Capital Markets and Money Markets
1. Demonstrate your understanding of classical and modern, domestic and global operations of money and capital markets by:
a. Explaining how the Global Financial Crisis [GFC] has had a significant impact on 1) the stability and interconnectedness of international financial markets and economies and 2) the regulatory responses that have been implemented in an attempt to stabilise the financial system.
b. While Commercial Banking was not the only sector to be affected by the GFC, clearly business continuity was threatened and many were exposed to the very real risk of failure. Business continuity risk management may be said to incorporate a disaster recovery planning process and a disaster recovery response process.
i) Define business continuity risk management.
ii)Identify and briefly explain the core components of a disaster recovery planning process.
iii)Identify and briefly explain the core components of a disaster recovery response process.
2. Bottom-up analysis approach focuses on the analysis of accounting ratios and other performance measures. Discuss this approach from two perspectives.
a. Evans and Partners is an investment advisory firm that provides specialist investment advice to its private clients. As part of the investment decision process, the senior investment analysts at the firm apply the bottom-up approach to the fundamental analysis of share prices.
i) Explain why Evans and Partners would use this type of analysis.
ii) Identify and discuss six different accounting ratios that should be included in a bottom-up approach model.
iii) Identify and discuss three other performance measures that may be used.
b. An investor is evaluating the use of the bottom-up and the top-down approaches to fundamental analysis. The investor wants to use the approach that will best enable the structuring of a diversified share portfolio that will achieve specified income returns and capital gains.
i) Compare both approaches and propose a recommendation as to which approach the investor adopt – top-down or bottom-up or both? Provide sound reasoning for your argument.
ii) The top-down approach includes an analysis of the local economy in which a company is situated, plus the economies of major trading partner countries and the global economy more generally. Why would an investor be interested in forecasting changes in these economies?
3. Listing on a stock exchange might be highly desirable for a company, but there are a number of requirements, conditions and costs associated with becoming a publicly listed corporation. For example, Freelancer Ltd is one of the newest public companies to list on the Australian Securities Exchange.
a) Provide a broad overview of Freelancer Ltd AND identify and discuss the rights, roles and responsibilities of Freelancer’s shareholders, board of directors and executive management now that it is a publicly listed company, including the specific requirements for Australian companies seeking general admission to the ASX and the ASX profit test and asset test requirements.
b) Explain why these rules are in place and how they contribute to an efficient stock exchange, support the interests of listed entities, maintain investor protection and impact will these have on the liquidity management of the firm and firm value?
c) Within the context of the ASX, explain why there is a requirement and need for continuous reporting.
Capital Markets and Money Markets
Capital markets and money markets are considered significantly essential for the success and development of the companies and countries (Smith, 1973). In this question, the impact of global financial crisis will be discussed. It is be highlighted how Global Financial Crisis impacted the international financial markets and stability of the financial system. After that, the disaster recovery processes adopted by commercial banks will be explained in detail. Various elements and steps of recovery process will be defined.
The markets of equity, market of company debt, the market of government and the market of foreign exchange are included in the capital markets. The market in which securities are traded is capital market. Common stock and bonds are two types of securities. The long term financial facilities are provided to the government and monetary institutions in order to enhance the capital. The market of stock and market of bond are two parts of capital market. It is responsibility of the public companies to raise capital by training stock in the stock market (Kose and Prasad 2010). The markets of wholesale and markets of retail are also included in the capital and money markets. In the primary market, the new stock of any company is offered to financiers and investors. In secondary market, the existing stock of the company is traded. Numerous monetary institutions as well as brokers of the cash or advances are included in the money market. These dealers freely deal with the cash and advances. The participants of the money market take advances and cash for a particular period of time in order to do all operations successfully. The instruments with limited maturity are traded in the money markets. On the other hand, the instruments with enduring maturity are traded in the capital markets (Krugman, 1979). The main item or medium of exchange is money. The money market provides shorter period financial services to the participant of the market. It is considered a sector of capital markets. Various monetary instruments are comparatively traded in these two types of the markets. Global market included a market in which various countries trade securities freely without any issue.
