Financial Institutions and Markets Assignment

BFC 5926
1. Introduction................................................................................................................2

2. Short term rate............................................................................................................2

3.Bond............................................................................................................................3

4.Equity and indices.......................................................................................................4

5. Foreign Exchange......................................................................................................6

6. Conclusion.................................................................................................................8

Appendix........................................................................................................................9

References list..............................................................................................................11

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1. Introduction
This report analyses the basic principles and operating procedures of the securities
market based on the four-week practical investment operation process of this group.
In the first part of this report, short-term debt will be analysis, and this group choose
treasury notes. Next, long-term debt will be discussed and the analysis of equity and
indices are presented in part three. Finally, this report will analyse the foreign
exchange and explain the reasons for buying the country's foreign exchange. Overall,
the portfolio is loss-making, so this report will reflect on its operations and combine
theory with practice to conclude some rules of the financial securities market.

2. Short term rate

Most countries’ debt market is composed of money market and capital market.
Reserve Bank of Australia defines money market is the market that trade short term
securities (Reserve Bank of Australia, 2019). Furthermore, Christopher and Peter
argue that government securities market is an essential market of money market, and
treasury notes (T-notes) is a primary type of securities (Christopher & Peter, 2015). In
order to raise short term funds, America issues a large number of T-notes, and they
have different interest rate and maturity date. Here are some T-note that America
issues:

Figure 1. T-notes
American T-notes’ face value is $1000, the expiration date and coupon rates are given
by the T-notes, payments can be calculated due to the coupon rates, so investors can

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use calculator calculate T-notes’ interest rate. Figure 1 shows the different interest
rates about these T-notes, our group purchased B-T-3.625-15092015, the price was
$1004.38 on 2nd April, since this T-note had the highest interest rate. Moreover, this
T-note had the highest coupon rate, so this T-note would have the highest payment.
We think although we only held this T-note one week, a higher coupon rate could
attract investors to purchase it to earn interests. The T-note which has a higher coupon
rate and interest rate could engage investors to purchase it, and it would have higher
liquidity, so investors could sell it in a short time. We sold this T-note on 9th April and
the price was $1004.14, and there was a deficit of $57.8, which was different from our
forecast. The reason is that the trade period is limited, and we did not observe the
price of T-note every day, so we might miss the highest price to sell the T-note.

3.Bond
Government not only issues short-term securities to raise funds, but also issues
medium-to-long-term securities. Subsequently, companies which are large and well-
respected can issue corporate bond as an alternative way to borrow funds. Comparing
treasury bonds (T-bonds) and corporate bonds, corporate bonds have a higher interest
rate, however, higher profit always with higher risk. Investors can be divided into
three types, most of them are risk-averse, some of them may be risk-neural, and others
are risk-seeking. For bond, our group were risk-seeking and we would like to earn
more profit by bonds, so corporate bond was selected. We purchased 230 shares B-
UAL-8.048-01052022 which issues by Continental Airlines at $1030.71 per share on
9th April, since we thought the price of this bond could increase, and reasons can be
described in these five aspects. Firstly, for corporate bonds, longer term to maturity
bonds are less liquidity than short term bonds. This bond’s expiration date is 1st May
2022, the maturity date is appropriate, and this bond could have higher liquidity.
Secondly, this bond’s coupon rate is higher, and it can attract more investors to
purchase it, which can also increase its liquidity. Thirdly, this bond rating is A-, it
means Continental Airlines is a well-respected company, and it could enhance

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investors’ confidence, so it could be a steady investment. Fourthly, the stock price of
United Continental Holdings, Inc. (UAL) had an increaseing trend since 27th March
to 8th April, so investors could predicte that this bond of this company would
increase.

Figure 2. UAL’s stock price

Finally, Zacks Equity Research reported that UAL would deliver the quarter report on
16th April, and revenue was expected to increase to $9,59 billion, which increased
6.2% than last year (Zacks Equity Research,2019). However, we sold this bond at the
same price as we purchased, the outcome was different from our prediction. Two
reasons can explain this result. Firstly, we could not use stock price to predict bond
price, the bond’s price is steadier, and its price could not increase sharply in a short
time. Secondly, UAL would deliver its quarter report on 16th April, so some investors
would like to read its report before they purchase a bond.

