...the brief description of Australia and china money market and interest rate trends. Besides, the leading roles of changing structure of economy and monetary policy for each country will be discussed in detail. Moreover, the most crucial point of this report is to analyse both historical and future money market interest rate trends in these two countries. Table of contents Transmittal document 1 Table of contents 3 Executive summary 4 Introduction 5 Australia 5 Historical Money Market Interest Rates in Australia 5 Prediction of the coming interest rate trend in Australia 7 China 7 Historical Money Market Interest Rates in China 8 Prediction of the coming interest rate trend in China 10 Conclusion 11 Appendices 12 Reference list 13 Executive summary This report aims to discuss the money market in two countries. Through a series of data and analysis, both historical and future interest rate in these two countries as well as events that lead the trends will be presented in this report. Furthermore, structural change for monetary policy that shows effects on the interest rate trends will be discussed particularly. Meanwhile, concerning the influences that financial instruments would have on the interest rate change, some basic market information such as balance between supply and demand as well as liquidity effect are demonstrated specifically. On the other hand, some forecasts of the interest rate tendency of Australia and china will also be explained...
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...Written by Emily Jones 1. Why are chemical properties of fuels of interest to us now and in the future? We use fuels to power many aspects of our lives, so the chemical properties of fuels are an interest to us now and in the future. There are many different types of fuels, but the three main fuels in which have scientist interested upon are, solid fuels, liquid fuels, and gaseous fuels. The main reason to why these varieties of fuels will interest us within the future to come is because the prospect of a society with much greater use of these products is often referred to as either the “bio-based future” or a “carbohydrate economy”. Without fuels, we wouldn’t be where we are today in society. An example of a fuel and how it actually helps...
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...has increased due to substantial changes domestically and internationally. This has given rise to increased financial price risks faced by both domestic and multi-national companies. Financial Derivatives are widely used by corporations to adjust to exposure to currency risk, interest rate risks, commodity price risks, and security holdings risk. Largely, companies are currently exposed to risks caused by unexpected movements in exchange rates and interest rates. Companies with a growing global presence are especially exposed to a wide range of financial risks, in particular foreign exchange risks and interest rate risk. Although, financial risks are the center of business operations of financial service firms, but they also impact the risk exposure of non-financial corporations. The management and supervision of these risks has become vital for the existence of companies in today’s unpredictable financial markets. The major financial risks that most firms are exposed to are interest rate risk, currency rate risk, commodity price risk, and security holdings risk. Interest rate risk is a very common type of risk, and result from a discrepancy in the sensitivity of a firms assets and liabilities to interest rate movements. On the other hand, currency risk exposure is virtually encountered by all firms, even if their exposure is not from a transaction or a translation risk. Many firms are also likely to face competitive risk due to foreign companies using weak home currencies to...
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...Hedging with Forward Forward rate agreement (FRA) is a forward contract that can be used to fix an interest rate for a future short-term loan or deposit. A FRA is not an actual short-term loan or deposit. In a FRA the buyer of the FRA agrees to pay a fixed rate of interest on the notional loan and in return to receive interest at the current market rate prevailing at the start of the notional loan period. On the contrary, the dealer of the FRA consents to get interest on the notional loan at the fixed FRA rate, and consequently to pay interest at the current market rate prevailing at begin of the notional loan period. Each company can buy more than one FRA to hedge the risk because of the increase in short-term interest rates. On the other...
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...certificates. These savings certificates were highly affected by interest rate fluctuations. The long term loans provided to people generate interest earnings which are do not increase or decrease with the interest rate fluctuations. Therefore, there was a mismatch between the interest rates earned by the bank and the interest rates that it had to give out. This caused large losses over the period 1979-1982 when interest rates rose. Table 1.1 The bank would violate the regulatory capital requirements if its losses were not controlled. The T-bill interest rates were on the rise. $400mm in savings certificates were to be rolled over on September 1. If interest rates continued to rise, then these certificates would be rolled over at the prevalent high interest rates (as mentioned in the case, the savings certificate interest rate was fixed at a spread over the T-bill interest rate). If the firm hedges itself from the interest rate fluctuations, then the loss that would be caused due to the savings certificate rollover at a high interest rate would be offset by the futures position. Let us look at this in detail: From exhibit 3, Profit and Loss Statement, comparison of the interest payment expenses ( as denoted by Dividends) has increase from 1979 to 1981 by 104.3% which is attributed to the rise in T-bills interest rates. Table 1.2 Time Period 1981 1980 1979 % Increase from 1979 to 1981 Dividends (denotes interest paid or credited to members) 40,162 26781 19660 104.3% Net...
