Finance

STATEMENT OF OBJECTIVES
As a 30 year old I realize that time is really moving fast and I have to plan not only for my future but also for my retirement plan. My life expectancy is 95 years and this is not bad given that the life expectancy is approximately 78 years (Julie, 2009). However that is not the maximum age I can attain since I have all it takes to make me live even more. Therefore I need money to spend after retiring. This will be made possible to current investments and savings. This means that I need a portfolio that will be growing annually at the age of 60 when I retire will start withdrawing a monthly maintenance amount 1000. The other objective is to pay off the mortgage.

Management of portfolio
Looking at their dreams it would be wise for Mrs. Fortune to build her craft business because she would be able to earn more. This would appear to be splitting responsibilities or doing Fortune a favour but looking at another perspective it would be an investment. The amount earned when Mrs Fortune business picks up will be used to maintain.

For the couple pay off the mortgage for their home at this period of time will be considered a wise move because they will definitely enjoy tax deductions and avoid interest associated with mortgage amount when it is spread. This is because the government deducts all of the money paid towards buying of property from the gross income to reduce the taxable income. In about fifty years the cumulative amount that will have been paid will be very high as a lump sum now.  I will also ensure they join qualified retirement plan is able to enjoy deferral of tax payment until the employee actually receives the retirement benefit. The benefits tax deferral cannot be observed at a go but over the years until someone retires it accrues a lot of income. When the couple increases their contribution towards their employer sponsored retirement plans it will be beneficial. For instance if the couple contribute 100 each month, each one of them will have 1200 in a year and after a period of lets say thirty the contribution will have grown tremendously . This money will be earning interest which will not be taxed until the time when it is withdrawn. In the event that the money is withdrawn as a lump sum it will only be taxed just that once. Considering a case when the couple decides to invest the money, they will be required to pay tax on every interest earned. The major advantage of contributing towards a pension plan is that one enjoys the benefits of tax deferral. However this is not all because a person will always encounter lower marginal tax rates when they are retired as compared to when they are working.

Establishing a sideline business for Mrs Fortune operation will definitely increase on their taxable income considering that the profits earned will be taxed. The jewellery operation earns about  10,000 per year, for instance this operation is established as a business it might even be able to earn much more than this. Therefore although the taxable income will increase, tax credits will also increase by a closer margin. It is therefore a wise way to invest.

It is important that in the event that the income becomes more than the expenses that this money is invested wisely.  Fortune already has a deposit from an inheritance worth 100,000 that is expected to use to clear a mortgage. He has also a portfolio of assets. This means that this couple has a lot to start with in terms of asset management because they already have long term investments.

They can use the money they have saved as a result of shared expenses to strengthen these areas or venture into other areas of asset management. When they invest in the portfolio that they already have it might be risky, however it might also be helpful because they already have confident with the respective institutions and will only be required to top up their savings with them. Diversification can also be risky because it will constitute venturing into a whole new area which might be time consuming to understand, securing a dependable firm can also be hard.

The use of money market account by the couple is a wise financial move considering that they have future plans. They all have other commitments that cannot allow them to get involved in a business that will be time consuming. In this case by opening a money market account they transfer this responsibility to a given institution. Basically the money invested in this way is money that is not needed presently therefore they can use this money market account for their monetary asset management provided that the institution is trustworthy. The major advantages of the money market account are the high amount of interest earned and the fact that it greatly reduces the risk of losing money. The money market account is an investment unlike other conventional accounts which are used for saving money. As a result it provides restrictions on issues such as withdrawal of money thereby providing discipline against the constant temptations to spend money. In other words the liquidity of the money is greatly reduced. Money market account allows for one to withdraw, there are restrictions on how many withdrawals that can be made within a month. Furthermore the institutions involved discourages combined withdrawals below a certain minimum amounts by imposing penalties. All this aspects combined ensures that the money market account remains a long term investment (Business.com).

Conclusion
The best ways for the couple to discuss the management of their money and other finances is first of all by keeping records and updating whenever changes are made. From this perspective, the couple can come with a plan governing aspects such as monthly expenses, combined future plans and individual plans. With this background they can therefore discuss the management of their finances or get the services of a professional if need be.

Securitization has remained one of the most important contrivances in the financial toolkit of banks. It allows banks to allocate their capital requirements more efficiently, access to funding sources that are cost effective, and better means of risk management.

As Greenbuam and Thakor (1987, 1995) observe, securitization permits banks to deviate from the traditional lending operations, allowing them to explore more basic activities bringing them corporate advantages.

Does the rationale for the BankUS securitization differ from other forms of securitization

The rationale for the BankUS securitization differs from other forms of securitization. This is because the bank wants to use securitization not for transforming its risk based assets in to commodity but to in its quest to lower reduce the economic and regulatory capital Bank US had to set aside under the Basel agreement, and to increase its leverage and profitability which is one of the basic rationale for securitization. Bank also wants to use securitization to lower the requirements on risk-based lending.

In addition, BankUS is keen to reduce its credit risks, and by extension, its reputation among investors and rating agencies because it risks being downgraded to an AA rating (Fagan  Frankel 2008).

The bank is currently required to hold 780 million capital having a risk based capital ratio of 8 and Tier 1 risk based capital ratio of 4, this is because the majority of the claims in banks current credit exposure count towards the riskiest asset category. Assets securitization of assets by BankUS would principally help the Bank to keep its rating from falling to Undercapitalized and to improve its profitability by further lowering it cost of equity capital.

BankUS will achieve this by principally by shedding majority of its assets having a poor rating, to which the market yield is comparatively higher than the Aaa rated assets. its capital requirements under the Basel agreement. BankUS wants to use securitization to lower the requirements on risk-based lending.

However, the banks purpose of lowering its cost of capital through securitization is common, only that the specific application is different.

The rationale for BankUS s securitization is the reduction of its credit exposures so as to reduce the economic and regulatory capital. BankUS also hopes to increase its leverage and profitability. In addition, BankUS is keen to reduce its credit risks, and by extension, its reputation among investors and rating agencies because it risks being downgraded to an AA rating (Fagan  Frankel 20).

On the other hand, unlike BankUS, many firms opt for securitization in order to increase capital availability (Cox, Fairchild  Pedersen 2). This is achieved by either reducing liquidity risk from liquid assets or by locking profits. Securitization is also aimed at lowering the cost of capital and isolating unwanted risk. Other rationales of securitization include convexity and duration matching, and the transfer of risk off the balance sheet and into the income statement. Securitization also helps in hedging against states of the world, which many securities are incapable of achieving.

