Examen Financial Markets
Q1: Do ordinary people have an effect on the money multiplier
Yes, ordinary people do have an effect on the money multiplier. The money multiplier
is influenced by the behavior of depositors and borrowers. For instance, the more
people deposit money into banks, the more funds banks have available to lend.
Conversely, if people withdraw their deposits or hold cash instead of depositing it,
the money supply shrinks, reducing the money multiplier.
Q2: Banks with high Kapital can go bankrupt
Yes, banks with high capital can still go bankrupt. High capital provides a buffer
against losses, but it does not eliminate all risks. A bank can face insolvency if it
experiences significant losses that exceed its capital reserves or if it faces a liquidity
crisis where it cannot meet its short-term obligations, regardless of its capital levels.
Q3: Difference between active and Passive management
Active Management:
Involves actively selecting stocks, bonds, or other assets to outperform a
specific benchmark or market index.
Managers use research, analysis, and forecasts to make investment
decisions.
Typically involves more frequent trading, aiming for higher returns.
Generally has higher fees due to the cost of research and transactions.
Passive Management:
Involves tracking a specific market index or benchmark, such as the S&P 500.
The goal is to replicate the index's performance rather than outperform it.
Investments are held with minimal trading, reflecting the index composition.
Typically has lower fees due to less active trading and lower research costs.
,Q4: Exercise: interest rate between 2 and 4
Q5: 4 reasons why private equity is profitable
− Investment decisions are made after in-depth analysis of non-public data
o You have access to much more information.
o As it concerns illiquid investments, even better analysis must be done before
investing, as getting out is very difficult.
− Alignment of interests
o Business management, fund managers and fund investors have 1 common goal:
the remuneration for very good management.
o The managers of the private equity companies buy shares in a company and it’s in
their interest that these companies become more profitable. Splitting the profit is
attractive for the fund managers.
− Expertise of Private Equity management teams
o The fund managers usually consist of teams of real experts in certain sub-domains
or sectors.
o Examples: economists, lawyers, tax specialists, engineers, ex CEO’s…
− Active involvement of Private Equity funds
o The managers are actively present in the companies in which they invest and help
the companies move forward with their expertise.
o It’s possible that the fund managers take a seat in the board of these companies.
- Long-run horizon
o On average, a manager remains invested 5-6 years. This period is long enough to
make an analysis and a plan, execute that plan and thus create value.
− A strategy focused on value creation
o The only real focus in creating value or added value.
,Q6: Future vs option
Future: A futures contract is a standardized agreement to buy or sell an asset at a
predetermined price at a specified future date. Both parties are obligated to fulfill the
contract terms.
Option: An options contract gives the buyer the right, but not the obligation, to buy
(call option) or sell (put option) an asset at a specific price before a certain date.
Q7: Exercise: Calculate the spot rate
Q8: Exercise: present value of future options
Q9: Exercise: dividend discount model
Q10: buy side vs sell side
Buy Side: Refers to institutions that buy securities for investment purposes, such as
mutual funds, pension funds, and hedge funds. They focus on investment strategies
to grow capital.
Sell Side: Refers to firms that sell securities and provide advisory services, including
investment banks, brokerage firms, and market makers. They provide research,
recommendations, and facilitate transactions.
Q11: price earnings or price book ratio?
Both ratios are valuation metrics used to assess a company's value. The choice
between them depends on the context:
P/E Ratio: Measures the price paid for a share relative to the earnings
generated per share. Useful for companies with stable earnings.
P/B Ratio: Measures the price paid for a share relative to its book value.
Useful for asset-heavy industries and companies where assets play a
significant role.
Q12: vega or beta or Delta or gamma or theta or rho
Vega: A measure of an option's sensitivity to changes in the volatility of the
underlying asset. It indicates how much the option's price will change with a 1%
change in volatility.