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...initial cash inflow and a future cash outflow. Which cash flows should be negative and which positive?" (Cornett, Adair, and Nofsinger, 2016, p. 95). The cash flow timeline is a visual depiction of inflows and outflows relative to the period under consideration. Cash flows are illustrated above the cash flow line with the corresponding periods that apply appearing under the cash flow diagram. Inflows are represented by positive numbers and outflows by negative numbers. Distinguished-level: State the reason for showing both a negative and positive amount on the time line. Showing a negative or positive amount on the timeline shows where money has been contributed or lost (negative) and where money has been earned (positive). By using the negative and positive values for cash flow, the timeline is aligned with accounting practices of debits and credits Question 2: Proficient-level: "How are the present value and future value related?" (Cornett, Adair, & Nofsinger, 2016, p. 95). The measure that relates present values to future values is the interest rate i. A present value can be moved forward in time with interest to arrive at the future value (). A future value can be discounted back to the present by rearranging the equation so that the FV is divided by the interest factor. Distinguished-level: Explain why a dollar is worth more today than a dollar received a year from now. The idea that a dollar today is worth more than a dollar inthe future, because the dollar received today can earn...
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...dealings foreign exchange play an important role. Fluctuations in the foreign exchange rate can have significant impact on business decisions and outcomes. Many international trade and business dealings are shelved or become unworthy due to significant exchange rate risk embedded in them. Hedging uses various techniques, it involves taking equal and opposite positions in two different markets (such as cash and futures markets). A hedge can be constructed from many types of financial instruments, including forward contracts, future contracts, options, swaps, many other types of over-the-counter and derivative products. Forward Contracts Generally, the most prominent instrument used in hedging for exchange rate risk management is the forward contract. Forward contracts are customised agreements between two parties to fix certain condition such as the currency exchange rate, interest rate or commodities price for a future transaction. It gives the buyer an obligation to purchase an asset and the seller an obligation to sell an asset at a specified price at a future point in time. Assume that a UK construction company, Wates just won a contract to build a new office building in US. The contract is signed for 1,500,000 dollar and would be paid for after the completion of the...
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...should be able to: n The Interest Rate Simple Interest Compound Interest Single Amounts • Annuities • Mixed Flows Understand what is meant by “the time value of money.” Understand the relationship between present and future value. Describe how the interest rate can be used to adjust the value of cash flows – both forward and backward – to a single point in time. Calculate both the future and present value of: (a) an amount invested today; (b) a stream of equal cash flows (an annuity); and (c) a stream of mixed cash flows. Distinguish between an “ordinary annuity” and an “annuity due.” Use interest factor tables and understand how they provide a shortcut to calculating present and future values. Use interest factor tables to find an unknown interest rate or growth rate when the number of time periods and future and present values are known. Build an “amortization schedule” for an installment-style loan. n n Compounding More Than Once a Year Semiannual and Other Compounding Periods • Continuous Compounding • Effective Annual Interest Rate n n n Amortizing a Loan Summary Table of Key Compound Interest Formulas Summary Questions Self-Correction Problems Problems Solutions to Self-Correction Problems Selected References n n n n n n n n n n n 39 Part 2 Valuation The chief value of money lies in the fact that one lives in a world in which it is overestimated. —H. L. MENCKEN A Mencken Chrestomathy The Interest Rate Which would you prefer...
