cases in finance final

7/28/2019 Cases in Finance Final

1/23

Cases In Finance


2/23

What is Quantitative Easing 3+?

Way of affecting the price of money interest

rates are close to zero there is : Quantitative

Easing (QE)

central bank creates new money

to keep long term interest rates low

aim is still to bring down interest rates facedby companies and households


3/23

How it works

Create Money

Buy Assets

Price rise ->yieldfall

Cheaper borrowing->greater spending

Demand increase-?Recession end


4/23

In your opinion do you believe QE3 will

be a success?

Based on Keynes theory

Works best when the whole economy is inrecession

Good corporate earnings and highproductivity of labor

Fiscal policy- taxation more effective

Monetary policy effects those who have assetslike stocks, real estate. Due to globalist ioncarry trade


5/23

What is the effect on bond yields and

how does it effect the market?

Bond yields will lower

Bond demand will increase -> price will

increase-> yield falls.

Cost of money reduces


6/23

The US also implemented Operation Twist to flatten the yield

curve? What is this process and how effectives has it been?

buying longer-term Treasuries and simultaneouslyselling some of the shorter-dated issues it already heldin order to bring down long-term interest rates.

Long term bonds-> prices up-> yield down->

From September 2011 through June of 2012 It has not been effective

Unemployment cant be solved by reducing cost ofcapital

Corporates are booking profit slowly-> expanding->translate into jobs in future-> corporate tax to lowerdeficit


7/23

What may be the long term effects on

the Dollar?

Dollar would lose value

Imports will become expensive

Trade deficit worsens External debt would increase as value of dollar

reduces


8/23

Any inflationary effect expected in the domestic

US markets?

Is there a possibility of Keynesian Liquidity trap?

The liquidity trap occurs when the demand for

money becomes perfectly elastic (horizontal on agraph).

Short term interest rates have come close to zero

(since late 2008) and at this point increase in supply

(through QE) might not increase the demand for

dollar.

So ,YES.


9/23

The Effects on international commodity prices

especially metals ?

(Prices of commodity have corrected after last

quantitative easing ended in June 2011 before

that they were continuously increasing during QEperiod.)

Prices of metals would increase :

1. Inflation (increased supply of dollar)2. Economic growth (effect of QE)


10/23

What position Long or Short would you take on

Copper?

Long(as prices would increase in future):

1. Inflation

2. Increased economic activity

3. Housing projects- good demand in china, india,

brazil


11/23

What are your views on Gold price movements,

upward or downward and why? Give 2 views- one

for a very short term position as a trader and onefor the Long term as a fundamental investor.

Traders view: Gold prices would go upwards in

this period of uncertainty (safe investment) till the

time economy is not in good shape.

Investors view :Correction in prices After some time people would invest in other

assets (when economic scenario improves), this

would decrease the demand for gold.


12/23

Which speculative position on Gold would you

take for the longer term? In your opinion Is

financialization of gold a good thing or it mayhave negative impact in terms of volatility etc?

Short:

As the economic environment becomes sttableinvestors would invest in other asset classes than

gold.

Financialization: Reduced storage risk and transportation risk.

It has definitely increased the volatility in

gold(more trading, no attachment).


13/23

Effect on oil prices and its impact on both

emerging and developed markets

The producers of oil as well as other commoditiestypically sell their output in a worldwide market

priced in U.S. dollars. Thus, they care about the

current and expected future purchasing power of the

dollar and how that will translate into goods and

services back home. But QE has been associated

with higher inflation and dollar depreciation, which

combines to erode the purchasing power of the

foreign producers of commodities. Thus, some of the

rise in the nominal price of oil has been to catch up

with that erosion.

Nonetheless what is true is that lower interest rates

spur economic growth, and thus, oil demand.

Oil prices have become the new interest rates,capping growth when Central banks insist on

flooding the market with liquidity, the inflated prices

of commodities like oil tends to stall the whole

economy.

Figure:- (S&P price index in blue)

(Crude oil prices in red)

I i i h ld i b f i


14/23

In your opinion should countries be focussing on

drilling for expensive Shale oil or sand oil based on

issues in North Africa, West Asia, Irans Hormuz pass

etc or you believe traditional oil will get cheaper in the

longer run?

The amount of economically recoverable oil shale isunknown. The various attempts to develop oil shale deposits have

succeeded only when the cost of shale-oil production in a given

region comes in below the price of crude oil or its other

substitutes.

Mining oil shale involves a number of environmental impacts,

more pronounced in surface mining than in underground

mining. They include acid drainage induced by the sudden rapid

exposure and subsequent oxidation of formerly buried materials,

the introduction of metals including mercury into surface-water

and groundwater, increased erosion, sulfur-gas emissions, and air

pollution caused by the production of particulates during

processing, transport, and support activities. In 2002, about 97%

of air pollution, 86% of total waste and 23% of water pollution inEstonia came from the power industry, which uses oil shale as the

main resource for its power production


15/23

Factors affecting Treasury Bills

Demand

Supply

LiquidityCredit risk/Default Risk

Economic condition

Inflation Rate


16/23

Economy Back on Track

Unlimited buying of debt promised by ECB

GDP debt ratio to increase to 100% but will

Fiscal Policy needs to be aligned


17/23

US-Stronger or Weaker?

High Debt

Emergence of China


18/23

22.Would the QE3 have a positive or negative

effect in European Union recovery?

The impact is very bleak

It will depend on the level of credit and

economic growth it spurs

Euro might not survive as the highly geared

nations may be forced to leave under the

pressure of deflation

And as the qe3 is more transparent and

benchmarked it will boost investor confidence


19/23

23.Would you be betting big on the carbon

Credit market in the future? Yes / no and why?

No

As the govts across the world are not totallycommitted towards it

Also, the are trying to formalize a new treatywhich will focus on emission target cuts after2020

Also, the EU as increased the carbon quotasfor the industries and this is the final year ofkyoto protocol.


20/23

Question 24

Prior to 2008, china used do sterilization by

Selling bonds in OMO.

After that by increasing the reserve

requirement.

Chinese bank are incurring losses due to it

But it is keeping inflation at moderate rate

Also locking in most of the money without any

use.


21/23

Question 25

The surge in Chinese home prices and loangrowth over the past five years has surpassedextremes seen in Japan before the Nikkei

bubble popped in 1990. Construction reached 12pc of GDP in China

last year; it peaked in Japan at 10pc.

Also the population of china is agingmultiplying the effect

The forex reserve of china will increase.


22/23

Question 26

Yes the changes are expected to happen.

With USD and Euro showing weakness and

depreciating in value the countries are

changing the composition of their forex

reserves.

Gold is the one safe alternative.

Also many are looking at the prospects of

Sovereign Wealth Funds.


23/23

Question 27

I will go long on the debt instruments

As the yields are already very high and the

economies have already bottomed out.

The yields are expected to decrease in future

thereby raising the bond prices.

Here one can earn from both capital

appreciation and interest income received

cases in finance final

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