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Assingment Indi Fin435

The document is an assignment for a financial market and banking services course at Universiti Teknologi Mara, detailing various topics such as differences between bond and stock markets, the impact of exchange rate fluctuations on multinational corporations, and the advantages and disadvantages of offshore markets. It includes calculations related to Treasury bills, currency exchange, and corporate bonds, as well as an analysis of call options. The assignment is prepared for Dr. Nor Halida Haziaton bt Mohd Noor by a student named Muhammad Amirul Mueiz bin Azhar.

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0% found this document useful (0 votes)
29 views7 pages

Assingment Indi Fin435

The document is an assignment for a financial market and banking services course at Universiti Teknologi Mara, detailing various topics such as differences between bond and stock markets, the impact of exchange rate fluctuations on multinational corporations, and the advantages and disadvantages of offshore markets. It includes calculations related to Treasury bills, currency exchange, and corporate bonds, as well as an analysis of call options. The assignment is prepared for Dr. Nor Halida Haziaton bt Mohd Noor by a student named Muhammad Amirul Mueiz bin Azhar.

Uploaded by

zhask1345
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIVERSITI TEKNOLOGI MARA UiTM KELANTAN BRANCH

FINANCIAL MARKET AND BANKING SERVICES

(FIN435)

ASSIGNMENT 1

PREPARED FOR:

DR NOR HALIDA HAZIATON BT MOHD NOOR

CLASS GROUP : D2BA2722B

PREPARED BY:

NAME STUDENT ID

MUHAMMAD AMIRUL MUEIZ BIN AZHAR 2024624672


TABLE OF CONTENTS

CONTENT PAGE

1. Explain two key differences between the bond market and stock market in 3
terms of instruments and risk levels. (5 marks)
2. Describe how exchange rate fluctuations affect multinational corporations 3
operating in Malaysia. Provide a real-world example. (5 marks)
3. Discuss two advantages and two disadvantages of offshore markets from 3
the perspective of financial regulations and tax implications. (5 marks)
4. Select one money market instrument available in Malaysia. Discuss their 4
functions and risks. (5 marks)
5. A company plans to invest RM 500,000 in a 3-month Treasury bill (T-bill) 4
with a discount rate of 3.5% per annum. Calculate the purchase price of
the T-bill and the effective yield (annualized return) on the investment. (5
marks)
6. A Malaysian company imports raw materials worth EUR 250,000 and 4
needs to make the payment in 90 days. The current EUR/MYR spot rate is
5.00, and the 3-month forward rate is 5.10. Required:

i. Calculate the amount payable in MYR if the company does not


hedge and pays at the future spot rate of 5.15. (2 marks)
ii. If the company enters a forward contract at 5.10, how much will it
save or lose compared to paying at the future spot rate? (3 marks)
7. Table 1 shows the information on two corporate bonds issued in Malaysia: 5

i. Based on Table 2, determine each bond’s yearly coupon rate,


coupon payment, maturity date, type of issuer, and currency
used for issuance. (5 marks)
ii. Briefly describe the meaning of the above rating given for each
bond. Which bond is more stable in fulfilling its debt obligations?
Justify your selection. (5 marks)

8. An investor buys a call option on ABC stock with an exercise price of RM 5


5.55. The option premium is RM 0.30, and the stock price at expiration is
RM 5.70.
i. Calculate the profit or loss per share for the investor. (5 marks)
ii. If the stock price drops to RM 4.80 instead, what will be the investor’s
maximum loss?
9. References 6

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Question

1. Explain two key differences between the bond market and stock market in terms of
instruments and risk levels. (5 marks)

= Stocks market represent ownership in a company, making shareholders partial owners


entitled to a portion of profits and potential growth. Stock market also offer ownership
rights with voting privileges and the potential for higher returns through price
appreciation and dividends but with higher risk. Bonds market represent loans made to
an entity, with bondholders acting as creditors who receive regular interest payments
and the return of principal at maturity. Bonds market provide regular interest income with
lower risk and have priority over stockholders during liquidation.

2. Describe how exchange rate fluctuations affect multinational corporations operating in


Malaysia. Provide a real-world example. (5 marks)

= Exchange rate fluctuations affect multinational corporations (MNCs) operating in


Malaysia in two ways. First in revenue and impact, when the Malaysia ringgit
depreciates against a foreign currency like USD, the cost of importing raw materials or
components priced in that foreign currency increases. This raises production costs for
MNCs relying on imported inputs. On the other hand, a weaker Ringgit makes exports
cheaper and more competitive internationally, potentially boosting revenue from foreign
sales. Second, translation and transaction risk, MNCs must convert foreign earnings into
their home currency. If the Ringgit depreciates, profits earned in MYR are worth less
when converted. This is known as translation risk. Similarly, transaction risk arises when
future payables or receivables are affected by changes in the exchange rate between
contract signing and payment. Real-world example in Malaysia is Toyota, a Japanese
multinational automaker with manufacturing and sales operations in Malaysian, is
sensitive to exchange rate movements. If the Ringgit weakens against the Japanese
Yen (JPY), it becomes more expensive for Toyota Malaysia to import car parts and
components from Japan. This can reduce profit margins unless the company passes on
costs to consumers. Conversely, if Toyota exports cars assembled in Malaysia to nearby
ASEAN markets, a weaker Ringgit could make those cars more competitively priced
regionally, increasing export demand.

3. Discuss two advantages and two disadvantages of offshore markets from the
perspective of financial regulations and tax implications. (5 marks)

= Two advantages of offshore market from the perspective of financial regulations and
tax implications are favorable tax treatment and less stringent financial regulations.
Favorable tax treatment, offshore markets often offer low or zero taxation on income,
capital gains, or interest. This allows companies or individuals to minimize their tax
burden legally through offshore subsidiaries or investment accounts. For the less
stringent financial regulations, many offshore jurisdictions have lighter regulatory
environments, offering more flexibility and privacy in financial operations. This can
reduce compliance costs and make it easier to manage complex international structures.