According to Fagan and Frankel, the most commonly used forms of securitization are mortgage backed securities (MBS) (24) and Asset Backed Securities (ABS) (25). Typically, they are used to generate cash upfront for illiquid income generating assets. BankUS is not using this approach because its underlying assets are corporate securities, which are rather liquid. The banks securitization is just to control its credit risk in order to allow for a lower risk-adjustment for the calculation of capital adequacy requirements.

The major reasons advanced for securitization are usually mitigation of risk and arbitrage profits for the originatororiginator this is achieved by providing finance through sale of assets to provide cash flows to pay off investors either with or without credit support from other sources. , aAlthough risk reduction does not happen in practice since the lowest tranche of the securities is usually retained on the originators balance sheet. However, in some instances, it does allow for the transfer of risk from parties that do not want to bear risk to those that do.

Securitization further would help BankUS to split the credit risk associated with its assets in to several tranches, placing such assets with third parties who are willing to absorb it. This would enable the bank to access the markets at higher debt ratings compared with its overall corporate rating and to obtain fund sources at generally more favorable rates. allows for diversification since securitized bonds may be negatively correlated with the portfolio of assets that certain investors hold. Securitization seems to be motivated most by the desire to reduce legal and regulatory capital requirements as was the case for the BankUS securitization. The process of securitization allows the originator to lower the equity it has to retain on its balance sheet and thus to increase leverage and profitability.

In sum, there are significant differences between the rationale for BankUS securitization and other forms of securitization. While most firms seek securitization so as to increase their capital availability, BankUS  s rationale for securitization is to reduce its credit exposure so as to reduce its economic and regulatory capital. However, BankUS  s use of securitization to lower its cost of capital is a common phenomenon in securitization.

I have had the privilege of working with Mr. Kaikai Zhang in China Citic Bank, Tianjin Binhai Branch. As the Recruiting Manager and Deputy General Manager of the said banking institution, I have interviewed hundreds of excellent college students from top universities in China who are applying for work. Being one of Chinas leading banks, China Citic has been a haven for students who undergo internship, with an aim to acquire valuable work experience and seek challenging positions in the banking sector. The skills and potentials of interns become apparent as days progress, impressing superiors and nurturing competence to work in the banking field. One of the interns who left a mark in China Citic is Mr. Kaikai Zhang.

Mr. Zhang did his internship with the bank in the summers of 2008 and 2009.  This internship was not only limited to his field of specialization as the banks management delegated him to take full responsibility of the management and organization of the college internship work team in order for him to maximize his potentials. As team leader, he strategically divided the workload among the teams where each team member had the opportunity to articulate his or her suggestions and comments on how to effectively address clients demands. This scheme brought Mr. Zhangs leadership and organization skills to light and merited him a regular employment with the bank.

Because of his hard work and effectiveness as a leader, he was promoted to become a financial analyst and advisor in the Investment Department. As such, he took charge of the mergers and acquisitions and private placements of debt and equity for emerging growth and middle-market companies.

During his tenure, Mr. Zhang has been at par with the standards set by the bank for its employees. With his dedication and excellence in the Department, he truly impressed me and all other employees. He has since exceeded our expectations. At present, he works on three separate deals in two-person deal teams and fulfills the role of both Associate and Vice President in all three deals. With these tasks at hand, Mr. Zhang is able to showcase his quantitative, collaborative, and communication skills by working in small teams with clients who are typical entrepreneurs with limited financial expertise and require a greater level of financial assistance. Thus, Mr. Zhang was the right man for the job.

Because of this, the bank has trusted Mr. Zhang and respected his opinions and suggestions. With the drastic financial losses faced by most commercial banks in China, Mr. Zhang submitted his proposal to China Citic top management, stating that in the long run, a focus on financecredit structural adjustments and a change in the current poor profit structure would be the fundamental solution for commercial banks to refinance their current obligations and still remain competitive in the global market. This analysis and suggestion were recognized and praised by the banks higher management and financial exporters. In addition to this, Mr. Zhang collaborated with the team in introducing groundbreaking improvements to the banks routine computer and financial management.

Beyond all these, Mr. Zhangs noteworthy communication and interpersonal skills did not escape the companys notice. He had plenty of opportunities to display his strong communication and interpersonal skills be it in routine jobs or in company parties. His enthusiasm and politeness in client meetings earned him praises his warm service toward clients built a good company image, resulting to more clients. All these are proof of his exemplary talent, business sense, work ethic, and intelligence.

Therefore, I highly recommend Mr. Kaikai Zhang to be an ideal candidate for the MSF Program of your prestigious Institution. He truly possesses the qualities necessary to be a business finance management student in your University. His attitude towards learning warrants further nurturance of his talents and skills under your tutelage. A good leader and team player, he will be an asset in any company. I can likewise guarantee that Mr. Kaikai Zhang will be an asset in your Institution and a valuable contributor to your student body.

Respectfully,
(Name ______________)
Deputy General ManagerChina Citic Bank
Binhai New Area Branch

HSBC is expected to have cut back on their dividend pay-out since their banking sector is one of the most heavily hit by the recent economic crisis. The kind of effect on them is a little different with Vodafone and Glaxo however. Vodafone is more or less not as badly hit by the crisis since they are in the telecoms industry as well as GlaxoSmithKline company which belongs to the pharmaceutical industry.

It can be noted that HSBC has been very aggressive in the dividend that it doles out to its shareholders. Although in normal situations, this would have been perceived as a sign of strength, in this case it is not. The payment of dividends signifies that the company is not planning to invest on anything soon. The company is only paying their shareholders, because they might think that there are no better investment opportunities for their business.

Vodafone, on the other hand, has significantly lowered its dividend pay-out to its shareholders. Although they are indeed affected by the current economic crisis like everyone, they are not badly hit as the financial sector. Owing to the nature of their business, they need to invest in their infrastructure very often. The fast development of telecommunications technology requires this firm to stay abreast of what is the current development in their field. The reduction in dividend clearly indicates that the company is going to need it and they are most likely planning to invest in new technology infrastructure to improve their current operations capability. This is advantageous for the shareholders despite the fact that their earnings are curtailed for awhile. The reinvestment of Vodafone into their own business would mean bigger returns in the future as well as increased competitiveness in their respective field.

GlaxoSmithKline on the other hand considerably reduced their capacity for the dividend payments of their shareholder. Their sector is also greatly hit by the financial crisis but the demand for their product and services are not slowing down. The advent of the internet however meant that the company take the beating of their stock by market forces. The withdrawal of the company from giving out such huge amounts of money shows that they might be trying to survive as well as planning to invest in substantial new drugs and research. In any of these cases, the company has no other way to be able to compete effectively but to invest in their related technology and areas of research for potential pockets of profit opportunities.

