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Market Fluctuations and Future Prospects

This project will further your understanding of how financial markets function. The assignment consists of two parts. Part A of the assignment focuses on the financial instruments of two companies, BHP Billiton (BHP) and Commonwealth Bank of Australia (CBA). Part B of the assignment focuses on debt markets and fiscal and monetary policy. To successfully complete this project, you will use/apply not only theories studied in this FIN203 but also other appropriate resources. Part A: BHP and CBA Share Price 1. What is the current price of ordinary / common shares in BHP and CBA? How has each evolved over the past 5-years? Graph each series and discuss their evolution. 2. Select one item of news that may have affected systematic (market) risk and one item of news that may have affected unsystematic (firm-specific) risk. Explain how each of the news items have moved the share prices of both BHP and CBA. Part B: Fiscal Policy, Monetary Policy and Debt Markets

1. Evaluate the current fiscal position of the Australian Federal Government. Briefly describe how you expect this to move over time. 1 2. Plot the current Australian yield curve for Commonwealth Government Securities (CGSs). At a minimum you should include the target cash rate, 90-day and 180-day rates, and the 2, 3, 5, and 10-year rates. a. Briefly explain the shape of the yield curve, using Expectations Theory and the Segmented Markets Theory b. How would you expect the movements in the fiscal position identified in B.1) to influence the yield curve?

3. Briefly describe the movements in the target cash rate from 2001 to 2017. How has the movements in the cash rate influenced the value of the Australian dollar in the foreign exchange market? Some suggested sources that you may find useful: CHAPTER 13 & 16 OF TEXT BOOK: Viney, C. and Phillips, P. (2015). Financial Institutions, Instruments and Markets. 8th edition. Australian Office of Financial Management – Presentation and Lodgement Further details on the presentation and lodgement requirements for the Assignment and penalties for late lodgement, along with the rubric for assessment purposes, are set out in the Subject Outline (SO), pages 7- 9. Within the context of section (e) of Presentation on page 9 (SO), it is recommended that the body of your essay contain 5 numbered sections, in line with the Marking rubric, viz., Introduction; Research (a literature survey); Analysis; Recommendations; and Conclusion.

You should follow the following typing conventions:

• Times New Roman font (at minimum, 12 pitch)

• 1.5 line spacing

• Top, bottom, left and right margins to be at least 2.5 cm from the edge of the page

• A4 paper; and

• Length – 2,500 words + / - 10%. 2 Research and Referencing You should begin by seeking references relating to the topic and subject content via Google or another search engine. It is suggested that you familiarize yourself with the Australian financial system by reading appropriate chapters in the text-book. You will need to discover at least 6 other references. This should include at least one other book and one journal article. Search the web-sites suggested in the text and the SO. Use Harvard referencing! Marking Guide See Subject Outline, pages 7 – 9. Remember plagiarism = severe penalties. Submission of Assignments. A soft copy is to be submitted to Moodle by Sunday, 20 May 2018 at 11:59 pm. Please submit to your Tutor a hardcopy Monday 21 May 2018 during tutorial, including a KOI Cover Sheet (see Moodle) and TURNITIN validation, showing the Similarity score

Market Fluctuations and Future Prospects

1. The current price of ordinary / common shares in BHP and CBA and evolvement of each over the past 5-years

The current price of ordinary shares in BHP is $51.36 (BHP Ltd, 2018) and of CBA is $70.77(CBA, 2018)