4.Equity and indices

The stock market usually means a market that issues and trades stocks through
exchanges or over-the-counter markets. It is one of the important areas that cannot be
ignored in the market economy. Because stock trading gives companies the
opportunity to obtain capital and allows investors to own a small portion of a
company's equity, the company will realize revenue based on its future performance.
Valentine et al. (2011) analyze that stock is issued in the "primary market", and once

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issued, any trading in the stock in the future will be described as trading in the
"secondary market".Shares in Australia generally contains ordinary shares and
preference shares, which are issued by companies through initial public offerings,
rights issues, private placement, share purchase plans and dividend reinvestment
plans.
The ASX report describes the stock price indices, which is used to measure the
average price of stocks contained in it. The indices are weighted averages, with the
weights determined by companies’ relative capitalization. They are frequently used as
performance benchmarks by fund managers. The major share price indices provided
by the ASX measures the average price of the largest 500 companies; accumulation
index that measures the average value of a share investment over time and the Dow
Jones Index, which is the main overseas share price indices of relevance to Australia.
This group chose to buy USO and Google in equity market for 10000 shares and 200
shares respectively. The price of oil fund generally fluctuates in a relative range
compared with ordinary company's stock price. The price also has a great relationship
with international events and states relations. According to the active production cuts
by Saudi Arabia and Russia, the global crude oil supply has dropped significantly in
recent. In addition, the decline in crude oil production in Iran, Venezuela and Libya
caused by geopolitical events have further boosted crude oil prices (L. Zhang, 2019).
Thus, it is deduced that price of USO might rise, but the reality was that the bid price
and offer price were $13.38 and $12.87, which means group lose nearly $5000 in this
transaction. It is noticed that short-term prices are random which might cause this
result due to trading time limit and it is still believed that price of USO will rebound
in the future.
The group also purchased Google in the equity market. The price of Google
($1224.99 on April 16) is obviously higher than other companies. As a result, only
200 shares were bought to reduce the risk of loss, and $2200 were earned after selling
the shares at $1235.75 although the price of Google only raised 0.88% during this
period. It can be concluded that higher price will bring both the higher risks and
returns. The reason that investing Google was that its total operating revenue raised to

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$36.339 billion in the first quarter of 2019, showing 17% year-on-year growth. Other
investors might also invest more after these data are released which finally caused the
price increase during the investment period. However, Google’s single profit model
may face challenges in future since it has over-reliance on search advertising revenue.
The reason why the group has not enough confidence on continued growth in stock
prices, resulting in the sales of stocks as soon as it raised.

5. Foreign Exchange
Foreign exchange refers to various means of payment that can be used for
international settlements expressed in foreign currencies (Shrikhande, 2002). As a
result of the foreign exchange transaction, foreign exchange market comes into being,
which refers to a trading network composed of various Banks and financial
institutions engaged in foreign exchange transactions (Valentine et al., 2011). Foreign
exchange transactions are expressed in terms of exchange rates, which is the price of
one currency is expressed in another. Valentine et al. (2011) state that in Australia, the
exchange rate is usually expressed by indirect quotation. To be more specific, One
AUD is equivalent to how many units of overseas currency, and is written as
AUD/overseas currency. In addition, foreign exchange transactions can be divided
into spot transactions and forward transactions, and in this paper, spot transactions
will be discussed as the group has used this way to make practical purchases.
The spot transactions are the most popular way in the real world, and it is defined as a
transaction occurring on the same day or within two business days (Valentine et al.,
2011). Fundamental analysis is necessary before buying foreign currency, which
involves macroeconomic indicators, asset markets and politics in both countries.
Specifically, macroeconomic indicators mainly concern the GDP, interest rates,
inflation rates and unemployment rates of these two countries (Gans et al., 2018). In
addition, purchasing power parity theory (PPP) also provides forecasts for foreign
exchange purchases, because the theory indicates that the ratio of currencies in two
countries eventually tends to be the ratio of the prices of the same commodity in those
two countries.

