FORMATS

Unit title:Money and Capital Markets

Unit code:FIN505

Credit points:8cp

Unit description:This course offers to explain the operations as well as a description and explanation of the rationale behind the development trends and current scenario of major financial markets. It provides an overview on the various financing alternatives available to business enterprise and the factors affecting the availability and pricing of these alternatives.

Unit objectives:This unit is designed to enable students to:

Knowledge

1. Identify the essential features of a financial system, its key players and trading mechanisms.

2. Assess the various rate and risk exposure pertaining to various types of financial instruments

3. Understand the forces affecting the behavior of rate of return on financial assets and their intrinsic valuation

Skills

1. Analyze and predict the impact on financial markets by policy changes and stimuli from recent global developments

2. Select appropriate financial instruments at the right rate and risk with respect to company financing situations

3. Control interest risk exposure, foreign exchange risk exposure through derivative instruments

Values/Attitudes

1. Value strategic foresight on the financial market environment

2. Critically sensitive towards the risk exposure of financial assets

Unit outcomes:1. Offer appropriate advice on financing arrangements with respect to the operating environment

2. Formulate hedging strategies to align the risk-return profile of a financial portfolio in line with investment objectives

Readings:Recommended texts

1. Madura, J. (2003), Financial Markets and Institutions 6th edn., South-Western 2. Rose, P.S. (2003), Money And Capital Markets: Financial Institutions and Instruments in A Global Marketplace, McGraw Hill

Supplementary readings

1. Van Horne, J.C. (2001) Financial Market Rates and Flows, 6th edn., Prentice Hall2. Choudhry, M., Joannas, D., Pereira, R. & Pienaar, R. (2002) Capital Market Instruments: Analysis and Valuation, Financial Times Prentice Hall

3. Hull, J.C. (2002), Fundamentals of Futures and Options Markets, 4th edn., Prentice Hall

4. Phillips, M.J. (1990), What Price Money?, Reserve Bank of Australia Bulletin, March 1990, pp. 42-46

5. Stanford, J. & Beale, T. (1995), The Law and Economics of Financial Institutions in Australia, Butterworths:Sydney

6. Valentine, T., Ford, G. & Copp, R. (2003) Financial Markets and Institutions in Australia, Pearson Education, Sydney

7. Bank Negara Malaysia Annual Report 2002

8. Fabozzi, F.J., Modigliani, F. (2002), Capital Markets: Institutions and Instruments, 3rd edn., Prentice Hall

9. Ryan, S.G. (2002), Financial Instruments and Institutions, Wiley Co

Journals

1. Asia Pacific Journal of Management

2. Business Week

3. Far Eastern Economic Review

4. Fortune

5. Forbes

6. Harvard Business Review

7. Journal of Marketing

8. Newsweek

9. Sloan Management Review

10. Time

11. The Economist

Unit contents:TOPICS

1. Role of Financial Markets and Institutions

Explain the role of financial intermediaries in transferring funds from surplus units to deficit units.

Introduce the types of financial markets available and their functions.

Introduce the various financial institutions that facilitate the flow of funds.

Learning actions:

Short introduction followed by role playing the funds raising exercise of a finance manager for small, medium and large firms.

Readings:

Madura Chapter 1

Horne Chapter 1

2. Financial flow analysis

Construct Flow of Funds matrix from publicly available financial flow information as a basis for analyzing the capital markets

Learning actions:Simple exercise on flow of funds analysis with BNM reports

Readings:

Horne Chapter 2

Financial section of BNM Annual Report 2002

3. The determinants and structure of Interest Rates Explain the Loanable Funds Theory by deriving demand and supply schedules for loanable funds.

Explain the Fisher Effect, and tie it in with Loanable Funds Theory by explaining how inflation affects the demand and supply schedules for loanable funds

Use quotation from newspaper to show how yields vary among securities and explain the cause of disparity in yields.

Provide logic behind how default risk, liquidity, tax status, maturity, and special provisions can affect yields. Offer various theories for the term structure of interest rates, and then combine these theories to provide an integrated explanation.Learning actions:Simple exercise on interest rate forecasting and yield curves estimation using bootstrapping method

Readings:

Madura Chapter 2 & 3

Phillips (1990)

4. The Central Bank and Monetary Policy

Describe the role and the organization of the Federal Reserve Bank (Fed) and explain how monetary policy tools are used by the Fed to control economic conditions

Explain the tradeoff involved in the Feds use of a loose or tight monetary policy.

Explain how financial market participants would react to a particular monetary policy. Explain how fiscal policy may influence the monetary policyLearning actions:Basics on the conduct of Monetary Policy and Policy objectives with a comparison of US and Malaysian monetary settings.

