INDIVIDUAL ASSIGNMENT

FIN435

1. Explain why it is so important to the broader economy to have an efficient and effective

of this market (Money Market, Forex Market, Capital Market, and Derivatives market)?

(8m) https://www.investopedia.com/terms/m/moneymarket.asp

Chen, J. (2021, March 16). Money Market Definition. Retrieved from Investopedia website:
https://www.investopedia.com/terms/m/moneymarket.asp

https://uk.indeed.com/career-advice/career-development/what-is-money-market

Money Market:
 To make a modern financial economy run more smoothly. It enables depositors to offer
loans to those who require short-term loans and allot capital to the most productive use.
 It makes a significant contribution to the market's balance of both supply and demand for
short-term monetary transactions.
 It facilitates in the evaluation of specific monetary policies.

Forex Market

https://www.earnforex.com/guides/why-forex-market-is-important/

International trade –

 It is very important for exporters and importers to convert payments they receive or
pay for transactions involving the purchase or sale of goods abroad, for which they
must convert the currency into US dollars or local currency, whenever they need to.

Financial instrument settlements

 Payments are frequently sent between nations as financial instruments (such as

checks, demand draft letters of credit, international fund transfers, etc.). The Forex
market determines the exchange rate that is used to determine the amount that will
be credited to the recipient's account.

Hedging

 An exporter can lock the exchange rate by entering into a contract with the
transacting bank to hedge the position and protect its interests in order to prevent
losses from the fluctuation of the domestic currency.

Capital Market

https://accountlearning.com/role-and-importance-of-capital-market-in-economy/

 It gives the general public the chance to invest their savings into favourable
securities that yield higher returns.
 It gives various institutions, including commercial banks, mutual funds, investment
trusts, and others, the chance to maximise their return on investment. They
assigned financial professionals who can foresee market changes.
 Due to the capital market's promotion of capital formation, it helps the nation
experience economic growth.
 Derivates

https://www.investopaper.com/news/financial-derivatives/

 Risk Management - The distribution of risks to investors by dividing the risk into
smaller parts helps to speculate.
 Market Efficiency - Using arbitrage as a tactic, buy and sell goods and assets
simultaneously on different markets in order to get benefit from the various current
market prices. Market equilibrium, where prices and the market are both efficient,
will eventually be reached.
 Operational Benefits – Provides liquidity and encourages short-selling, which
advantages for both investors and the economy.

2. Explain how the economic activity would be affected if there were no financial markets

and institutions. (5m)

https://www.frbsf.org/education/publications/doctor-econ/2005/january/financial-markets-
economic-performance/

Federal Reserve Bank of San Francisco. (2005). Please explain how financial markets may affect
economic performance. Retrieved from Federal Reserve Bank of San Francisco website:
https://www.frbsf.org/education/publications/doctor-econ/2005/january/financial-markets-
economic-performance/

1) Limited financial markets, instruments, and financial institutions, and poorly defined legal
systems, may make raising capital more expensive and reduce the return on savings or
investments.
2) Risks may be higher than in economies with more fully developed financial systems that
would affect market participants because of limited information or lack of financial
transparency.
3) In small markets, it is more difficult to keep a diverse portfolio. It is hard to fulfil the desires
of borrowers and lenders since the financial markets only have a few trading activity which
cause costly to find the right product, maturity and risk profile.

3. What are the similarities and differences between a capital market and the banking

system? (5m)

Capital market is a place that allows the trading of funding intruments such as shares, debentures,
debt instruments, bonds, ETFs, etc.

1. What are derivatives? What are their key uses? (6m)

Done
2. What are the benefits of using derivative instruments in managing risk? (4m)
https://corporatefinanceinstitute.com/resources/derivatives/derivatives/
https://financescp.net/2022/01/30/the-economic-benefits-and-risks-of-derivatives/

jenis kontrak kewangan yang nilainya bergantung pada aset asas, kumpulan aset atau
penanda aras

Hedging is a strategy that tries to limit risks in financial assets.