There have not been any drastic changes in the dividend policy of HSBC despite the ongoing financial crisis. The dividend has actually remained the same from previous years even though the earnings have already dropped considerably. Vodafone on the other hand has an erratic dividend policy within the last five years. It started low on 2005 and then swings upward and comes back low again on 2008. The financial crisis however has surprisingly increased the earnings per share of the company that is why they are able to increase their dividend payments to shareholders as well. GlaxoSmith on the other hand does not have any significant effects felt because of the economic crisis. The nature of their products which are life saving drugs would always be in demand despite people having lost their regular means of income. Their company actually posted a higher earnings compared to the years that the financial crisis was just building up.

The selection of these three companies is based on the fact that they are all operating on different industries or sectors of the economy. The relationship between their share prices as well as the dividends paid to the shareholders is analyzed for the connection between dividend policy and the resulting share prices.

Share Prices20092008200720062005
HSBC5580938880
VodaFone1930332224
GlaxoSmithKline3848525547
The resulting graphs show that there is no relationship between the share prices of the company with their dividend policy. The data does not even come close to having a correlation factor close to 1 or even remotely close to it. This is to be expected since the dividend policy simply indicates the relative strength or weakness of a company and not exactly the fundamental truth behind the scenes. If we are to evaluate this using the null hypothesis testing, the null hypothesis would be whether the increase in share prices would correspond to increase in dividend yield as well. The data that resulted were all lesser than the 0.5 confidence factor. The hypothesis therefore is false. There is no connection between share prices and dividend yield. This can be easily explained by the fact that the companies with high earnings do not necessarily give out dividends to their shareholders. The executives might decide that they need the money for further expansion or to gear up for an advertising battle with a rival company.

Introduction
Portfolio theory and Capital asset pricing model are financial tools which helps the investors and analyst. It helps analyst and investors to decide the type of shares they would like to have in their portfolio and the expected return from that stock. Though it is based on historical data still it helps analyst and investor to decide the future action.

This tool also helps the investor identify the risk he is taking on his investments. Since, every investor has a risk appetite so he can decide the stock he would like to have in his portfolio. He can calculate the amount of return he will get for a specific level of risk so it act as a measure by which he can identify the growth he will get on his investments.

Portfolio Theory
Introduction
This theory helps analyst to decide the shares they would like to offer a potential investor for a specific level of risk. Since, diversifying helps to reduce risk this act as a great tool as it helps to reduce the risk for a specific level of return. This helps to make the investment more secure and get a higher return.

2.2 Description
Portfolio theory is an important financial tool which helps investors and researchers. According to Titman (2003) it specifies that, the risk for an investor can be minimised by creating a portfolio for an expected level of return. Every investor wants a good return on their stock for a specific level of risk. Portfolio theory helps to create those desired portfolios. This theory according to Ross Randolph, Bradford  Roberts (2007) says, As return increases risk also increases but after a certain point the return doesnt increases in the same proportion as risk. Suppose for example a person holds a single share of a company. Then the risk involved is high as the price may move up or down in relation to the market but in case we have a bundle of securities then a downward movement in one share is compensated by an upward movement in the other. This helps to reduce the risk.

This theory by Titman (2003) says that as it is used by analyst and managers to see how much return a portfolio gives and the amount of risk they have to bear for it. Then they try to compare the result and if there are deviations they work on improving the portfolio of securities. This is done so that the analyst can understand the risk taking ability of the investor
.
2.3 Calculation of portfolio risk
This theory is important because it helps investors to diversify the risk undertaken by them. For example suppose an investor invest 65 of his money in Infosys and 35 in Intel.  The return on Infosys is 10 and Intel is 20. The expected return on his portfolio is
Infosys is 10 x 65  6.5
Intel it is 20 x 35  7.0.
The expected return on your portfolio is 6.5  7.0  13.50.
Now lets assume that a correlation coefficient of 1
Standard Deviation of Infosys  31.5 (i.e. the risk associated)
 Standard Deviation of Intel  58.5 (i.e. the risk associated)
So, the portfolio risk is  (.65) X (.65) X (31.5) X (31.5)  (.35) X (.35) X (58.5) X (58.5) 2(.65 X .35 X 31.5 X 58.5)  1006.1

There for the portfolio risk is sq root of 1006.1 which is 31.7. So, we see that the return of the investor increases at the same time the risk decreases. Thus investors prefer this model as it helps to quantify his risk for a return.

2.4 Efficient frontier of portfolio
The other reason supported by Ross Randolph, Bradford  Roberts (2007) as to why this theory is so relevant is that, combining stocks help to reduce risk. This is shown in the efficient frontier which measures all the combination of securities and the risk and return associated with them. It is shown in the following figure.

Here, the investor would want to be in the 3rd box as the return is highest and the risk involved is lowest. In the case of 4th box the return is higher but the risk is much higher compared to the return. Investors always want to move towards box 3. This helps an investor identify where he lies and how his stock is performing in relation to the market and what all needs to be done to make his investment safe.

2.5 Advantages
This also helps the investor know how their stock is moving in relation to the market. It has been pointed out by Keith  Dirk (2008) that, Combination of fixed income securities like bond and equities will help the investor know how their stock is moving with the market. This would make investor desire for such a portfolio where one stock moves in one direction and the other in another.

The reason pointed out by Nolan (2009), is that it compares the market risk associated with each asset in the portfolio. Since, it considers every single aspect so the recommendations that come on the basis of it are sounder.

A more thorough understanding of the market reveals that markets tend to grow in the long run. This has been supported by Essential Portfolio Theory (2009) by showing that, a longer horizon typically takes a fish hook shape which resembles the efficient frontier. Thus, if an investor has the correct portfolio of stocks then he can benefit in the long run as the risk reduces over a longer horizon.
This is seen as a common phenomenon that investors dont worry about the future as analyst provides a forecast for it. Since, forecast is done on historical data after taking into consideration all that is happening in the market and economy still there is a high risk of choosing the wrong stock.

This theory also helps investors to identify the return they would receive if they have a risk free security and a risky security while comparing it with two risky securities. It will thus according to Peng (2000) help them, decide whether he should invest in risky securities or risk free securities as it helps to identify his ability to take risk.

Bob (2008) pointed out that, portfolio theory helps conservative investors to gain more compared to aggressive investors. This is so because a conservative investor has the advantage of moving up higher on the efficient frontier line as compared to an aggressive one.

