Financial Markets and Trading Anaylsis

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FM - May 2011 - FINAL

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1 FM - May 2011 - FINAL on Thu Jun 23, 2011 10:21 pm

Guys I've got these questions they might be useful...

1) The modern global economic system

The financial media mention developing nations, in particular “the BRIC Economies”.

Explain the role of the BRIC economies, touching upon what group of nations are expected to arise post-BRIC. Include whatever quantitative data as necessary, comparing and contrasting with other parts of the global economy.

2) Fixed income instruments

What is a “repo”? What is a “reverse repo”?

Create a diagram detailing cash flows. Who engages in these trades? What do they expect to achieve?

3) Foreign Exchange

What is the “domestic Fisher effect”? What is the “international Fisher effect”?

4) Credit Derivatives

You have been asked by a colleague to explain Credit Default Swaps.

Your answer should include a diagram showing all relevant cash flows under all circumstances.

5) Value at Risk

Explain the three main approaches to calculating Value at Risk.

Pick one approach and outline the key steps involved in this calculation. Clearly identify the assumptions made at each stage of the calculations.

6) Overall tools & techniques


Explain the concepts of correlation, variance and expected return. Why do we prefer to evaluate securities on the basis of standard deviation?

Illustrate the use of these statistics in the investment evaluation decision.


Depending upon the state of the economy, two companies you are considering investing in have the following forecasted reutrns

Economy Probability Possible Ret Probability Possible Ret
Very weak 0.1 -4 0.1 -2
Weak 0.2 -1 0.2 -1.5
Steady weak 0.25 0 0.25 -1
Steady strong 0.2 1 0.2 10
Strong 0.15 4 0.15 40
Very Strong 0.1 100 0.1 45

Calculate the expected value, variance and standard deviation of each company.

Calculate the correlation between the two companies.

7) Fixed Income


Explain default risk and how it impacts Government Securities.

Why is the US Yield Curve so important in pricing corporate bonds? Present a diagram illustrating how the government yield curve influences pricing.


Calculate the price of the following instruments, showing all work:

Nominal 5000 1000 100
Coupon(%) 11% 12% 1%
Maturity (years) 2 3 5
Payment frequency SEMI ANN SEMI ANN ANN
Discount rate 4% 13% 1%

Which bond trades at par?
Which bond trades at a premium?
Which bond trades at a discount?

Cool Commodities


Compare and contrast futures and forward contracts.

Pick one of these derivatives, and illustrate their use from the perspective of the producer and the consumer. Be sure to identify possible risks.


For the following questions assume the risk free rate of return is 1.25%

Your company imports large quantities of oil. On January 1st 2011 the spot price of oil is $100. You are concerned that recent events will drive the price of oil higher in 90 days time when you will need to purchase a large quantity. Under these circumstances calculate the price of a forward contract. In 90 days time the spot price of oil is $125; calculate the profit or loss of your forward position.

What is the 10 month forward price of a dividend security based on the following information:

Current price $12.50
Quarterly dividend $0.33
Dividend payment dates: 3M, 6M, 9M

9) Money Markets

Why are the Money Markets so important to corporations?

Explain the pros and cons of investors purchasing Gilts compared to Commercial Paper.


Your broker calls, offering to sell you commercial paper with a face value of £5,000.00 for the price of £4,950.00. The instrument matures in 30 days after settlement. Calculate the Discount Rate.

You are offered commercial paper carrying a Discount Rate of 4.75%. The instrument matures 90 days after settlement. Calculate the Discount Price.

Calculate the Discount Dollar Amount of an instrument carrying a face value of £10,000 offered at a discount rate of 3.75% with 360 days from settlement to maturity.

10) Equities


Explain what class of investor would be interested in preference shares. Who should avoid investing in these shares and why?


Calculate the share price of a company the pays a stable dividend of £1.15 pa when the required rate of return demanded by equity investors is 8%. What will the price be if investors demand 12% to hold these same shares?

What will the share price be under both scenarios if dividends grow by a rate of 1% pa?

What will the share price be under both scenarios if dividends decline at a rate of 1% pa?


Describe a financial market you are interested in and have selected for analysis.

Outline one or more instruments traded in this market. Detail key drivers of valuation of these instruments.

What is this markets value now? What was the value of this market six and twelve months ago?

What do you forecast as the value of this market in one years time and why?

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