Date

Close

1-Apr-18

46.75

8-Mar-18

0

1-Mar-18

44.43

1-Feb-18

46.5

1-Jan-18

49.02

1-Dec-17

45.99

1-Nov-17

41.55

1-Oct-17

40.98

7-Sep-17

0

1-Sep-17

40.53

1-Aug-17

43.5

1-Jul-17

41.66

1-Jun-17

35.59

1-May-17

35.09

1-Apr-17

35.6

8-Mar-17

0

1-Mar-17

36.32

1-Feb-17

37.82

1-Jan-17

41.29

1-Dec-16

35.78

1-Nov-16

37.54

1-Oct-16

35.02

1-Sep-16

34.65

31-Aug-16

0

1-Aug-16

30

1-Jul-16

29.69

1-Jun-16

28.56

1-May-16

26.97

1-Apr-16

31.34

9-Mar-16

0

1-Mar-16

25.9

1-Feb-16

22.61

1-Jan-16

21.91

1-Dec-15

25.76

1-Nov-15

26.68

1-Oct-15

32.89

9-Sep-15

0

1-Sep-15

31.62

1-Aug-15

36.83

1-Jul-15

38.37

1-Jun-15

40.71

1-May-15

44.63

1-Apr-15

51.29

11-Mar-15

0

1-Mar-15

46.47

1-Feb-15

52.52

1-Jan-15

46.33

1-Dec-14

47.32

1-Nov-14

51.63

1-Oct-14

59.44

3-Sep-14

0

1-Sep-14

58.88

1-Aug-14

68.63

1-Jul-14

71.09

1-Jun-14

68.45

1-May-14

67.88

1-Apr-14

70.54

5-Mar-14

0

1-Mar-14

67.77

1-Feb-14

68.9

1-Jan-14

63.95

1-Dec-13

68.2

1-Nov-13

68.22

1-Oct-13

70.69

4-Sep-13

0

1-Sep-13

66.5

1-Aug-13

63.28

1-Jul-13

62.73

1-Jun-13

57.66

1-May-13

65.32

1-Apr-13

67.22

6-Mar-13

0

1-Mar-13

68.43

1-Feb-13

74.86

(Data Source: BHP Ltd, 2018 from Yahoo finance)

 Share performance of BHP is fluctuating as the trend is first declining and again gets increases as this shows the market fluctuations of this company (Edeling and Himme, 2018). BHP is required to improve its current position to get rid of the market complexities.

Date

Close

12/31/2012

0

1/31/2013

66.9075

2/28/2013

67.6435

3/31/2013

73.0542

4/30/2013

66.4997

5/31/2013

68.8072

6/30/2013

73.8101

7/31/2013

72.4475

8/31/2013

70.8263

9/30/2013

75.67

10/31/2013

77.4006

11/30/2013

77.3808

12/31/2013

73.83

1/31/2014

74.2577

2/28/2014

77.0227

3/31/2014

78.4748

4/30/2014

81.1503

5/31/2014

80.4442

6/30/2014

83.2987

7/31/2014

80.8818

8/31/2014

74.8843

9/30/2014

80.0463

10/31/2014

80.285

11/30/2014

85.1885

12/31/2014

88.8486

1/31/2015

91.4247

2/28/2015

92.8967

3/31/2015

88.3911

4/30/2015

84.6315

5/31/2015

84.6712

6/30/2015

87.0882

7/31/2015

76.36

8/31/2015

72.72

9/30/2015

76.73

10/31/2015

79.43

11/30/2015

85.53

12/31/2015

78.67

1/31/2016

70.14

2/29/2016

74.92

3/31/2016

73.89

4/30/2016

77.43

5/31/2016

74.37

6/30/2016

77.35

7/31/2016

71.81

8/31/2016

72.4

9/30/2016

73.39

10/31/2016

78.65

11/30/2016

82.41

12/31/2016

81.66

1/31/2017

82.32

2/28/2017

85.91

3/31/2017

87.4

4/30/2017

79.65

5/31/2017

82.81

6/30/2017

83.73

7/31/2017

75.8

8/31/2017

75.25

9/30/2017

77.63

10/31/2017

79.43

11/30/2017

80.34

12/31/2017

78.87

(Data Source: CBA, 2018 yahoo finance)Above mention, the graph shows the share movement of Commonwealth Bank of Australia for a period of 5 years. This analysis starts from 2013 to 2018 by reflecting the increasing or decreasing share prices of all the shares of an entity (Queiroz, M., and et al., 2018). The above figure shows the increasing share prices from 2013 to 2018 depicts the actual performance of the company.

2. News that have affected systematic risk and news that have affected unsystematic risk and its impact on share prices of both BHP and CBA.