2.6 Drawbacks
In spite of this theory being so relevant still concerns has been raised regarding it. Bob (2008) in his study found that, investors believe that that their portfolios are diversified in individual stocks, mutual funds, bonds, and international stocks. While these are all different investments, still they are all in the same asset class and generally move in concert with each other. This makes their investment risky as seen in the recent market crashes.

Since, it is done by human there is a bit of subjectivity involved which might lead to the creation of portfolio not being correct as there could be biasness.

Capital Asset Pricing Model

3.1 Introduction
This model has been of great help to the financial sector. It helps to identify the return a stock gives for a level of risk. It helps to gauge the extra return that would be available to the investors up and above the risk free rate. This helps the analyst to decide on the stocks they would like to offer to an investor depending on his ability to take risk.

Investors are also greatly benefited from this model. Since, they can calculate the additional return they would receive over the risk free security so they can decide whether they would like to invest in a particular security or not.

3.2 Description
The capital asset pricing model gives a better picture for the investors. Ross, Randolph, Bradford  Roberts  (2007) pointed out that, Capital asset pricing model is used to determine the required rate of return of an asset, if that asset is added to an already well-diversified portfolio, given the assets non-diversifiable risk.

It is useful for investors because it helps them to calculate the price for a security or portfolio on the whole. It helps the investor to find out the extra return they will get compared to what they would have received had they invested in fixed income securities. Thus it is calculated as
Expected return of an asset  risk free return  beta expected excess rate of return  risk free return
This helps an investor to identify how risky his investment is. According to Antony (2008), it helps an investor to identify how the securities behave in relation to the market. It is illustrated in the following diagram how it holds relevance for the investor

It shows the investor that above the risk free rate he earns extra premium because of the risk involved. This helps him identify the fact that his investment has given him proper return. This will also help the investor to decide whether he wants to invest in a particular security as he can see the risk he has to bear while investing in a particular investment.

Now, according to Ross Randolph, Bradford  Roberts (2007), when we try to see both this models together it presents a clearer picture for the investor as he knows where his security lies in the efficient frontier. This is explained below

Here we see that the investor realizes where is security is. He would want his security to touch the frontier as that would be optimizing his return. This would make the investor know which assets suits his portfolio as it will determine the return he is getting at that level of risk.

3.3 Calculation of return on an asset
Lets look at an example to see its calculation
Return on government securities is 8
The beta (risk factor) is 1.8
Market Return for B Ltd is 10.5
Then the expected return is  8  1.8 (10.5 - 8)
                                             12.5
This helps the investors decide whether he would invest in that particular security. He would do so only if the actual return is more than the expected return. This would help him identify whether his stock lies in the efficient frontier line and decide whether he should invest or not in that security.

3.4 Advantages
Thus, according to George (2007), it is an important tool for equity researchers and analyst as it helps in project appraisal. It can be used to compare projects of different risk classes and is therefore superior to a net present value approach which uses only one discount rate for all projects, regardless of their risk.

Glenn (2002) also points that, this model is of great help to investor as it helps him to theoretically calculate the price of a stock or investment. The investor can calculate the value and find out whether the stock is over rated or under rated. This will help him decide whether he needs to invest in that particular investment or not. It will thus help him find out whether the market reflects the correct value and will also help him gauge the efficiency of the market.

As pointed out by Singh (2008) it help analyst to determine the cost of equity for the firm and estimate the required return for business. It also helps to determine the hurdle rates for corporate investments and to evaluate the performance of investment division in terms of costs and returns.

3.5 Drawbacks
In spite of it being used worldwide Willkie (1997) has pointed out that, Capital Asset Pricing Model doesnt work for different investor in different currencies. Here this theory assumes that investors have measured their risk in the same currency, but when currency changes, as in case of imports and exports than this model doesnt give the correct value and the expected return varies. This is so more because countries vary in size so its difficult to arrive at equilibrium.

Since, it uses the historical method for calculating the return so it might not give the actual return as the actual conditions prevalent in the market might be different from what the historical data reflects.

Conclusion
These two models are of great help to the investors and also the equity researchers. This helps them to take vital decision regarding the investment in a particular security. It helps them decide whether they would invest in a security for a prescribed level of risk.

Both these tools have helped to identify the stocks and have been in use for a long time. This has increased the efficiency of both this model. This is helping both the investor and the analyst as it is an easy model for calculation and does not involve the complexities which are prevalent in other models.

Euro- area financial markets have seen an advancement both qualitatively and quantitatively since the introduction of the Euro and in particular the London financial market whose role remains as relevant if not more important than ever before. An integrated and competitive money market in the Euro zone has been as a result of the introduction of the Euro and its attendant policy framework.

Influence
The London financial market has been witness to the effects of enhanced competition since the advent of the single currency as prior to its introduction, the various currencies provided a stumbling bloc to integrated financial markets thus the flow of capital towards the most productive investments could not be witnessed. Previously restrained competition forces have been unleashed (Studener, 2004).

Competition in the private sector has been enhanced as it is generally acknowledged that one of the benefits of greater competition is the resultant low cost to consumers.

Competition between sovereign issuers-Sovereign issuers traditionally held monopolies in their financial markets but the use of the Euro signifies competition against each other for a wider pool of private savings. This can be cited as the reason the British Government instituted reforms aimed at their bond markets to bring them in line with the best standards resulting in the best investments. The Euros influence in highlighting the shortcomings of the bond markets cannot be gainsaid resulting in unparalleled benefits to investors.

Competition between Regulators and Legislators-The onset of the Euro signified the continued circulation of capital on a large scale across the financial markets and London was no exception. Pressure was on legislators to provide the financial markets with highly competitive environments. An example of this is when European countries such as France passed legislation which was aimed at providing a similar standard to the German Pfandbrief market which for a while had been deemed as a standard for mortgage bond markets. Investors in the London financial market have seen competition which has resulted in a convergence of legislation resulting in high returns for investors.

Competition between the various financial structure models i.e. competition between the intermediated model that revolves around bank lending and the disinter-mediated model based on bank securities has seen a relative upsurge both in the equity market and the private bond market. The result is that a wider range of options is accessible to the borrower thus enabling entrepreneurs to gain the kind of capital most beneficial to them.

The Euro financial market is without a center-The Euro has not only gone from being a regional currency especially as it was designed to be so but has also found footing in markets outside the European Union. The competitiveness of financial centers had been touted before the Euro came into effect and it would have been interesting to see which markets would play hosts to what but that has yet to take root. The London financial market still remains dominant in foreign exchange trading holding almost one-third of the global foreign exchange turnover as per the Survey of Foreign Exchange and Derivatives Market Authority (Studener, 2004).