In 2007 to 2008, the countries of world experienced global financial crisis. After the worldwide disaster occurred in 1930s, the Global Financial Crisis of 2008 was considered the biggest crisis. This financial crisis impacted the economy of diverse nation badly. This disaster started in the 2007 when the subprime mortgage market of United States experienced a biggest crisis. This mortgage market crisis become one of biggest crisis in 2008. This crisis impacted the overall market of the world. In this crisis, the worldwide global downturn occur. After that, the Great Recession occurred. The crisis of European debt also happened frequently. The global financial crisis significantly impacted the whole financial system (llen, 2010).
Global Financial Crisis of 2008
The Global Financial Crisis significantly impacted the US stock market and financial institutions. In 2007, the market of United States surpassed 14000 points according to Dow Jones Industrial Average. This average appeared at 660 point in March 2009. This estimation was at peak after four years. It is investigated that the forceful strategy of the Federal Reserve of numerical simplification encouraged the fractional rescue in the market of stock market (Allen, Babus and Carletti 2009). It is thought by the policy maker Dow that there is divergence among the sickness of the current market as well the Great Depression. It was investigated that there was 50% decline in the market during this depression. In 2007, there was exceptional decline in the market. The whole financial system was badly impacted by this Global Financial Crisis. The financial institutions are impacted by the Global Financial Crisis as well. In 2007, the liquidity position of BNP Paribas was impacted severely in UK due to impassable extractions from funds of hedging. At start, this was not noted by the investors. After that, this severe impact was investigated when financiers and investors tried to discharge properties in greatly leveraged monetary institutions. More than USD 1 trillion was lost by the banks of Europe and USA during 2007 to 2009. During 2007 to 2010, the banks of USA and UK lost almost USD 2.8 trillion. It is expected that banks of USA faced loss of USD 1 trillion. The banks of UK and Europe faced loss of more than USD 1.6 trillion. It is anticipated by International Monetary Fund that banks of USA faced 60% losses. Bank of England also faced severe loss (Chang and Velasco 2000).
The commercial banks faced extensive loss during the Global Financial crisis. The organization and engagement to make sure that a company may carry out the operations in situation of severe crisis and is capable to recuperate to a functional level in a rational period is known as business continuity. The business continuity of commercial banks threatened severely. Recovery, contingency and resilience are three main factors which are included in the business continuity process. The main objective of risk management of business continuity is to make sure a financial institution as well as its staff are organized to reply an activity that disturbs aggressive business operations as well as are capable to efficiently rescue those operations. This is related with managing all functions of the financial institutions. The danger of severe functional as well as monetary results concluding from insufficient or failed procedures and activities (Brunnermeier, 2001).
Impact of Global Financial Crisis on Financial Institutions
A recovery plan of disaster is a recorded procedure or collection of processes to rescue and secure a company. The company made these plans and processes on the document. The risk disaster recovery process contains several components. First of all, the various risk factors are analyzed. After that, the recovery functions of the business are investigated. The strategies for recovery of crisis are made. The employees and workers are trained and educated as per requirements of strategies. The disaster recovery strategies are tested and examined. The plan for maintenance is also made. The process of disaster recovery plan contains various steps. Planning are developed to recover the crisis. The evaluation and assessment is done by the teams of recovery. The required staff will conduct operations of direct recovery. The teams will be provided complete information regarding these strategies. The company also makes various backup plans of recovery. In the end, the performance is evaluated comprehensively (Mbaye, 2003).
After investigating all the data, it is concluded that capital markets and money markets are considered essentially important. The Global Financial Crisis significantly impacted the whole financial system and financial institutions in 2008. The disaster recovery plan is considered essential. Various steps and components must be fulfilled to recover the crisis.
