View
221
Download
0
Category
Preview:
Citation preview
7/28/2019 Cases in Finance Final
1/23
Cases In Finance
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
3/23
How it works
Create Money
Buy Assets
Price rise ->yieldfall
Cheaper borrowing->greater spending
Demand increase-?Recession end
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
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.
7/28/2019 Cases in Finance Final
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)
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
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.
7/28/2019 Cases in Finance Final
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).
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
15/23
Factors affecting Treasury Bills
Demand
Supply
LiquidityCredit risk/Default Risk
Economic condition
Inflation Rate
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
17/23
US-Stronger or Weaker?
High Debt
Emergence of China
7/28/2019 Cases in Finance Final
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
7/28/2019 Cases in Finance Final
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.
7/28/2019 Cases in Finance Final
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.
7/28/2019 Cases in Finance Final
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.
7/28/2019 Cases in Finance Final
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.
7/28/2019 Cases in Finance Final
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
Recommended