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This group chose to buy the AUD. According to the latest data, the PPP of Australia
and USA in April 2019 is AUD/USD=0.6896, which is the lowest in recent years
(IMF,2019). As the GDP growth rate of Australia is predicted to rise, it can be
predicted that the PPP of AUD/USD will rise. Therefore, at present, AUD/USD is at a
low level and there will increase and it will be profitable if buying AUD now. In
addition, for USD, according to the latest news, America's GDP for the first quarter,
released on April 26th, grew by an average of 3.2%, the highest since 2018. But
professional analysts indicate it is due to the effect of the government tax cuts, whose
impact is now over (CNBC, 2019). Therefore, America's economic performance is
likely to fall in the future and it is further judged that AUD/USD will rise. The group
plans to buy at a low AUD/USD level and sell at a high, which would generate a
profit. However, since the time limited of the task, the team bought at 0.7058 on April
30 and sold at 0.6695 on May 3, losing 62.74 US dollars. As can be seen from the
following trend chart, AUD/USD shows a declining trend in these days, which is
contrary to the predicted results.

Figure3. From April 30 to May 3, the AUD/USD trend

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Overall, this operation did not meet the expectations of the group, which may be
because the short-term foreign exchange market is difficult to be analysed with
specific quantitative thinking and has randomness, while the group only analysed the
long-term impact.

6. Conclusion
This report makes the following conclusions according to the operation results in the
past four weeks. Firstly, the price of short-term bonds fluctuates, and investors should
focus the price on every day. Secondly, investors buying long-term bonds should be
concerned about the impact of international policy. For the equity market, high prices
mean high risk. Thus, the group sold when prices rose, guaranteeing a profit.
Subsequently, Indices are difficult to predict and is influenced by international news,
so they require daily attention. Finally, investors should not only analyse long-term
factors for foreign exchange but also short-term factors such as current affairs and
policies.

Word count: 1940

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Appendix

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References list
Christopher, V., & Peter, P. (2015). Financial Institutions, Instruments and Markets, 8e. Sydney,
Australia: McGraw-Hill Education.

CNBC. (2019). US economy. Retrieved from https://www.cnbc.com/2019/04/26/gdp-q1-2019-

first-read.html

Gans, Joshua & King, Stephen, 1962-, (author.) & Byford, Martin, (author.) & Mankiw, N.
Gregory, (author.) & ProQuest (Firm) (2018). Principles of microeconomics (7th Asia-Pacific
edition). Cengage Learning, South Melbourne, Victoria.

IMF. (2019). Implied PPP conversion rate. Retrieved from

https://www.imf.org/external/datamapper/PPPEX@WEO/OEMDC/ADVEC/WEOWORLD

Reserve Bank of Australia. (2019). RBA Glossary. Retried from

https://www.rba.gov.au/glossary/index.html?search=money+market

Shrikhande, M. M. (2002). A general equilibrium analysis of foreign direct investment and the
real exchange rate. International Journal of Finance & Economics, 7(4), 309. Retrieved from
https://search-proquest-com.ezproxy.lib.monash.edu.au/docview/214186851?accountid=12528

Valentine, T., Ford, G., O'Hara, L., & Sundmacher, M. (2011). Fundamentals of financial markets
and institutions in Australia. Frenchs Forest, N.S.W: Pearson Australia.

Zacks Equity Research. (2019, April 10). United Continental (UAL) Earnings Expected to Grow:
Should You Buy? Retried from https://finance.yahoo.com/news/united-continental-ual-
earnings-expected-143002840.html

Zhang, L. (2019). High crude oil prices are good for some chemical and coal industries .
Retrieved from https://news.mysteel.com/19/0510/10/V01726B61E44294D7.html

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