Traditionally, London has dominated trade in many currencies. Trade in the Euro much like the US dollar means dealing with international markets instead of regional ones. The Euro becomes attractive to markets such as the London financial market as it is clear size is so large hence making it very attractive to investors

During times of crisis such as the 11th September 2001 attacks the Euro has had a calming effect on global markets. Major European banks had to undertake the enormous task of liquidating U.S banks. This was made possible due to an agreement between the European Central Bank and the Federal Reserve. The reverse is also tenable. Such collaborative and pre-emptive measures are aimed at maintaining financial stability in global markets and this has in turn been beneficial to the London financial market.

Conclusion
Interdependence has arisen between global financial stability and domestic financial stability as markets become globalized.As this happens financial stability has to be thought of and achieved within a global structure. Jurisdictions have to ensure cooperation especially in times of crisis such as the economic crisis that began in late 2008.

Adverse selection and moral hazard problems are well known to cause financial crises. Adverse selection specifically hampers the running of financial markets as bad credit risks motivate loan borrowing. Moral hazard is a principal-agent problem whereby managers as the agents get less profit maximizing incentives compared to the stockholders who are the principals.  As such, borrowers indulge in economic activities that are less desirable as far as the lender is concerned. An increase in adverse selection and moral hazard problems can therefore be termed as among the primary causes of the Great Depression of the 1930s.

Adverse selection and moral hazard in the Great Depression
The 1920s were characterized by a thriving economy which made the stock prices to keep rising. This attracted investors and banks as it was seen as an easy way of making millions of money. Investors never seemed to understand the principles and trends in stock markets and instead they wanted to enter the market through all means possible. It is for this reason that increased their borrowing all in an attempt to gain investment in the sure stock market. With increasing hopes that the stock market would have great returns, the stock prices doubled through 1928 and the great part of 1929. Little was it known that the economy was built on an inverted pyramid as stock market crush occurred in the last quarter of 1929. At this point, the economy was already having adverse selection problems as people would borrow to invest in a market that was thought to be stable only to prove unstable by the crush. The stock market crush is well known to have exacerbated the Great Depression.

Banks have a big role in reducing adverse selection through financial selection. As stock markets prices continued going down in the early 1930s, investors were experiencing hardships in repaying their loans making more banks to close. By 1933, about one third of the banks had closed down. Adverse selection worsened with few banks to offer financial intermediaries and increased business uncertainties especially in the stock market. Information was not readily available to financial markets such that it was very difficult to determine investors who were likely to succeed. Financial markets therefore restrained from offering financial services. With such order of events, the depression became even more severe.

The banking system failed much and increased adverse selection and moral hazard problems. On learning that the stock market was collapsing, banks went ahead to collect collaterals from investors who had borrowed from them. The investors were however being faced by the challenged of almost worthless stocks putting the banks into more crisis. People who had deposited with the banks then moved to withdraw their monies to avoid the awaiting collapse in the banking system. The agricultural sector that could have saved the economy seemed less promising. Prospects of recovery of the economy were very low as firms net worth went down day after day. This led to more adverse selection and moral hazard problems making the economy slump more into economic contraction of the Great Depression. Adverse selection and hazard problems were further increased by the fact that the U.S. had a foreign exchange crisis as it avoided buying from European economies yet she wanted the economies to buy from her.

Conclusion
The Great Depression started by adverse selection and moral hazard problems leading to the stock market crush. More of these problems only led to increase in economic contraction. This cascade of events plus lack of proper government regulation worsened the Great Depression.

Define the following terms and identify their role in finance

a. Finance Allocation of resources and funds of the organization in order to maximize the wealth. Firm obtained funds both from external and internal sources at a lower possible cost via sale of stock, bonds, bank loans, etc. Allocation of resources is another aspect of finance as per the needs and the requirement of the business.    

b. Efficient Market in an efficient market the securities are fairly priced and reflect all the prevailing information with respect to the stock.

c. Primary Market Primary markets are those form of market in which companies raises their newly formed capital. Like General Electric sells its new common stock in order to raise the capital via primary market. Moreover, a company often introduces its IPO in the primary market.

d. Secondary Market Secondary markets are those form of markets in which existing stocks and securities are traded among the investors.

e. Risk An entrepreneur has viable information with respect to the investment but entrepreneur is uncertain with respect to the future either an entrepreneur gets the low or negative return.  

f. Security a financial instrument either a stock which reflects the ownership in the company or a bond which indicates a relation with the company by granting a loan to the company. Security is often used a guarantee repayment of debt.      

g. Stock Any individual invest in the business of the company and buying the part of ownership in the business. While the original owner issue the stock in the public. With doing this exercise owner of the business raises its equity finance as well as business wealth.

h. Bond a bond is a written agreement between a borrower and lenders in which the borrower agrees to repay a stated sum on a future date and to make periodic interest payments at specified dates (Myers, Brealey and Marcus, 2001).

i. Capital financial assets which is invested in the business in order to generate the revenue and also the profit. The capital mainly exists in the form of cash, inventory, equipment, machinery, etc. Moreover, companies often raises its capital by issuing stocks and bonds in the financial market.

j. Debt In debt companies sell their bonds, mortgages and notes either in primary or secondary market from which companies generate its finance. Debt is feasible when an entrepreneur wants to fund its assets and knows that the business will produce a positive cash flow stream.

k. Yield the actual rate at which bond or security is issued is referred as yield.

l. Rate of Return the return of the company either in form of realized or unrealized gained or lost which the company generates throughout the year in relation with their investments.      

m. Return on Investment used to assess the profitability of a firm. The formula of ROI is (annual profit) (investment capital). The concept of ROI is applied on project management, real estate, investment made in the stock market, etc. In addition, if an entrepreneur wants an immediate result with respect to its revenue generation, market capitalization and other related matters then ROI provides appropriate results. The major theme and purpose of ROI is to correctly figure out the capital investment decisions.

n. Cash Flow Cash flow discussed over the companys operating activities (review the increase and decrease in current assets and current liabilities), investing activities (review over the sale and purchase of fixed assets) and financing activities (review over issuancepayment of loan, issuancerepurchase of share, dividend paid etc) during the year. It also discussed on the in flow and outflow of the cash and also on the cash equivalents.