Bottom approach and top down approach are considered significantly essential for investment and funding purpose. The objectives and goals of the both approaches are same (Biatov and Köhler 2006). These approaches are used to enhance the stocks and investments. In this question, the different among top down approach and bottom up approach will be discussed in detail. Various reasons will be highlighted as why an investor should select top down approach or bottom up approach. Various ratios and performance measurements used in model of bottom up approach will be demonstrated in detail. The approaches are significantly essential, so each and every factor will be discussed in detail.
The bottom up approaches are considered significantly essential for success and development of the company (Hume and Sentence 2009). In this approach, the economic situation and conditions are investigated in detail. The whole market position is analyzed as compared to evaluating single factor. The companies are investigated individually in order to invest in profitable company. The basic and main factors of the company are analyzed in this approach. The commodities of the corporation, the competitive place, the potential of earning, and the status of the company in the industry is analyzed in detail. The enduring prospects of growth and earning estimations are analyzed in this approach. In order to investigate the growth and potential of the company, various financial ratios such as liquidity ratios, profitability ratios, efficiency ratios, solvency ratios and market growth ratios are analyzed in detail. The measurement is analyzed through investigation of financial ratios (Frankel and Rose 1996).
Disaster Recovery Processes Adopted by Commercial Banks
Evans and Partners is well-established advisory company that offered expert advice about investment to its various customers. For purpose of investigating the share price, the fundamental analysis was conducted by the company. The assessment of company’s monetary reports, fitness, competitive markets and rivalry position is known as fundamental analysis. In order to conduct the fundamental analysis, the senior analysts of the company use bottom up approach (Eisenhardt, 1989). The investors selected this approach because they can completely understand the financial position of the company. By using bottom up approach, financiers straightly concentrate on the basic and fundamentals of the company. All aspects related to company are investigated in detail. Through this approach in the analysis, the micro and macro basics that influence upcoming modifications in the share price are considered. The company is using this approach because whole attention will be placed on company’s prospects and possibilities. The monetary and managerial performance, weaknesses, efficiency will be measured through analysis of ratios (Tranter and Reynolds 2006). The analysts will considered choosing the stocks of corporations with the extensive percentages for involvements in a portfolio of investment.
Evans and Partners selected diverse ratios in bottom up model for investigating the share price for investment. The company will use six diverse ratios that will be involved in the model of bottom up approach. 1st is current ratio. The current ratio will define the company’s capability to discharge current obligations through current assets. Secondly, the quick ratio must be used. The quick ratio defines the corporation’s capability to discharge the recent obligation with the quick assets. Thirdly, the interest coverage ratio should be used (Madhavan, 1992). This demonstrates in which way the corporation may manage its payments of interest. Fourthly, EBIT to total fund ratio should be used. This ratio indicated that company’s capability to make profit by using all assets. Fifthly, the EBIT to long term fund ratio should be used. This indicates the company’s capability to earn income through utilization of fixed assets. Lastly, the company should use ROE ratio. This ratio shows the corporation’s capability to earn profit through utilization of equity. Earnings per share ratio, price earnings ratio and price to net tangible assets are considered three important performance measures. These ratios can be used to measure the performance of the company as these ratios indicate the position of stock in the market (Van & Horn 1975).
Top down approach and bottom approach are considered essential to make investment decisions. In the fundamental analysis, a financier assesses the utilization of the approaches. He makes decision on the basis of this investigation to structure the diversified portfolio. In the top down approach, numerous industries and sectors are analyzed in detail to make a balance in the portfolio of the investment. The risk is assessed through accumulating the influence of inner functional dangers. The difference in the variables of economy is measured. On the other hand, individual stocks are investigated in the bottom up approach. The proficiency as well as managerial competence of corporations are observed in this approach. Various numerical models are used to assess the risk factors in this approach (Cline, (2000).