, Beta: A measure of a stock's volatility relative to the overall market. A beta greater
than 1 indicates higher volatility than the market, while a beta less than 1 indicates
lower volatility.
Delta: The way the price of the option moves compared to the movement of the
underlying. It is the expected relationship between the price of the option and the
price of the underlying
Gamma: Gives the way delta moves in function of the underlying. How much the
delta moves when the underlying moves
Theta: Gives the effect of a options change in time to maturity
Rho: give the effect on changes in the interest rates.
Q13: explain risk
Risk refers to the possibility of experiencing financial loss or underperformance
relative to expectations. In finance, risk can arise from various factors, including
market volatility, credit issues, liquidity constraints, interest rate changes, and
operational challenges. Risk is an inherent part of investing, and managing it
involves understanding and mitigating potential negative outcomes.
Q14: What influences the money multiplier?
1) Reserve Requirement Ratio (RRR): This is the percentage of deposits that
banks are required to hold in reserve and not lend out. A lower reserve
requirement increases the money multiplier because banks can lend out a
larger portion of their deposits. Conversely, a higher reserve requirement
reduces the money multiplier.
2) Currency Drain Ratio: This refers to the proportion of money that people
choose to hold as cash outside of the banking system. When people prefer to
hold cash rather than deposits, the money available for banks to lend
decreases, reducing the money multiplier.
3) Excess Reserves: Banks sometimes hold reserves above the required
minimum, known as excess reserves. If banks hold more excess reserves,
less money is available for lending, which reduces the money multiplier.
4) Public's Demand for Loans: The willingness of the public to borrow money
affects how much banks can lend. When demand for loans is high, the
potential for money creation increases, boosting the money multiplier.
5) Interest Rates: Higher interest rates can discourage borrowing and reduce
the amount of money circulating in the economy, while lower rates encourage
borrowing and can increase the money multiplier.
6) Confidence in the Banking System: Public trust in the stability of banks
influences deposit levels. Higher confidence leads to more deposits,
increasing the funds available for lending and thus the money multiplier.
Q1: Do ordinary people have an effect on the money multiplier
Yes, ordinary people do have an effect on the money multiplier. The money multiplier
is influenced by the behavior of depositors and borrowers. For instance, the more
people deposit money into banks, the more funds banks have available to lend.
Conversely, if people withdraw their deposits or hold cash instead of depositing it,
the money supply shrinks, reducing the money multiplier.
Q2: Banks with high Kapital can go bankrupt
Yes, banks with high capital can still go bankrupt. High capital provides a buffer
against losses, but it does not eliminate all risks. A bank can face insolvency if it
experiences significant losses that exceed its capital reserves or if it faces a liquidity
crisis where it cannot meet its short-term obligations, regardless of its capital levels.
Q3: Difference between active and Passive management
Active Management:
Involves actively selecting stocks, bonds, or other assets to outperform a
specific benchmark or market index.
Managers use research, analysis, and forecasts to make investment
decisions.
Typically involves more frequent trading, aiming for higher returns.
Generally has higher fees due to the cost of research and transactions.
Passive Management:
Involves tracking a specific market index or benchmark, such as the S&P 500.
The goal is to replicate the index's performance rather than outperform it.
Investments are held with minimal trading, reflecting the index composition.
Typically has lower fees due to less active trading and lower research costs.
,Q4: Exercise: interest rate between 2 and 4
Q5: 4 reasons why private equity is profitable
− Investment decisions are made after in-depth analysis of non-public data
o You have access to much more information.
o As it concerns illiquid investments, even better analysis must be done before
investing, as getting out is very difficult.
− Alignment of interests
o Business management, fund managers and fund investors have 1 common goal:
the remuneration for very good management.
o The managers of the private equity companies buy shares in a company and it’s in
their interest that these companies become more profitable. Splitting the profit is
attractive for the fund managers.