With unemployment levels at 10 - 12 and the number of graduates set to increase this year, the odds of me finding a job are only 5.  The odds of me finding a job that I actually like are at 2.  These are not very good odds for me considering my educational attainment and my background.  However, if I take up my degree in finance at this academic institution, the numbers are different.  The time that I spend pursuing my education coincides with the downtime in the economy.  This means I increase my value at the time when demand is low.  When I finish this degree, the market has been estimated to have improved thus increasing employment rates and my chances of landing that dream job increase to 10.  This 8 difference is the reason why I am applying for my finance degree at this University.

Numbers dont lie, as a mentor of mine loved to say.  One will always be one and two will always be two.  There is no way to twist that around but there will always be a way to appreciate or use those numbers.  This is where my interest in finance comes from.  As I read about the collapse of markets all over the world, it becomes clear to me how people just massaged the numbers to draw in investors.  I have sometimes hypothesized that if those financial analysts had just seen the numbers for what they were this whole predicament could have been established.  This, however, is also where my drive of becoming a responsible and ethical financial analyst comes from and that is why I feel this University is the best fit to help me achieve my goals.

I realize that it is not enough to merely have a goal or a dream to reach.  It is also important to take the steps necessary to fulfill those dreams.  This is why I have the proper education and experience required to achieve my goals.  As far as academics go, I have been able to consistently maintain a respectable grade point average in my three (3) years at Kings College in London, University of London where I have been studying Business Management.  During this time, I have gained important skills that I know will be crucial to my success in the realm of business and finance.  This has been rather important to me as I have developed a grasp of the business environment that is integrative and broad.  I have learned various management disciplines and related skills that have also enhanced communication and essential transferable skills that I have, which I feel is key to succeeding in the ever competitive world of business.

Building on the academic knowledge that I have acquired in school, I also worked on developing other aspects such as bridging the gap between various techniques to link theoretical knowledge to good business practices.  This has been key to my understanding of the financial realm because it has enhanced my critical and innovative thinking and communication skills through different aspects of requirements of the course.  As such, I believe that I have, in my years of study, accumulated a significant amount of knowledge and training to succeed but not enough to excel, which is what I seek to do in pursuing my studies in finance at this school.

I have always believed that there is no better teacher than real life experience.  This is why I have made sure that I not only have the academic knowledge but also the practical application to supplement my development.  My personality, in my humble opinion, is best suited for this kind of endeavor (finance) because of my ability to multi-task.  During my past work experiences, I have often come across as witty and amiable.  Yet, I am no push over when it comes to working in a corporate or business environment.  I firmly believe that I can succeed in anything that I want to as long as I work hard at it.  I get things done.  The job gets done faster and more efficiently as and when the objectives are clear, the strategies acceptable, and the resources are available.  Of course, in the real world, these do not always happen.  To the extent that they happen and to the extent that I can make them happen, I go after them and manage to get the job done. 
My most important work experience comes from my experience as an intern at the Merrill Lynch Summer Programme in the summer of 2007 where I first learned about the different challenges of global finance. 

During this two week program, I had the wonderful opportunity to learn from different guest speakers giving a talk about different financial tools and also giving the general concept of what different roles in the company do and how their lives are.  I also met people from different countries where I learned so much, especially about the rapid economic growth in the Asian region, particularly countries like Taiwan, Korea and China.
 Little did I realize that this experience was going to lead me to working with a larger financial group called Billion Star Limited in Hong Kong where I worked as a junior accounting clerk for the firm.  During this time, I was responsible for handling the day-to-day paper work.  In addition, I also handled the date entry and assisting the accountant to prepare annual financial report required, such as cash flow statement and balance sheet.  I was responsible for the daily paper work and acting as a bridge between customers in Africa and suppliers in China.  I am proud to say that during the 3 months of employment in the company, I was able to further enhance my communication skills as well as my negotiation skills.  It was during this time that I realized that my most important character strength, in my opinion, is my ability to adapt, accept and learn.  My business acumen and knowledge is due to the fact that both my parents are business oriented and running businesses of their own.  This provided me with a closer view of what I need to accomplish at an academic level before venturing into a business of my own, particularly in this highly competitive field.

I also believe that an outstanding individual is one who is not only academically excellent but one who also shows balance.  While the emphasis on good grades has been pounded into our consciousness at a young age, I believe that the key to true personal development lies in being able to cultivate other talents and skills.  As such, I engaged in other activities that I felt would address this need.  As far as extra curricular activities are concerned, I trained myself to speak Mandarin and Japanese.  I also enjoy other sports, such as badminton and squash.  It is these things that I feel have not only given me unique opportunities in life but also a sense of destiny in that I am meant to accomplish something.

As I look forward to improving my skills and developing traits that are useful in the future, I also look forward to building a solid foundation that is built on fundamentals such as business and finance.  If I am to build my value, I would like this to be on education and not speculation.

1. What is personal finance Explain with example.
Personal finance encompasses the application of finance principles and techniques to individuals rather than business organizations and non-profit making entities. Variations in the finance methods used exist between the two.  However, the salient principles of finance remain the same.  For example, in personal finance one can find budgeting techniques like cash budgets that are used in order to plan in advance cash disbursements in comparison with cash income.  This will enable an optimal utilization of cash in line with the main objectives of the individual.  This adheres with the same finance principle of organizations, where cash budgets are prepared to ensure a sound cash flow in line with business plans.  Another important aspect of personal finance entails the building of a retirement fund.  The working age of an individual is normally within the age region of 18 to 60.  At retirement age a person will cease working and will rely upon the retirement fund build during his working time frame.  A vast spectrum of retirement funds is available in the business arena.  Personal finance is thus used in order to short-list the most optimal mediums of retirement funds available for that individual.  Such short-listing will be conducting in line with the salient aims of such person.  Retirement fund methods are not applied to business organization, where additional finance is either invested in the growth of the firm or distributed to its equity investors.  However the same principle still rests under both scenarios of maximizing stakeholders wealth.

2. How inflation affects your income and consumption Explain with example.
Inflation comprises an aggregate increase in prices resulting from either higher aggregate demand andor greater cumulative costs. Whenever inflation takes place, assuming all other variables remain constant, the income of the population per se will remain the same.  However, the disposable income of the population will diminish if the same level of consumption is kept.  For example, let us hypothetically presume that an individual in quarter 1 earns an income of 500 per week.  During such quarter the money spent on basic needs like food amounted to 100 per week, leaving to a disposal income of 400 per week to be spent on consumables or saved in banks.  If due to inflation the expenditure on basic needs increases by 120 per week, the disposable income will decrease to 380 per week if the same level of spending is kept.  In instance of inflation, one cannot presume that the level of consumption remains the same because it will be altered especially for luxury goods.  A decrease may also take place for goods meeting basic needs, where the individual will shift to inferior goods that hold a lower cost.  For example, an individual holds a basic wage of 150 per week and due to inflation to cost of food increased from 100 to 120 per week.  This individual may diminish the level of consumption or shift to inferior goods to keep the same expenditure.  Thus inflation does not directly affect income, but negatively alters the disposable income and consumption of the population.