Readings:

Madura Chapter 4 & 5

Hull Chapter 5

5. Debt Security Markets Money Market

Identify the more popular types of short-term bonds

Explain how finance managers could perform cash management through money market

The concept of default risk and corporate credit rating

Learning actions:The presence of money market enables corporation treasurer to earn interest on idle cash and yet maintain liquidity position. Illustrate through a few scenarios.

Readings:

Madura Chapter 6

6. Debt Security Markets Bonds Market

Explain the various aspects of a long-term loan agreement and the variety of bonds

Discuss the potential problems with excessive financial leverage.

Role of the bond markets in facilitating corporate capital restructuring

Predicting market reactions to various types of economic stimulus in bond trading

Learning actions:Qualitative discussion how a bondholder could be ripped off by firms excessive leveraging and bond investors should trade in response to various anticipated changes.

Readings:

Madura Chapter 7

7. Bond Valuation and Investment Strategy

The discount cash flow concept and bond valuation Price risk and reinvestment risk due to interest rate moment Concept of bond duration and bond investment strategyLearning actions:Simple valuation exercise under different interest rate movement to illustrate the concept of price risk and reinvestment risk. Bring in the concept of duration as a measure of interest risk exposure and various bond investment strategy in managing the risk

Readings:

Madura Chapter 8

8. Equity Markets Identify the various types of stock.

Describe the process of an initial public offering and a secondary offering.

Explain how firms are monitored within the stock market.

Explain stock valuation models and how to assess the risk of stocks and stock portfolios

Learning actions:Explain the process of raising long-term capital funds through equity instruments and intuitively describe the way equity is valued and how stock market scrutinize the management of a publicly listed company.

Readings:

Madura Chapter 10 & 11

9. Mutual Fund and Securities Operations

Describe various type of mutual funds available, how they operate and elaborate on their strengths and weaknesses

Describe and explain the main functions of securities firms and how securities firms facilitate corporate acquisitions.

Describe how securities firms participate in financial marketsLearning actions:

The operations of two financial intermediaries that is most likely encountered by average individual investors are explained and evaluated.

Readings:

Madura Chapter 24 & 25

10. Derivative security markets I Futures Markets Explain why speculators take positions in financial futures, and how the outcome is determined.

Explain how institutional investors hedge with interest rate futures, and the tradeoff involved.

Explain how stock index futures can be used by institutional investors

Learning actions:

A short description on the futures market organization and function of the instrument followed with a hypothetical scenario. The class is assigned to discuss on the decision process in hedging strategy and how to execute the hedging with futures/forwards

Readings:

Madura Chapter 13, Hull Chapter 2 to 4

11. Derivative security markets II Options Markets Explain why speculators take positions in stock options and how the outcome is determined.

Explain why institutional investors take positions in stock options and the tradeoff involved.

Explain how stock index options are used by institutional investors.

Explain how options on financial futures are used by institutional investors

Learning actions:

Examples to illustrate how the use of option could alter the risk-return profile of financial securities. Apply the option pricing techniques in a simple case study on the pricing of convertible - Group exercise using Excel.

Readings:

Madura Chapter 14

Hull Chapter 8 to 13

12. Interest Rate Risks and Controlling devices How interest rate movements can adversely affect the performance of various financial institutions.

Explain in general terms how interest rate swaps can hedge interest rate risk.

Identify the various types of interest rate swaps, and the advantages of each

Learning actions:

A brief introduction on the instrument followed by a mini-case study to illustrate the use of interest rate swap in protecting a portfolio held by a banking institution.

Readings:

Madura Chapter 15

Hull Chapter 6

13. Exchange Rate Risks and Controlling devices

Describe various types of exchange rate systems and identify factors that influence exchange rates.

Explain how various foreign exchange derivatives can be used to hedge against exchange rate movements.

Explain the lessons learned from the Asian crisis

Learning actions:

Begin with an anatomy of forex risks exposure then assess the state of pre-crisis forex exposure of some Asian countries. Followed by description of hedging/speculation with derivative instruments and illustrations on how to use exchange derivatives to safeguard the bottom line of cross border business operations. Some short exercise on Covered Interest Parity.

Readings:

Madura Chapter 16

Hull Chapter 6

14. Structured financial products

Introduction to Asset-backed bonds, Securitizing mortgages, Mortgage-backed securities and Collateralized mortgage securities

Evaluation and analysis of mortgage-backed bonds

Learning actions:

Some simple exercises just to illustrate how securitization could create liquidity however at the expense of compromise on the risk structure

Readings:

Choudhry, M. Chapter 11

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