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...received in the future is worth in today's dollars. Therefore, the Present Value of a future cash flow represents the amount of money today which, if invested at a particular interest rate, will grow to the amount of the future cash flow at that time in the future. The process of finding present values is called “Discounting” and the interest rate used to calculate present values is called the “discount rate”. Thus, the Present Value is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. Time Value of Money is based on the concept that a dollar that you have today is worth more than the promise or expectation that you will receive a dollar in the future. Money that you hold today is worth more because you can invest it and earn interest. After all, you should receive some compensation for foregoing spending. For instance, you can invest your dollar for one year at a 6% annual interest rate and accumulate $1.06 at the end of the year. You can say that the future value of the dollar is $1.06 given a 6% interest rate and a one-year period. It follows that the present value of the $1.06 you expect to receive in one year is only $1. http://www.econedlink.org/lessons/index.cfm?lesson=EM37 A key concept of Time Value of money is that a single sum of money or a series of equal, evenly-spaced payments or receipts promised in the future can be converted...
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...Soluion: Application for Financial Futures Case Solution for 'Peoples Federal Savings Bank' 1. Should Peoples Federal Savings have hedged its September 1 savings certificate rollover? Yes. The reasons are explained as below: Peoples had accumulated assets of $556m. These assets were funded by short term consumer deposits, consisting largely of 3-month fixed rate savings certificates. These savings certificates were highly affected by interest rate fluctuations. The long term loans provided to people generate interest earnings which are do not increase or decrease with the interest rate fluctuations. Therefore, there was a mismatch between the interest rates earned by the bank and the interest rates that it had to give out. This caused large losses over the period 1979-1982 when interest rates rose. Table 1.1 The bank would violate the regulatory capital requirements if its losses were not controlled. The T-bill interest rates were on the rise. $400mm in savings certificates were to be rolled over on September 1. If interest rates continued to rise, then these certificates would be rolled over at the prevalent high interest rates (as mentioned in the case, the savings certificate interest rate was fixed at a spread over the T-bill interest rate). If the firm hedges itself from the interest rate fluctuations, then the loss that would be caused due to the savings certificate rollover at a high interest rate would be offset by the futures position. Let us look at this...
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...Time Value of Money: Simple Interest versus Compound Interest Outline I. Applications of Time Value of Money 1.1 Example One 1.2 Example Two 2. Interest 2.1 What is Interest? 2.2 Three Variables of Interest 1. Principal 2. Interest Rate 3. Time 2.3 Why is Interest Charged? 3. Simple Interest 3.1 What is Simple Interest? 3.2 Simple Interest Formula 4. Compound Interest 4.1 What is Compound Interest? 4.2 Compound Interest Formula 5. Compound Interest Tables 1. Future Value of $1 2. Present Value of $1 3. Present Value of an Ordinary Annuity of $1 4. Present Value of an Annuity due 5. Present Value of a Deferred Annuity 6. Conclusion 7. References Abstract The time value of money (TVM) is based on the principle that "a dollar today is worth more than a dollar in the future, (Mott, 2010, pp.31). Waiting for future dollars involves a cost -the cost is foregoing the opportunity to earn a rate of return on money while you are waiting" (pp.31). TVM was developed by Leonard Fibonnacci in 1202 and is one of the basic concepts of finance. One hundred dollars today has a different buying power than it will have in the future. For example, $100 invested in a savings account at your local bank yielding 6% annually will grow to $106 in one year. The difference between the $100 invested now-the present value of the investment-and its $106 future value represents the time value of money, (Spiceland...
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...in the future when compound interest is applied. Discounting – The process of finding the present value of a cash flow or series of cash flows; the reverse of compounding. Time Line – A graphical representation used to show the timing of cash flows. If not otherwise stated, assume that the cash flow(s) occur at the end of the period indicated. Terminology PV0 = present value (normally at t = 0) FVn = future value at the end of n periods i = interest rate, discount rate, required rate of return, etc. n = number of periods interest is earned m = the number of compounding (discounting) periods per year FVIFi,n = future value interest factor for i and n (Table A-3) PVIFi,n = present value interest factor for i and n (Table A-1) FVIFAi,n = future value interest factor for an annuity of n payments at i interest (Table A-4) PVIFAi,n = present value interest factor for an annuity of n payments at i interest (Table A-2) FVA = future value of an annuity of n years PVA = present value of an annuity of n years PMT = the periodic level (equal) payment or deposit of an annuity e = Euler’s constant = 2.71828… (repeating decimal; approximately 2.7183) ln = natural logarithm EAR = effective annual rate of interest Solving for the Future Value and Present Value of Lump Sums Future value of...
