20180103final Exam QnA Answers

Regulations & Financial Markets – Final Exam, Fall-2017 – IBA, Karachi.
Tuesday
26th December, 2017
Please read the complete question paper first. I will come in each class for 10-15 minutes only. Attempt
the MCQs on question paper by circling the correct option. Similarly, attempt the CAR exercise on the
format provided at the end of the paper.
Multiple Choice Questions (25 Marks)

1. Contingent liabilities of a bank/DFI shall not exceed at any point in time:
a. 3 times of its equity
b. 5 times of its equity
c. 10 times of its equity
d. None of the above
2. KSE-30 Index is designed to provide investors with a sense of how:

a. large company’s scrips based on asset size of the Pakistan’s equity market are performing
b. large company’s scrips in each sector of the Pakistan’s equity market are performing
c. large company’s scrips of the Pakistan’s equity market are performing
d. All of the above
3. (Morgan Stanley Capital International) MSCI, a leading global index provider, shifted all its
indices to the Free-float Methodology in:
a. 2009
b. 2002
c. 2013
d. 2005
4. Recomposition of the KSE-100 Index rules fall into:
a. the sector-rules
b. the free-float capitalization rules
c. rules for new issues
d. all of the above
5. If the impact cost decreased from 0.76% to 0.51%. This shows that liquidity in the stock:
a. Has improved
b. Has deteriorated
1
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c. Remains the same
d. Creates hurdles for the small investors
6. Why trading volume is considered a poor proxy of liquidity:
a. It can be due to manipulation
b. It can due to selling pressure from small investors
c. It can be due to false rumors in the market
d. All of the above
7. Free-float calculation can be used to construct stock indices for better representation than those
constructed on the basis of total market capitalization:
a. False
b. True
8. How liquidity can be increased in the market:
a. By providing incentives to domestic and foreign investors
b. By increasing the proportion of free float of shares
c. By strictly complying with market disclosure requirements
d. All of the above
9. The brokers that trade on their own behalf earn annual rates of return that are:
a. 20-50 percentage higher than those earned by outside investors.
b. 50-90 percentage higher than those earned by outside investors.
c. 30-70 percentage higher than those earned by outside investors.
10. The self-regulating functions of exchanges typically consist of:
a. Setting rules for trading
b. Overseeing the trading system to prevent manipulation
2
c. Establishing rules to govern the conduct of members
d. All of the above
11. Manipulation may harm resource allocation in an economy through:

a. Trading activity
b. Weak enforcement
c. Price distortion
d. Inadequate disclosures
12. Traditionally, one of the main sources of revenue for stock exchanges have been:
a. Listing fees
b. IT services
c. Investor awareness programs
13. ‘Pump and dump’ price manipulation scheme suggests:
a. Colluding brokers artificially decrease prices and induce outside traders to sell their
holdings and exit the market.
b. Colluding brokers artificially control prices and create panic among outside traders to
bring volatility in the market.
c. Colluding brokers artificially increase prices and attract positive feedback traders.
d. Market timing and liquidity provision by brokers contribute towards price manipulation.
14. There is no generally accepted definition of market manipulation:

a. True
b. False
15. The demutualization process started in response to the:

a. Problems in local exchanges
b. Technological advancement and global competition
c. Losses incurred by mutualized exchanges
d. All of the above
16. Demutualization is at least perceived to create a:

a. Conflict of interest between investors and brokers
b. Conflict of interest between managers and owners
c. Conflict of interest between regulators and investors
d. Conflict of interest between profit motive of an exchange and its regulatory function
17. Can the stock exchange company becomes a publicly traded and listed company?
a. Yes
b. No
18. The benefits from demutualization is:
3
a. New corporate governance structure that is effective in managing conflicts
b. Professional management to increase efficiency and profits
c. Technological advancement
d. All of the above
19. Generally speaking, little is known about:

a. The prevalence of manipulation
b. Effects of manipulation
c. How manipulation responds to regulation
d. All of the above
20. As per prudential regulations for corporate banking, What is the maximum limit of clean /
unsecured financing to a single obligor:
a. Rs. 500,000/=
b. Rs. 100,000/=
c. Rs. 2,000,000/=
d. Rs. 1,000,000/=
21. Can the Banks/DFIs pay dividend before meeting minimum capital requirement (MCR):
a. No
b. Yes, but not more than 5%
c. Depend on the profitability of bank/DFI
d. Board of Directors are empowered to decide before approval from shareholders
22. The comprehensive “Code of Corporate Governance” document, which banks also have to follow
is issued by:
a. Ministry of Finance (MoF)
b. Pakistan Stock Exchange (PSX)
c. State Bank of Pakistan (SBP)
d. Securities & Exchange Commission of Pakistan (SECP)
23. What do we mean by ‘Surplus on revaluation of securities’:
4
a. The increase in dividend income
b. Securities issued after amalgamation
c. Book entry for increase in market value of securities
d. Entry to book capital gains on sale of securities
24. As per PRs for commercial banking, fitness and propriety covers following broad elements,
except:
a. Integrity, honesty & reputation
b. Track Record and qualification
c. Solvency and experience
d. Political affiliation
25. As per PRs for commercial banking, all are considered suspicious transactions, except:
a. Large unusual transactions
b. Unusually small transactions
c. Unusual pattern of transactions
d. Transactions that do not match with the income sources of client/(s).
26. Even if equal opportunities of access to information is guaranteed, do you think that there is
asymmetric information in the financial market:
a. No
b. Yes
27. Who are under stronger obligation of loyalty to protect inside information:
a. People who come by the information accidentally
b. People who obtain information by word of mouth
c. Managers and employees of the company
5
d. Consultants, lawyers, investment bankers and other professionals who provide their
services to a company
28. Establishing a compliance function on insider trading, with a direct line to top management is an
example of ‘external measure to prevent insider trading’:
a. False
b. True
29. Keeping record of all orders and operations to facilitate control is an example of:
a. Internal measure to prevent insider trading
b. External measure to prevent insider trading
c. None of the above
30. The prior knowledge that a firm’s losses were far higher than expected would be an example of
inside information:
a. True
b. False
c. Depends on other factors
Short Q&As – Part B (28 Marks)
1. Explain briefly the motives for demutualization and regulatory implications of stock exchange
demutualization? [Not more than 5-6 lines]
There are two main forces driving stock exchanges to demutualize: (1) increased
global competition and (2) advances in technology.
A major concern among regulators is that the attempts to maximize profits and
shareholder value by demutualized exchanges will come at the expense of
reduced self-regulation and supervision.
2. Why stock exchange regulators focus on free-float methodology for including companies /
securities in the benchmark indices? [Not more than 3-4 lines]
6
Free-Float calculation can be used to construct stock indices for better market representation than
those constructed on the basis of total market capitalization of companies.
It gives weight for constituent companies as per their actual liquidity in the market and is not unduly
influenced by tightly held large-cap companies.
Free-Float can be used by the Exchange for regulatory purposes such as risk management and market
surveillance.
3. Define inside information and explain briefly the ethical considerations on insider trading as
morally illicit? [Not more than 6-7 lines]
Any specific information regarding one or several securities or one or several issuers of securities
which has not been disclosed to the public and which, when or if it is disclosed, could substantially
influence or could have substantially influenced the price of said securities.
(a) Equal opportunities of access to information: unfair competition
(b) Trust is needed to ensure that the market operates properly
(c) Professional secrecy and loyalty
(d) Respect for the rights of the owners of inside information
4. What kind of price manipulation scheme is found in the paper ‘Unchecked intermediaries’ and
how it works. Also mention key findings from the paper? [Not more than 5-6 lines]
The paper finds compelling evidence for a specific trade-based ‘pump and dump’ price manipulation
scheme: When prices are low, colluding brokers trade amongst themselves to artificially raise prices and
attract positive-feedback traders. Once prices have risen, the former exit leaving the latter to suffer the
ensuing price fall.
When brokers trade on their own behalf, they earn annual rates of return that are 50-90 percentage points
higher than those earned by outside investors.
Analytical Questions – Part C (Marks 42)

Q.1 Due to heavy rains and massive floods of 2012 in Southern Punjab and Sindh Province, M/s. Abdul
Ghani & Sons’ ‘Hot Water Mangoes & Dates Treatment (Fruit Processing) Plant’ was shut down.
Consequently, the company unable to pay its principal and interest (installment) that was due on
December 31, 2012. The outstanding principal of UBL Bank Limited at the time of default was Rs. 23
million. The bank has to create specific provision on this overdue loan as per time-based criteria. The
forced sale value (FSV) of 'plant & machinery under charge' held as collateral was Rs. 9 million and
‘Industrial land’ FSV was Rs. 18 million. Further, after continuous follow up by the bank, the owner of
fruit processing plant paid cash / Cheque to UBL of Rs. 2 million against the classified loan on May 05,
2017 (as a token for out-of-court settlement). Draw complete schedule of classification / provisioning.
Q.2 Calculate Capital Adequacy Ratio of Pak Oman Microfinance Bank Limited as at December 31,
2016.
Q.3 Calculate the impact cost:
7
Sample Order Book of ‘Noon Sugar’
S. No. Buy Side Order Book Sell Side Order Book

