Financial Markets and Institutions


Complete the Academic integrity micro-credential:

You will receive a certificate when you complete the micro-credential and Submit the certificate under submission point 2.


Please submit your final assessment under submission point 3

You are a financial advisor who regularly educates new clients about how market and economic systems work to take the mystery and fear out of investing. You have found that when clients understand how things work behind the scenes, they feel more confident in continuing to invest throughout their lives, regardless of the doom and gloom that they may see or hear in the news. In this report, you are asked to address questions that your new client Leo has and help him to have a better understanding of financial markets.

1.    Understanding Different Asset Classes


a)    There are many ways to invest money. Suppose that Joe wonders what investment options he can choose from. In the following table there are different assets, chose three of them and fill in related columns. You should also provide an example for each of them.

(6 marks)




Potential Returns





Cash investment


b)    Australia and New Zealand Banking Group Limited (ANZ) offers a bill facility to corporate clients. The bank website explains the terms and conditions of Bills of Exchange.

Use a diagram to describe the structure of a bank bill. In your explanation, clearly distinguish the roles of the parties associated with the bill issue.

(5 marks)

c)    In June 2020, Singapore Airlines Limited undertook a renounceable rights issue of new ordinary shares in the capital of the company and mandatory convertible bonds to entitled shareholders.

·         Explain the renounceable rights issue of ordinary shares and discuss the advantages and disadvantages.                                                           (2 marks)

·         Explain to Leo what is convertible bonds and why would Singapore Airlines undertake mandatory convertible bonds to entitled shareholders?

(2 marks)

2.    Central Banks, Monetary Policy and Interest Rates



  1. Market participants, including financial institutions, fund managers and corporations, must understand monetary policy setting impacts on economic activity and the business cycle. A central bank will typically implement monetary policy settings in order to achieve certain economic outcomes over a business cycle. Choose two countries from the list below, describe the intermediate target for monetary policy, and explain the implementation process of the monetary policy in the two countries you selected. Give examples of different economic indicators that may give an insight into the future stages of a business cycle.
  • the United States
  • Australia
  • Singapore
  • China
  • Russia
  • New Zealand
    • marks)


  1. In 7th Sep, for the fifth time this year, the Reserve Bank of Australia (RBA) increased the cash rate by 0.5%. The current cash rate is 2.35%. Explain to Leo how the monetary policy transmits to the overall economy. Explain how the high cash rate affects imports and exports in Australia and provide an example for your reason.

(4 marks)


  1. Obtain weekly data from Refinitiv Eikon and plot the interest rates (bid and ask mid- rate) on 2-year commonwealth government bond (AU2Y-TBOND) and 10 year commonwealth government bond (au 10Y-TBOND) from June 2020. Determine the shape of the yield curve by using one of the interest rate theories you know and share your opinion on whether the Australian economy is heading for a boom or for a recession. Explain your choice.

(4 marks)




  1. Derivative Securities



  1. Leo knows that the primary purpose of a futures contract is the management of risk exposures. Provide more explanation about its key features and also with an example explain pros and cons of futures contacts.

(2 marks)


  1. Leo bought Amazon shares at 140$ in August and after a couple of weeks it dropped to 45$ in Mid of September, so based on this risky and high volatility situation of stock markets, he is looking to control his risk by the option contract. Leo needs your advice on using options contracts. The following table shows a list of options for you to choose from. Further, suppose that each contract contains 100 shares
Strike Call premium Moneyness Put premium Moneyness
$125 $10.05   $0.01  
$130 $3.65   $0.05  
$136 $0.7   $0.99  
$145 $0.05   $10.48  



  • Please specify the moneyness of the above options. Are they in the money, at the money, or out of the money?

(3 marks)

  • Explain the type of risk that Leo is facing and which option is your suggestion to control his risk, provide your reason and explain it.

(3 marks)



  1. Fund Management



  1. Managed funds are often categorised by the type of investments purchased by the fund. These include capital stable funds, balanced growth funds and managed capital growth funds. For each of these funds, discuss the types of investments the fund might accumulate and explain the purpose of the investment strategies. If Leo is identified as a risk-averse investor, which type of fund would you recommend Leo to consider investing in?

(4 marks)


  1. The risk free rate in Australia in Jun 2022 was 3.37%. Based on the following information for three different funds A, B and C in Australia. Calculate the Coefficient of variation, Sharpe and Jensen Indices of performance for these funds and interpret the results.

(4 marks)



Fund Average return (%) Variance(%)             Beta

Fund A

  Fund B

Fund C












  1. Obtain information on the following two funds:
  • Colonial First State Developing Companies Fund
  • Vanguard Australian Shares High Yield Fund


Compare the risks to investors presented by each of these funds and identify the types of investors that would favour these funds.

(2 marks)

(TOTAL 15+14+8+10 = 47 MARKS)


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