− Expertise of Private Equity management teams
o The fund managers usually consist of teams of real experts in certain sub-domains
or sectors.
o Examples: economists, lawyers, tax specialists, engineers, ex CEO’s…
− Active involvement of Private Equity funds
o The managers are actively present in the companies in which they invest and help
the companies move forward with their expertise.
o It’s possible that the fund managers take a seat in the board of these companies.
- Long-run horizon
o On average, a manager remains invested 5-6 years. This period is long enough to
make an analysis and a plan, execute that plan and thus create value.
− A strategy focused on value creation
o The only real focus in creating value or added value.
,Q6: Future vs option
Future: A futures contract is a standardized agreement to buy or sell an asset at a
predetermined price at a specified future date. Both parties are obligated to fulfill the
contract terms.
Option: An options contract gives the buyer the right, but not the obligation, to buy
(call option) or sell (put option) an asset at a specific price before a certain date.
Q7: Exercise: Calculate the spot rate
Q8: Exercise: present value of future options
Q9: Exercise: dividend discount model
Q10: buy side vs sell side
Buy Side: Refers to institutions that buy securities for investment purposes, such as
mutual funds, pension funds, and hedge funds. They focus on investment strategies
to grow capital.
Sell Side: Refers to firms that sell securities and provide advisory services, including
investment banks, brokerage firms, and market makers. They provide research,
recommendations, and facilitate transactions.
Q11: price earnings or price book ratio?
Both ratios are valuation metrics used to assess a company's value. The choice
between them depends on the context:
P/E Ratio: Measures the price paid for a share relative to the earnings
generated per share. Useful for companies with stable earnings.
P/B Ratio: Measures the price paid for a share relative to its book value.
Useful for asset-heavy industries and companies where assets play a
significant role.
Q12: vega or beta or Delta or gamma or theta or rho
Vega: A measure of an option's sensitivity to changes in the volatility of the
underlying asset. It indicates how much the option's price will change with a 1%
change in volatility.
, Beta: A measure of a stock's volatility relative to the overall market. A beta greater
than 1 indicates higher volatility than the market, while a beta less than 1 indicates
lower volatility.
Delta: The way the price of the option moves compared to the movement of the
underlying. It is the expected relationship between the price of the option and the
price of the underlying
Gamma: Gives the way delta moves in function of the underlying. How much the
delta moves when the underlying moves
Theta: Gives the effect of a options change in time to maturity
Rho: give the effect on changes in the interest rates.
Q13: explain risk
Risk refers to the possibility of experiencing financial loss or underperformance
relative to expectations. In finance, risk can arise from various factors, including
market volatility, credit issues, liquidity constraints, interest rate changes, and
operational challenges. Risk is an inherent part of investing, and managing it
involves understanding and mitigating potential negative outcomes.
Q14: What influences the money multiplier?
1) Reserve Requirement Ratio (RRR): This is the percentage of deposits that
banks are required to hold in reserve and not lend out. A lower reserve
requirement increases the money multiplier because banks can lend out a
larger portion of their deposits. Conversely, a higher reserve requirement
reduces the money multiplier.
2) Currency Drain Ratio: This refers to the proportion of money that people
choose to hold as cash outside of the banking system. When people prefer to
hold cash rather than deposits, the money available for banks to lend
decreases, reducing the money multiplier.
3) Excess Reserves: Banks sometimes hold reserves above the required
minimum, known as excess reserves. If banks hold more excess reserves,
less money is available for lending, which reduces the money multiplier.
4) Public's Demand for Loans: The willingness of the public to borrow money
affects how much banks can lend. When demand for loans is high, the
potential for money creation increases, boosting the money multiplier.
5) Interest Rates: Higher interest rates can discourage borrowing and reduce
the amount of money circulating in the economy, while lower rates encourage
borrowing and can increase the money multiplier.
6) Confidence in the Banking System: Public trust in the stability of banks
influences deposit levels. Higher confidence leads to more deposits,
increasing the funds available for lending and thus the money multiplier.