Qty Price Qty Price
1 2000 68.50 1800 70.50
2 3500 68.45 2100 69.55
3 3000 68.00 3500 69.50
What is the buyer impact cost against the purchase of a security worth 500,000/=?
The impact cost calculated above; do you think this security / company be eligible to be considered for
KSE-30 Index? Moreover, noon sugar traded 93 days during July-December 2017 (i.e., 126 total trading
days); will it qualify for inclusion in KSE-30 Index?
8
Q.4 Calculate the base divisor and index price? On which date we calculate new base divisor and index
value?
Table 1 – Friday, December 29, 2017
S. No. Company Name Price No. of Free-float

shares (million)
1. Inter. Steel Ltd 97.55 174.00
2. Pak Intl. Bulk 15.20 817.30
3. Engro Fert. 63.00 600.88
On Monday, January 1, 2018; the ‘International Steel Ltd’ is replaced by ‘Crescent Steel’; Price of
Crescent Steel is 106.00 and number of free-float shares are 170.82 million.
Pakistan International Bulk Terminal has declared 30% cash dividend and its book closure date starts
from January 01, 2018.
Engro Fertilizer Ltd has declared 10% cash dividend and 5% stock dividend (bonus shares) and its book
closure date starts from January 01, 2018.
The KSE 100 Index as on December 29, 2017 is 38,825.74
Table 2 – Monday, January 01, 2018
S. No. Company Name Price No. of Free-float Market Value

shares (million)
1 Crescent Steel Ltd 100.70
2 Pak Intl. Bulk (XD) 12.35
3 Engro Fert. (XD,XB) 61.11
9
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Regulations & Financial Markets – Final Exam, Fall-2017 – IBA, Karachi.

Multiple Choice Questions (25 Marks)

2. KSE-30 Index is designed to provide investors with a sense of how:

4. Recomposition of the KSE-100 Index rules fall into:

b. the free-float capitalization rules

c. rules for new issues

d. all of the above

d. Creates hurdles for the small investors

6. Why trading volume is considered a poor proxy of liquidity:

a. It can be due to manipulation

b. It can due to selling pressure from small investors

c. It can be due to false rumors in the market

d. All of the above

8. How liquidity can be increased in the market:

a. By providing incentives to domestic and foreign investors

b. By increasing the proportion of free float of shares

c. By strictly complying with market disclosure requirements

d. All of the above

10. The self-regulating functions of exchanges typically consist of:

a. Setting rules for trading

b. Overseeing the trading system to prevent manipulation

d. All of the above

11. Manipulation may harm resource allocation in an economy through:

14. There is no generally accepted definition of market manipulation:

15. The demutualization process started in response to the:

16. Demutualization is at least perceived to create a:

18. The benefits from demutualization is:

19. Generally speaking, little is known about:

b. Yes, but not more than 5%

c. Depend on the profitability of bank/DFI

d. Board of Directors are empowered to decide before approval from shareholders

a. Ministry of Finance (MoF)

b. Pakistan Stock Exchange (PSX)

c. State Bank of Pakistan (SBP)

d. Securities & Exchange Commission of Pakistan (SECP)

23. What do we mean by ‘Surplus on revaluation of securities’:

b. Securities issued after amalgamation

c. Book entry for increase in market value of securities

d. Entry to book capital gains on sale of securities

a. Integrity, honesty & reputation

b. Track Record and qualification

c. Solvency and experience

a. Large unusual transactions

b. Unusually small transactions

c. Unusual pattern of transactions

d. Transactions that do not match with the income sources of client/(s).

a. People who come by the information accidentally

b. People who obtain information by word of mouth

c. Managers and employees of the company

a. Internal measure to prevent insider trading

b. External measure to prevent insider trading

c. None of the above

c. Depends on other factors

Short Q&As – Part B (28 Marks)

Analytical Questions – Part C (Marks 42)

Q.3 Calculate the impact cost:

S. No. Buy Side Order Book Sell Side Order Book

Table 1 – Friday, December 29, 2017

S. No. Company Name Price No. of Free-float

S. No. Company Name Price No. of Free-float Market Value

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