3. Explain the steps in successful career planning.  Give Examples.
There are six salient steps in successful career planning.  One should first outline his strengths and abilities, which will aid himher to pinpoint the key areas of success together with weaknesses that may be rectified by remedial actions like further education.  Examples of skills range from communication, analytical and technical skills.  Information about career data that the individual wishes to pursue should then be gathered.  This will enable the person to identify more clearly the employability in such post.  For example if a writer career is pursued and this individual is not proficient in written communication, this implies that heshe should mitigate such weakness through further education in order to apply for such a job.  Tapping into the network of the career field will also further outline the job roles and duties.   Such tapping can be undertaken by discussing the job with relatives andor friends that are engaged in it.  Research into the labor market pertinent to the desired job should also be conducted to outline the labor supply and job availability.  Once a person has gather all the aforesaid preliminary data, career tests should be undertaken to further enlighten if such job is up to the individuals expectations.  Examples of these tests are aptitude and personality style tests.  Finally, job shadowing should be adopted, which encompasses observation of someone working in such job.  Volunteering can also provide a first hand experience of such job and portray more clearly if this job is what the individual is seeking.

4. Explain City Index and how it is used.  Give Examples.
City index encompasses a numerical scale that covers a particular element.  A city index may comprise numerical figures that can aid in the identification of particular buildings and the distinction between different areas.  Another city index used in stock markets aids in the classification of business organizations.  For example, the CAC 40 Index is a stock market index that outlines the 40 top companies listed in the stock market of Paris.  The FTSE 100 index is an index present in the United Kingdom stock market, which highlights the 100 largest companies enlisted in Englands stock market.  A city index is very useful because it aids in the identification of a specific item.  For example an investor is risk averse and heshe dislikes investing in risky business enterprises.  However, heshe is keen to invest in the stock market of less risky organizations.  In such a stance, it would be advisable to select a company listed in the FTSE 100 if the investment is conducted in the United Kingdom, because such organizations are well established and the risk of corporate bankruptcy is lower when compared with a new firm.  Thus an index encapsulates a classification and a distinction of a specific item.  Such index is also beneficial to financial analysts and consultants.  Such individuals have a wide spectrum of investors and the city index of the stock market would help them to classify such investors in different categories depending on their investment demand and needs. 

5. Financial statements measure your financial health and progress.  Explain this statement.  Give Examples.
Financial statements portray the statement of affairs of an organization for a particular period.   If one conducts a time series examination or a cross section analysis of an organization, one can convey financial information that is helpful in assessing the firms financial health.  A time series examination comprises analyzing the movement in key variables over time.  For example, if one considers the net income for a firm in 2007, 2008, 2009, which amounted to 12 million, 10 million and 7 million.  Such figures indicate that the profitability of the company is declining and weakening the financial health of the company.  A cross sectional analysis encompasses examining key variables or ratios of a company in comparison with another firm operating in the same or similar industry or the industry average.  For instance, to examine the working capital management of a company one may compute the current ratio, which outlines the ability of the current assets to cover the current liabilities.  If the current ratio of company A stands at 1.4x and the industry current ratio is at 2.5x, one can contend that the working capital management of the company is poor in relation to its industry, implying a deteriorating financial health.  The financial health is assessed on three grounds being, profitability, financial position and financial stability.  The information on profitability is mainly gathered from the Income Statement, while that of the latter is attained from the Balance Sheet.  Hence, one can contend that the financial statements are a key medium for financial analysis.

6. Explain the steps in calculating your income tax.  Give Examples.
There are three main steps that are adopted in the computation of the income tax.  Such steps rely on salient regulations and practice pertinent in the determination of the income tax.  Such regulations and practices are highlighted in the aforesaid three steps, which are explained below.  The first one comprises computation of the affective tax rate by relying on the past tax return.  For example, if last years income was 50,000 and the tax paid amount to 7,000, then the effective tax rate is 14 (7,00050,000) x 100.  This step should be taken cautiously especially when alterations in the tax regulations have been enacted by the Government.  One has to remember that new laws may alter the effective tax rate and in such instances one cannot rely on past income tax rates.  The second step consists of computing the tax of this year.  Thus one needs to take the income of this year and multiply it by the effective tax rate computed in step one.  For instance, if the income of this year is 60,000, then the tax should amount to 8,400 (60,000 x 14).   The last, but not least is the determination of the quarterly payments that have to be affected for this years income tax liability.  Since in a year there are four quarters, one need to divide the tax liability by four to compute the effective tax due per quarter.  Thus using the same above example, the quarterly tax payments amount to 2,100 per quarter (8,4004).

Outline
Explanation of the Balance of payment
Evolution of the monetary approach to the balance of payments theory
Key assumptions of the monetary approach to the balance of payments
Characteristics of the monetary approach to the balance of payments
Implications of the monetary approach to the balance of payments

Introduction
Balance of payments is a breakdown of transactions made by a country with other countries duringspecific period of time. It is used as a mechanism to indicate the level of political and economic stability in a country, for instance a country possessing a positive balance of payments would mean that there is considerable foreign investment ( i.e. high influx of imports) and that this country has low exports.

Over the years, various approaches have been applied to the balance of payments (BOP) system but the monetary approach remains the most appropriate by far. Under the monetary approach, balance of payments is determined based on the fixed exchange rate system.

Evolution of the Monetary Approach to the Balance of Payments (MBOP) System
Methods used in analysis of effects of economic changes on the balance of payments have undergone considerable revision in the last century. For instance, after World War I, there were issues of resource allocation and exchange devaluation which paved the way for the application of value theory which revolved around demand and supply and their respective elasticities. Similarly, during the Great Depression in the 1930s, John Keynes came forward with his version of economics to resolve issues with the elasticities approach, known today as Keynesian economics.

Income-absorption approach
Keynesian economics paved the way for further research on different approaches to the balance of payments, for instance the income-absorption approach which was put forward by E.M.Bernstein. Under this approach, balance of payments on a current account was viewed as the difference between national income and expenditure (termed as absorption). In case there was a devaluation of the current account balance, the subsequent effect was shown by subtracting expenditure from the income.