According to the study of Macro axis, BHP Billiton Company is taken as less risky an entity as an investment in this company will result into higher returns as this attracts a lot of investors towards thus entity which further increases the share price of the BHP shares (Damodaran, 2018). The efficiency of the firm is identified with the help of Sharpe ratio which is of 0.24 which, in turn, shows the return generated for per unit of risk for the previous 1 month.

According to the leading news article, Commonwealth Bank of Australia is proved as less risky and more valuable investment for its investment. This theory is explained with the help of beta of an entity as the existing beta of CBA is of 0.63 (Commonwealth bank of Australia’s market risk, 2017). The beta shows the efficiency of an entity as this less volatile as compared to all other stock indexes lies in the market (Cheng and Li, 2018). Ann investor will get its principal along with the higher returns by investing the share of this company (Hoepner and et al., 2018). With this action of the company, the share price of the firm will get higher which arouses the interest of all other investors (Kim, Kim, Kim and Bang, 2018).

Systematic and Unsystematic Risk Analysis

PART B

1. Evaluation of the current fiscal position of the Australian Federal Government and description of this movement over time.

The current financial position of the Australian Federal government is stable as due to the introduction of new policies by the government will result into greater savings and higher cash flow balance for the year 2016-17 (Bedi, 2018). The budget will improve to get a budget limit of $1.7 Billion which results in balancing the budget to get rid of all the difficulties (Australian Federal government position, 2018).

The Australian government is keeping all it’s spending under the control which in return will induce the overall gross domestic product of the overall economy of Australia (Hugo, Isenring Sinclair and Agarwal, 2018).