1) Hedging risk exposure – Allow economic agents to control risk factors by entrusting
them with the duties of hedging against financial risks. For instance, a multinational
American corporation selling products all over the world will generate revenue in
various currencies, and all of these currencies will depreciate against the dollar, resulting
in a lower profit. By entering into futures contracts in which it agrees to exchange
foreign currencies against dollars at a predetermined exchange rate, the company
eliminates the risk associated with currency rate fluctuations.
2) Allow price detection. Means that by looking at the value of derivatives such as
options or futures, we can infer future cash prices, the spot price of the next days or
months
3) The elements that affect asset pricing - For example, futures spot prices can be used to
approximate commodity prices.
4) Market effectiveness - The payoff of assets can be reproduced using derivative contracts.
As a result, in order to prevent arbitrage opportunities, the costs of the underlying asset
and the related derivative often seem to be in equilibrium.
5) Access to unavailable assets or markets - By using interest rate swaps, a company can
get better interest rate about available interest rate through direct borrowing.
6) have a higher level of liquidity than their underlying asset. Lower transaction costs are
associated with increased liquidity. The S&P 500, for example, is less expensive than
making a trade an ETF on the index.
3. How does the financial system react to the impact of COVID-19? (4m)
https://www.oecd.org/coronavirus/policy-responses/global-financial-markets-policy-
responses-to-covid-19-2d98c7e0/

OECD. (2020, March). Global financial markets policy responses to COVID-19. Retrieved
from OECD website: https://www.oecd.org/coronavirus/policy-responses/global-
financial-markets-policy-responses-to-covid-19-2d98c7e0/

1) Expand central bank liquidity support - To ensure that indebted corporations facing
acute liquidity problems earn the liquidity they needs, central banks should carefully
evaluate the terms of their programs.
2) Urgent fiscal support to viable businesses - To meet increasing insolvency issues, fiscal
authorities could provide affected businesses with a mixture of equity, debt, and credit
guarantees. While response to moral hazard, program design and conditionality will be
essential to effectiveness.
 3) Other fiscal support to small businesses and households - Provide advice to banks on
how to temporarily calm repayment terms for businesses and households. This exertion
could be mixed with partial fiscal assurance to provide banks with encouragement to
expand financial intermediation during times of uncertainty.
4) Market regulatory approaches - Increase the focus on high-frequency and algorithmic
trading with a greater emphasis on reviewing algorithm strategies that may be more
probable to fail during times of acute market stress.

4. Explain the difference between Equity market and debt market. (4m)
https://www.motilaloswal.com/blog-details/difference-between-debt-market-&-equity-
market/1082
Equity Market
a) Financial market in which shares are issued and traded through exchange
b) Debts on funds: Equity financing allows a company to acquire funds without incurring
debt
c) Returns: Hope earning greater returns
d) Term: Equity Market fetches returns (mengambil pulangan) over a long period of time

Debt Market:

a) Are assets that require a fixed payment to the holder, usually with interest.
b) Debts on funds: Issuing a bond increases the debt burden of the bond issuer.
c) Returns: Offer lower potential returns.
d) Term: fetches return in a comparatively shorter term

5. What are determinants of exchange rates? (4m) menentu kadar pertukaran

https://canamcurrencyexchange.com/9-factors-that-influence-currency-exchange-rates/
https://www.investopedia.com/trading/factors-influence-exchange-rates/

OECD. (2020, March). Global financial markets policy responses to COVID-19. Retrieved
from OECD website: https://www.oecd.org/coronavirus/policy-responses/global-
financial-markets-policy-responses-to-covid-19-2d98c7e0/
1) Inflation: Differentials in inflation have different purchasing powers and hence different
currency rates. For example, it might cost one unit of currency to buy an apple in one
country but cost a thousand units of a different currency to buy the same apple in a
country with higher inflation. Countries with low inflation typically have stronger
currencies compared to those with higher inflation rate.
2) Interest Rates: Different country’s central banks use interest rates to modulate inflation
within the country. Higher interest rates offer lenders in an economy a higher return
relative to other countries for example, establishing higher interest rates attracts foreign
capital, which bolsters the local currency rates.
3) Political Stability- A politically stable country attracts more foreign investment, which
helps prop up the currency rate. Poor political stability devalues a country’s currency
exchange rate.
4) Economic Health - For example, a country with low unemployment rates means its
citizens have more money to spend, which helps establish a more robust economy. With
 a stronger economy, the country attracts more foreign investment, which in turn helps
lower inflation and drive up the country’s currency exchange rate.

1.THE IMPORTANCE OF EFFECTIVE MARKET

2. AFFECT TOWARD ECONOMIC ACTIVITIES IF THERE IS NO FINANCIAL INSTITUTION

3. SIMILARITIES AND DIFFERENCES BETWEEN CAPITAL MARKET AND BANKING SYSTEM

4. DERIVATES AND KEY USE

5. BENEFITS OF USING DERIVATIVE INSTRUMENTS I MANAGING RISK

6. FINANCIAL SYSTEM REACT TOWARD COVID-19'S IMPACT

7. DIFFERENCE BETWEEN EQUITY MARKET AND DEBT MARKET

8. DETERMINANTS OF EXCHANGE RATE