. The interest rate is therefore subject to change depending on the prevailing economic environment. In order to mitigate the interest rate risk, Bright Fortune can enter into a contract with the lender so as to swap from a floating interest rate to a fixed interest rate. The fixed interest rate to be used in future will be set in advance and therefore it won't change as the Federal Reserve adjusts interest rates[Sun15]. The principal and interest charged on the loan will be paid depending on the earlier agreed rate. Currency Swap Bright fortune can enter into a currency swap where the principal and interest paid are swapped into a different currency. Since the loan is in US Dollars, Bright Fortune can borrow on behalf of a US Company in the Singaporean Financial markets. This swap arrangement can be facilitated by an international intermediary where the principal and interest would be swapped. References Saunders, A. &. (2014). Financial institutions management. . McGraw-Hill Education,. Sun, Q. &. (2015). Pricing foreign equity option with stochastic volatility. Physica A: Statistical Mechanics and its Applications,, 437, 89-100