2. Plot the current Australian yield curve for Commonwealth Government Securities

2-May-18

0

1.5

4-Apr-18

0

1.5

7-Mar-18

0

1.5

7-Feb-18

0

1.5

6-Dec-17

0

1.5

8-Nov-17

0

1.5

4-Oct-17

0

1.5

6-Sep-17

0

1.5

2-Aug-17

0

1.5

5-Jul-17

0

1.5

7-Jun-17

0

1.5

3-May-17

0

1.5

5-Apr-17

0

1.5

8-Mar-17

0

1.5

8-Feb-17

0

1.5

7-Dec-16

0

1.5

2-Nov-16

0

1.5

5-Oct-16

0

1.5

7-Sep-16

0

1.5

3-Aug-16

-0.25

1.5

6-Jul-16

0

1.75

8-Jun-16

0

1.75

4-May-16

-0.25

1.75

6-Apr-16

0

2

2-Mar-16

0

2

3-Feb-16

0

2

2-Dec-15

0

2

4-Nov-15

0

2

7-Oct-15

0

2

2-Sep-15

0

2

5-Aug-15

0

2

8-Jul-15

0

2

3-Jun-15

0

2

6-May-15

-0.25

2

8-Apr-15

0

2.25

4-Mar-15

0

2.25

4-Feb-15

-0.25

2.25

3-Dec-14

0

2.5

5-Nov-14

0

2.5

8-Oct-14

0

2.5

3-Sep-14

0

2.5

6-Aug-14

0

2.5

2-Jul-14

0

2.5

4-Jun-14

0

2.5

7-May-14

0

2.5

2-Apr-14

0

2.5

5-Mar-14

0

2.5

5-Feb-14

0

2.5

4-Dec-13

0

2.5

6-Nov-13

0

2.5

2-Oct-13

0

2.5

4-Sep-13

0

2.5

7-Aug-13

-0.25

2.5

3-Jul-13

0

2.75

5-Jun-13

0

2.75

8-May-13

-0.25

2.75

3-Apr-13

0

3

6-Mar-13

0

3

6-Feb-13

0

3

5-Dec-12

-0.25

3

7-Nov-12

0

3.25

3-Oct-12

-0.25

3.25

5-Sep-12

0

3.5

8-Aug-12

0

3.5

4-Jul-12

0

3.5

6-Jun-12

-0.25

3.5

2-May-12

-0.5

3.75

4-Apr-12

0

4.25

7-Mar-12

0

4.25

8-Feb-12

0

4.25

7-Dec-11

-0.25

4.25

2-Nov-11

-0.25

4.5

5-Oct-11

0

4.75

7-Sep-11

0

4.75

3-Aug-11

0

4.75

6-Jul-11

0

4.75

8-Jun-11

0

4.75

4-May-11

0

4.75

6-Apr-11

0

4.75

2-Mar-11

0

4.75

2-Feb-11

0

4.75

8-Dec-10

0

4.75

3-Nov-10

0.25

4.75

6-Oct-10

0

4.5

8-Sep-10

0

4.5

4-Aug-10

0

4.5

7-Jul-10

0

4.5

2-Jun-10

0

4.5

5-May-10

0.25

4.5

7-Apr-10

0.25

4.25

3-Mar-10

0.25

4

3-Feb-10

0

3.75

2-Dec-09

0.25

3.75

4-Nov-09

0.25

3.5

7-Oct-09

0.25

3.25

2-Sep-09

0

3

5-Aug-09

0

3

8-Jul-09

0

3

3-Jun-09

0

3

6-May-09

0

3

8-Apr-09

-0.25

3

4-Mar-09

0

3.25

4-Feb-09

-1

3.25

3-Dec-08

-1

4.25

5-Nov-08

-0.75

5.25

8-Oct-08

-1

6

3-Sep-08

-0.25

7

6-Aug-08

0

7.25

2-Jul-08

0

7.25

4-Jun-08

0

7.25

7-May-08

0

7.25

2-Apr-08

0

7.25

5-Mar-08

0.25

7.25

6-Feb-08

0.25

7

5-Dec-07

0

6.75

7-Nov-07

0.25

6.75

3-Oct-07

0

6.5

5-Sep-07

0

6.5

8-Aug-07

0.25

6.5

4-Jul-07

0

6.25

6-Jun-07

0

6.25

2-May-07

0

6.25

4-Apr-07

0

6.25

7-Mar-07

0

6.25

7-Feb-07

0

6.25

6-Dec-06

0

6.25

8-Nov-06

0.25

6.25

4-Oct-06

0

6

6-Sep-06

0

6

2-Aug-06

0.25

6

5-Jul-06

0

5.75

7-Jun-06

0

5.75

3-May-06

0.25

5.75

5-Apr-06

0

5.5

8-Mar-06

0

5.5

8-Feb-06

0

5.5

7-Dec-05

0

5.5

2-Nov-05

0

5.5

5-Oct-05

0

5.5

7-Sep-05

0

5.5

3-Aug-05

0

5.5

6-Jul-05

0

5.5

8-Jun-05

0

5.5

4-May-05

0

5.5

6-Apr-05

0

5.5

2-Mar-05

0.25

5.5

2-Feb-05

0

5.25

8-Dec-04

0

5.25

3-Nov-04

0

5.25

6-Oct-04

0

5.25

8-Sep-04

0

5.25

4-Aug-04

0

5.25

7-Jul-04

0

5.25

2-Jun-04

0

5.25

5-May-04

0

5.25

7-Apr-04

0

5.25

3-Mar-04

0

5.25

4-Feb-04

0

5.25

3-Dec-03

0.25

5.25

5-Nov-03

0.25

5

8-Oct-03

0

4.75

3-Sep-03

0

4.75

6-Aug-03

0

4.75

2-Jul-03

0

4.75

4-Jun-03

0

4.75

7-May-03

0

4.75

2-Apr-03

0

4.75

5-Mar-03

0

4.75

5-Feb-03

0

4.75

4-Dec-02

0

4.75

6-Nov-02

0

4.75

2-Oct-02

0

4.75

4-Sep-02

0

4.75

7-Aug-02

0

4.75

3-Jul-02

0

4.75

5-Jun-02

0.25

4.75

8-May-02

0.25

4.5

3-Apr-02

0

4.25

6-Mar-02

0

4.25

6-Feb-02

0

4.25

5-Dec-01

-0.25

4.25

7-Nov-01

0

4.5

3-Oct-01

-0.25

4.5

5-Sep-01

-0.25

4.75

8-Aug-01

0

5

4-Jul-01

0

5

6-Jun-01

0

5

2-May-01

0

5

4-Apr-01

-0.5

5

7-Mar-01

-0.25

5.5

7-Feb-01

-0.5

5.75

 2. The current Australian yield curve for Commonwealth Government Securities (CGSs)

a) Explanation of the shape of the yield curve, using Expectations Theory and the Segmented Markets Theory

Expectation theory tests the Australian yield curve by showing expected short-term rates as according to this theory yield of two year period is considered as one year bond of current as well as the future period (Adorno, 2018). This theory says that declining state of above yield curve shows the short-term rates to decline in the future.