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...Course Overview • Valuing Payoff Streams • Intertemporal consumption: Saving and Borrowing • What To Take Away How to value different streams of future payoffs? Would you rather get $5 dollars every year for the next 5 years or $10 dollars today? How does one compare streams of future payoffs? Let’s start by comparing two periods. What is the equivalent of $1 tomorrow? If the interest rate is R I could invest $1 and receive $(1+R) tomorrow. Conversely, I can borrow $1 today under the promise of paying back $(1+R) tomorrow. We will determine the value of a future payment by discounting them at the interest rate that could be earned. The interest rate R often is given on a yearly basis. How to discount a payment of $1 in 5 years time? By compounding we get that the Present Discounted Value (PDV) of $1 in 5 years is 1 (1 R)5 2 9/14/2010 Example So would you rather get $5 dollars every year for the next 5 years or $10 dollars today? It will depend on the interest rate. If the interest rate is R then the present discounted value of the stream of $5 dollars for the next 5 years 5 5 5 is: ... 2 (1 R) (1 R) (1 R)5 We can draw this value as a function of the interest rate PDV 25 •As the interest rate increases, $1 in the future is worth less today •In our case, if the interest rate is below 40% you would...
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...Chapter Twenty Four Futures and Forwards Chapter Outline Introduction Forward and Futures Contracts • Spot Contracts • Forward Contracts • Futures Contracts Forward Contracts and Hedging Interest Rate Risk Hedging Interest Rate Risk with Futures Contracts • Microhedging • Macrohedging • Routine Hedging versus Selective Hedging • Macrohedging with Futures • The Problem of Basis Risk Hedging Foreign Exchange Risk • Forwards • Futures • Estimating the Hedge Ratio Hedging Credit Risk with Futures and Forwards • Credit Forward Contracts and Credit Risk Hedging • Futures Contracts and Catastrophe Risk • Futures and Forward Policies of Regulators Summary Solutions for End-of-Chapter Questions and Problems: Chapter Twenty Four 1. What are derivative contracts? What is the value of derivative contracts to the managers of FIs? Which type of derivative contracts had the highest volume among all U.S. banks as of September 2003? Derivatives are financial assets whose value is determined by the value of some underlying asset. As such, derivative contracts are instruments that provide the opportunity to take some action at a later date based on an agreement to do so at the current time. Although the contracts differ, the price, timing, and extent of the later actions usually are agreed upon at the time the contracts are arranged. Normally the contracts depend...
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...on financial futures to hedge its exposure to interest rate movements? Interest rate risk is one of the major financial risks of banks, many factors will the impact of changes in interest rates which is more difficult to predict, one of the daily management task of the bank is to focus on how to control interest rate risk. Interest rate risk management is largely dependent on bank deposits for their own management structures, and the use of new financial instruments to hedge risks or trying to gain benefit from risk control operation There are some instruments can use for avoid the risks such as floating rate certificates of deposit, futures, interest rate options, interest rate swaps, interest rate caps. On the other hand, Interest rate options are an effective tool to avoid the short-term interest rate risk, when the borrowers buy an interest-rate option, it can provide protection during the negative changing in interest rate and gain on benefit from the positive changing in interest rate. Base on this situation, the best way for saving institution that is buying put options on interest rate futures, when the interest rate going up then reduce the spread which is offset by the gain on the short position in futures. On the other hand, if the interest rate going down, then the institution will be loss on the short position in futures. The institution can use the put option to avoid the short position in futures and it can gain on benefit from the interest rate decrease...
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