CONFIDENTIAL BM/APR 2008/FIN536

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE : FINANCIAL MARKETS AND INSTITUTIONS

COURSE CODE : FIN536
EXAMINATION : APRIL 2008
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of seven (7) questions.

2. Answer only five (5) questions in the Answer Booklet. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by the
invigilator.

4. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 5 printed pages
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QUESTION 1

a) Study the following situation and answer the question that follows:

'Encik Abu operates a small sundry shop in a rural area. Business is running well
with profits showing positive trend. Due to his good savings habit he managed to
keep a reasonable amount of fund. He still has three school-going children and
therefore needs to plan their educational financial needs in the future. His small
business may, at certain time especially during festivals, require him to buy more
stocks on a wholesale basis from suppliers to meet the needs of his kampong folks.'

Discuss the type of financial institution that is most suitable for him that will help meet
his savings needs and at the same time meet his financing requirements.
(8 marks)

b) With reference to the following chart identify the most likely institution (labeled as
Institution X) that suits the flow of funds indicated and describe the role and functions
of this identified institution as a financial intermediary in the Malaysian financial
system.

Providers • I Institution || * MGS, Corporate

of fund » x K bonds, shares,
pay premium invest in deposits

(7 marks)

c) Explain briefly two (2) advantages of financial intermediation?

(5 marks)

QUESTION 2

a) One of the monetary tools of Bank Negara Malaysia is the Statutory Reserve
Requirement (SRR). Explain in what economic situation would Bank Negara
Malaysia increase the Statutory Reserve Requirement.
(6 marks)

b) The fundamentals of our country are strong, however, the external factors are
adversely affecting the stock market leading to fluctuations in the Bursa Malaysia
Composite Index (KLCI).

From the statement above, explain what is meant by (i) fundamentals and (ii)
external factors.
(8 marks)

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c) Discuss the contributions of investment banks to the development of the capital

market.
(6 marks)

QUESTION 3

a) Name one Islamic banking product that applies to each of the following syariah
concepts and explain any one (1) of the following:

i) Al-Wadiah
ii) Al-Mudharabah
iii) Al-Musyarakah
(6 marks)

b) "Issuing of more licenses to foreign financial institutions to operate in Malaysia will

further develop Islamic banking, thus making this country an important international
Islamic financial hub. At the same time however, due to strong competition, it may
adversely affect the performance of the local Islamic banks." Discuss this statement.
(10 marks)

c) How is 'Islamic banking business' defined in Islamic Banking Act 1983?

(4 marks)

QUESTION 4

a) List four (4) main participants in the foreign exchange market, and briefly explain one
(1) of the participants.
(4 marks)

b) A speculator in the foreign exchange market buys USD 1 million against RM at

3.3300. Later, the market moves to a different level and the last quoted price in the
market is 3.3275/3.3285. He has to square his position at the latest exchange rates.
Is he making a profit?
(4 marks)

c) Illustrate the movement of funds and parties involved in a Repurchase Agreement

(REPO) as one of the main money market instruments.
(6 marks)

d) Credit and liquidity risks are two major money market risks. Differentiate these two
(2) risks and how can bank minimize these risks.
(6 marks)

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QUESTION 5

a) i) Discuss the development of the financial derivatives market in Malaysia.

(8 marks)

ii) List any four (4) derivatives products and its underlying markets traded on the
Bursa Malaysia Derivatives Berhad.

(4 marks)

b) Tax haven' is one of the characteristics of an offshore financial center,

i) What is meant by 'tax haven'?

(4 marks)

ii) What is the tax structure (amount of tax to be paid) of offshore companies in
Labuan that are involved in the 'offshore trading activities' such as banking,
insurance, management and licensing?
(4 marks)

QUESTION 6

a) Bank Negara Malaysia is vested with comprehensive legal powers under a set of
legislations. Explain briefly the main provisions of each of the following legislations:

i) Banking and Financial Institution Act 1989

ii) Exchange Control Act 1953

(6 marks)

b) List three (3) types of collateral (security) required for bank's lending and explain the
realization process of these assets upon non-payment of the borrower.
(9 marks)

c) Briefly explain the importance of asset and liability management committee of a

bank.
(5 marks)

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QUESTION 7

a) The signals of bad loan (red flags) can be divided into three categories - account
operations, business operations and changing environment. Explain the threats in the
changing environment that affect the profitability of companies. Do you think banks
have control over these threats?
(8 marks)

b) "XXX Bank Berhad posted a 23% jump in net profit to RM2.1 billion for the year
ended Dec 31, 2007 (FY07), thanks to higher net interest and financing income
as well as other operating income and lower loan loss provisions."

The above is an earnings announcement of one of the leading banks in Malaysia.

Based on the above statement, discuss the probable factors of the bank that may
lead to a higher net interest and financing income which in turn become the major
contribution to the bank's profit.
(10 marks)

c) How do you derive to the risk-weighted capital ratio of banks?

(2 marks)

END OF QUESTION PAPER

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