Top-Down vs Bottom-Up Approaches for Investing in Companies
Both approaches are considered best. In order to make an excellent diversified portfolio, the investor is required to use both approaches. In top down approach, various macro factors are analyzed and assessed. The growth rate of extensive global communities, and their responses towards policies of government is analyzed. The rate of exchange among domestic and global nations, moving rates of interest, developments in the balance of payments, rates of inflation, movement of prices and development rate of economy is analyzed (Berman, 1978). On the other hand, various financial statements, ratios, and managerial performance of particular companies is investigated in the bottom up approach. Performance indicators of similar companies, modifications in core managements and data about companies’ values and mission is analyzed. On the basis of above reason, it is suggested that investor should use both approaches to make diversified portfolio in order to achieve efficiency and set objectives. An investor analyze diverse economies in top down approach because it is beneficial for investment prospects in future. The investor analyze the changes in performance of economies and restructure his portfolio according to these changes. The performance of companies is also impacted by the performance of industry (De Santis and Imrohoroglus 1997). So, analysis of industries is considered essential.
On the basis of above mentioned analysis, it is concluded that both approaches are considered significantly essential. These approaches provide sufficient benefits to investors. The decision should be based on logical and analytical reasoning.
The companies and corporations in Australia are required to get registration on ASX (Lee and Mark 1991). This is essentially important for success and development of the company. In this report, various requirements to get admission on ASX will be explained. The roles and responsibilities of management of Freelance Ltd will be highlighted. The impact of these registering requirements on share price will be discussed. The requirements of reporting will be highlighted in the last part.
Freelance Limited is an Australian company. Headquarter of the company is situated in the Australia. The main objective of Freelance Limited is to provide online outsourcing marketplace. Online marketplace and payment services through online are two segments in which the company operates (Laeven and Fabian 2013). Business of Escrow is included in the payments services through online segment. An employer recruits work in diverse segments in outsourcing marketplace segment. In order to get registration on ASX, it is responsibility of the company to comply with diverse legislative and registration rules and regulations. It is the main right of the shareholder to put right vote in the general meetings of the company as the board of directors of the company are elected by the votes of shareholders. As a possessor of the company, the shareholder cannot participate in the activities of the company. The board of directors are responsible to make policies and strategies to achieve the goals. The recruit qualified people and provide them appropriate resources to fulfill these objectives. The directors of the company are responsible to check the performance of the company. They check whether the objectives of the company are fulfilled or not. They evaluate activities to make sure that results are achieved in the best interest of stakeholders. Executive management group is elected by the board of directors. The group of management is accountable for getting particular goals as well as strategies by managing daily activities and operations. Board of directors are responsible to stakeholders (Fisher, 1933). The management is accountable to the directors (Reinhart and Reinhart 2009).
The listing requirements to get admission on ASX directly impact the liquidity management and value of the company. These rules also participate in the effective stock exchange. In order to get admission, it is responsibility of the company to possess at least 300 shareholders. Each shareholder should have USD 2000 maximum value. The company can get registration at two stock exchanges (Schularick and Taylor 2012). However, it is required to comply with rules and regulations of ASX. Profit Test and Asset Test are considered essential for getting registration on the ASX. If a company is getting registration under assets test, it should possess AUD 1.5 million of working capital. In case the company does not have this working capital, it is required to maintain AUD 1.5 million of working capital after 1st financial year. The budgeted revenue can be involved in this amount as well. On the other hand, no working capital is required if company is getting admission under profit test (Munga, 1974).
These rule impact the liquidity position because the companies are required to maintain AUD 1.5 million of working capital under asset test. The net worth of tangible assets should be AUD 4 million. The market capitalization must be more than AUD 15 million. The registering rules impact stock prices and interest of investors because the companies are required to maintain AUD 1 million profit from constant activities in past 3 years under profit test. The companies are required to maintain AUD 500000 profit from constant activities in past 1 year under profit test (Schwartz, 1988).
According to rules of ASX, a company is required to report on constant basis. The ongoing reporting is fundamental requirement for the companies. The companies are required to produce half yearly and annual based financial reporting. These reports are used for making managerial and investment decision (Tymoigne and Wray 2009). The ongoing reporting is essential because the decision making process of investors and managers based on this requirement. The errors and mistakes can be highlighted during the year.
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