Market segmentation theory states the shape of the above yield curve that the above yield curve is the humped curve as the middle part of the above curve is showing higher rates as compared to the starting and ending part (Cooke, Freisthler and Mulholland, 2018).

b) Influence of movements in the fiscal position identified above to influence the yield curve

Increasing spending in the budget of Australian government will reduce the cash rate which will results in the declination in the yield curve as it is related to the cash rate (Wellmann and Trück, 2018). Due to increasing cash outflows, the cash balance will get affected which shows negative influence of the changes in the fiscal position on the overall yield curve.

3. Description of the movements in the target cash rate from 2001 to 2017 influence of movements in the cash rate on the value of the Australian dollar in the foreign exchange market

Movement of cash rate from 2001 to 2017 is the most fluctuating position observed in the above line chart as the cash rate initially starts with higher rate then gets increases and then decline shows that cash rate is highly affected by the external market factors affecting the overall performance of an entity (Chen, Zhang, Tam and Wu, 2018).

The changes take places in the cash rates will directly affect the Australian dollar traded in the foreign exchange market. Increase in the cash rate will also increase the value of an Australian Dollar which allows investors to invest in the Australian economy to boost up its overall returns (Influence of ash rate on the Australian dollar, 2017).

Books and journals

Edeling, A. and Himme, A., 2018. When Does Market Share Matter? New Empirical Generalizations from a Meta-Analysis of the Market Share–Performance Relationship. Journal of Marketing. 82(3). pp.1-24.

Damodaran, A., 2018. Equity Risk Premiums (ERP): Determinants, Estimation and Implications–The 2018 Edition.

Cheng, C. and Li, J., 2018. Early default risk and surrender risk: Impacts on participating life insurance policies. Insurance: Mathematics and Economics. 78. pp.30-43.

Kim, W., Kim, Y. M., Kim, T.H. and Bang, S., 2018. Multi-dimensional portfolio risk and its diversification: A note. Global Finance Journal. 35. pp.147-156.

Hoepner, A. G., and et.al.,  2018. ESG shareholder engagement and downside risk.

Bedi, R., 2018. Cowen and Zines's federal jurisdiction in Australia [Book Review]. Ethos: Official Publication of the Law Society of the Australian Capital Territory, (247), p.59.

Hugo, C., Isenring, E., Sinclair, D. and Agarwal, E., 2018. What does it cost to feed aged care residents in Australia?. Nutrition & Dietetics. 75(1). pp.6-10.

Wellmann, D. and Trück, S., 2018. Factors of the term structure of sovereign yield spreads. Journal of International Money and Finance. 81. pp.56-75.

Adorno, T. W., 2018. Kant's critique of pure reason. John Wiley & Sons.

Cooke, A., Freisthler, B. and Mulholland, E., 2018. Examination of Market Segmentation among Medical Marijuana Dispensaries. Substance use & misuse, pp.1-5.

Chen, Y., Zhang, H., Tam, K.L. and Wu, M., 2018. The Making of Contemporary Australian Monetary Policy-Backward-or Forward-Looking?. International Journal of Economics and Finance. 10(6). p.127.

Queiroz, M., and et. al., 2018, January. The Complementarity of Corporate IT Alignment and Business Unit IT Alignment: An Analysis of Their Joint Effects on Business Unit Performance. In Proceedings of the 51st Hawaii International Conference on System Sciences.

Australian Federal government position, 2018. 

Cash rates of Australia, 2018. Available

CBA, 2018. 

Common wealth bank of Australia’s market risk, 2017. 

Influence of cash rate on Australian dollar, 2017. 

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