=Two disadvantages of offshore market are increasing regulatory inspection and


compliance risks and limited legal protections. For regulatory inspection and compliance
risks, due to concern over money laundering, tax evasion, and illegal financial flows,

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offshore markets are increasingly under inspection by global regulators. Entities using
offshore structures may face more audits, reporting requirements or reputational risks.
For limited legal protection and transparency, offshore financial centers may not have
the robust legal framework found in major onshore markets. This can pose risks in the
event of disputes, fraud or enforcement issues, as legal action may be more complicated
or less effective.

4. Select one money market instrument available in Malaysia. Discuss their functions and
risks. (5 marks)

One money market instrument available in Malaysia is Treasury Bills. For the functions,
Treasury Bills are short-term debt instruments issued by Bank Negara Malaysia (BNM)
on behalf of the government. They help the government manage short-term liquidity
needs and fund temporary budget shortfalls. T-Bills are used by BNM as part of open
market operations to control liquidity in the financial system. By issuing or redeeming T-
Bills, the central bank can influence short-term interest rates and the money supply. For
the risks of T-Bills, they can still be affected by changes in market interest rates. If
interest rates increase after purchase, the value of existing T-Bills in the secondary
market may decrease. Upon maturity, there is a risk that the reinvested proceeds may
yield a lower return if interest rates have fallen. This is a common issue for investors who
rely on short-term instruments that are constantly changing.

5. A company plans to invest RM 500,000 in a 3-month Treasury bill (T-bill) with a discount
rate of 3.5% per annum. Calculate the purchase price of the T-bill and the effective yield
(annualized return) on the investment. (5 marks)

=Purchase price = RM 500000 ( 1 – ( 3.5% x 90)/360)


= RM 500000 (0.99125)
= RM 495625
=Yield (annualized return) = ¿ ¿
= 0.03578 @ 3.578%

6. A Malaysian company imports raw materials worth EUR 250,000 and needs to make the
payment in 90 days. The current EUR/MYR spot rate is 5.00, and the 3-month forward
rate is 5.10. Required:
i. Calculate the amount payable in MYR if the company does not hedge and pays
at the future spot rate of 5.15. (2 marks)
= amount in MYR = 250000 x 5.15
= RM 1287500
ii. If the company enters a forward contract at 5.10, how much will it save or lose
compared to paying at the future spot rate? (3 marks)
= forward payment = 250000 x 5.10
= RM 1275000
Savings = 1287500 – 1275000
= 12500
By entering the forward contract at 5.10, the company will save RM12500.

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7. Table 1 shows the information on two corporate bonds issued in Malaysia:

Table 1
Bond Name, Bond Ratings Yield to Maturity
MGS 3/2019 3.85% 14.05.2025 (MYR), AA3 (RAM) 3.88%
CIMB 4.10% 25.06.2034 (MYR), A1 (RAM) 4.28%
Assuming the nominal principal value of each bond above is MYR 10,000.

i. Based on Table 1, determine each bond’s yearly coupon rate, coupon payment,
maturity date, type of issuer, and currency used for issuance. (5 marks)
=
Bond name MGS 3/2019 CIMB
Coupon rate 3.85% 4.10%
Coupon payment 3.85% x 10000 = 4.10% x 10000 =
RM385 RM410
Maturity date 14.05.2025 25.06.2034
Type of issuer Government Corporation
Currency used for (MYR) (MYR)
issuance

ii. Briefly describe the meaning of the above rating given for each bond. Which
bond is more stable in fulfilling its debt obligations? Justify your selection. (5
marks)

= MGS 3/2019 issuer by government of Malaysia. For the rating is AAA, highest
possible for sovereign debit in domestic currency. This rating indicates extremely
strong capacity to meet financial commitments. These bonds carry minimal
default risk. CIMB bond issuer by reputable corporation. Typical rating often is
AA, depending on the issue and market conditions. High-quality bond with very
low credit risk, but still slightly riskier than government bonds because it is not
sovereign-backed.

8. An investor buys a call option on ABC stock with an exercise price of RM 5.55. The
option premium is RM 0.30, and the stock price at expiration is RM 5.70.
i. Calculate the profit or loss per share for the investor. (5 marks)
= intrinsic value = RM 5.70 – RM 5.55
= RM 0.15
Total loss = RM 0.15 – RM 0.30
= RM 0.15 (Loss)

ii. If the stock price drops to RM 4.80 instead, what will be the investor’s maximum
loss? (5 marks)

5|Page
= Since RM 4.80 is below than RM 5.55, the option is out of the money and will
not be exercised. The investor’s maximum loss is RM 0.30 per share, which is
the premium paid.

9. Reference list

i. Difference between Stocks and Bonds. Axis Bank (2015).


https://www.axisbank.com/progress-with-us-articles/investment/demat-trading/
difference-between-stocks-and-bonds#:~:text=Stocks%20offer%20ownership
%20rights%20with,typically%20offer%20limited%20growth%20potential
ii. https://www.bnm.gov.my/
iii. Adam Hayes (2024). Offshore definition, how it works, pros and cons.
https://www.investopedia.com/terms/o/offshore.asp
iv. Troy Segal ( 2023). Offshore investing, pros and cons.
https://www.investopedia.com/investing/pros-cons-foreign-market-investing/
#:~:text=Advantages%20include%20tax%20benefits%2C%20asset,offshore
%20jurisdictions%20and%20accounts%20face.
v. MIDF Money Market, Islamic and conventional instruments.
https://www.midf.com.my/money-market-instruments

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