This approach faced a similar criticism to the elasticities approach since it did not consider balance of payments on the whole but only the current account. Secondly, its analysis of effects of current account changes was also not considered suitable.

Monetary Approach
Owing to problems with existing approaches, a monetary analysis of the balance of payments was encouraged. Although it met severe criticism from various quarters over its efficiency to resolve issues of inflation and unemployment but was found to be quite appropriate since the balance of payments were itself monetary in nature. Furthermore, it was easier to apply than other approaches since it analyzed the effects of changes in both current and capital account balances.

Monetary approach has long been associated with David Humes specie flow analysis which was the first original contribution to this approach. Later, Professor at the University of Chicago Milton Friedman has also made valuable contribution to the quantity theory of money. During the last decade of the 21st century, Professors Mundell and Johnson made the monetary approach more familiar in academic circles and hence highlighted the usefulness of the approach.

Frenkel and Johnson Monetary Model for Balance of Payments System
Key contributions with regard to the monetary approach have been made by two leading economists of their time Frenkel and Johnson. They postulated a theory on this approach which was later formulated into a simple to implement monetary model which was originally drafted for a small open economy.

Their model was based on the following assumptions
Real income is considered to be fixed at its ultimate level known as the full employment or natural level.
The law of one price was considered to be valid in both commodity and financial markets.
Both domestic price level and domestic interest rate are pegged with the reserve currency.

This model also proposed that the demand for real balance of payments was also dependant on real income and the prevalent interest rate. Moreover, supply of money is equivalent to domestic credit (i.e. monetary balance created through domestic transactions) in addition with changes in foreign monetary reserves.

J.J.Polaks Quantity Theory of Money
Another renowned economist and an employee of the IMF J.J.Polak also made significant contribution to the monetary approach through his article which was published in 1957. The concepts he put forward were in contrast with that of Milton Freidman. He proposed the assumption constant income velocity of circulation which was different for each country but was equal to a corresponding change in money supply.

According to Polak, the relation between income and money was not necessarily an identity but had a behavioral aspect to it which he considered to be a demand function responsible for determination of current income through income of previous periods and changes in money supply in prior periods.

Polak, in his theory, utilized the import function as another behavior equation and assumed both exports and movements in capital along with domestic money supply to be determined exclusively. He further assumed that the current values taken for income, import function and money demand would be the result of a history of changes in domestic money supply and external factors in the balance of payments. Polaks work has been increasingly compared to Tiffins analysis but his work has been more appreciated probably because it does not require income forecasting which is usually determined internally.

However, there were limitations in Polaks work, for instance, exports, net capital changes and creation of domestic money supply need to be forecasted. Moreover, Polak has based his work on a small open economy and is therefore reflective of the more recent theories on the monetary approach.

Monetary Approach and Its Relationship with the Closed Concept of the Economy
Monetary approach was introduced in 1970s when the Bretton Woods system was in force and the fixed exchange rate regime was also in place, in other words the prevailing concept of economy was that of a closed one. This is perhaps a reason behind monetary approach being termed as an extension of the closed economy.

Another economist, Manuel Gutitian, placed significant emphasis that in an open economy creation of domestic money supply is largely influenced by factors outside the control of monetary authorities. He therefore concluded that domestic money supply creation was an appropriate mechanism for controlling balance of payments.

Some year later, another economist Mohsin Khan prepared a paper with extensive research on ten developing economies. He formulated a model based on continuous-time disequilibrium framework. Through this approach, he was able to anticipate time pattern adjustment with the final equilibrium values through linear differential equations system. This simulation displayed that his model was successful in explaining behavior pattern of balance of payments for a wide range of countries.

Central Themes of Monetary Approach to the Balance of Payments
The MOBP theory has four central ideas to it which have been discussed below 
BOP is a monetary phenomenon
The balance of payments is reflective of the changes made in a countrys foreign reservesby its monetary authorities and in fact provides a channel through which excess domestic demand can affect the domestic supply. Therefore, balance of payments is a crucial aspect when formulating a nations economic policy.
From a theoretical viewpoint, it can be said that balance of payments are the primary means through which private sector in an open economy can adjust money supply with the corresponding demand. The assertion that balance of payments is monetary in nature is highly dependent on an individual empirical judgment. Under the monetary approach, it is assumed that both supply and demand are usually not affected by changes and are affected in a predictable manner provided the changes do affect them. This conception further implies thatchanges in trade balances have an offsetting effect on the capital account and do not affect the current account.

It further postulates that factors such as price levels and money supply play an important role in determining the stability of demand.  (Carbaugh, 2008. p. 209)

The Law of one Price International Commodity Arbitrage
Equilibrium values of money demand variables i.e. real income, price level etc. do not always move in a pre-determined fashion. The law of one price aims to overcome this uncertainty it is of the opinion that price of goods is known with certainty in the short run as well. This is achieved by obtaining a product of exchange rate and foreign price of goods. Moreover, it also states that in full equilibrium prices of goods do not change as a result of monetary setbacks for instance, devaluation, changes in foreign price of goods, changes in domestic borrowing. etc. and therefore a set price level can be maintained. However, law of one price has faced severe criticism and was eventually put out of use when its implementation revealed incorrect outcomes.

As a result, purchasing power parity has been increasingly used in both the long run and short run. Similarly, asset arbitrage model has also been found superior to the law of one price.

Balance of Payments as a Stock Adjustment Process
BOP is reflective of the changes in equilibrium stock reserves. These changes are largely of two types, namely balanced growth and disturbance in equilibrium.

Balanced growth
A developing economy will definitely experience growth in trade and income and as a result will intend to place this inflow of money into a better performing currency, namely foreign reserves. This can simply be done by providing only a fraction of the money created from domestic trade such that the expected levels of reserves flow in hence creating a BOP surplus. Such a stock adjustment will proceed in a normal manner and will not require any difference in demand, supply or price levels.

Subsequently, this will result in normal level of demand surplus for those demanding foreign reserves and a normal level of demand deficit for suppliers of foreign reserves.

Disturbance to equilibrium
These disturbances can arise for a number of reasons, particularly due to devaluations and domestic credit fluctuations.

Money supply in a fixed rate regime
Monetary approach to the balance of payments is based on the fixed exchange rate mechanism. This is quite helpful for small countries or developing economies and can be used as monetary policy for external transactions and fiscal policy for internal transactions. Under the fixed rate regime, emphasis is made on the disequilibrium of the balance of payments.

Key Assumptions in the Monetary Approach
The monetary approach to the balance of payments is based on four key assumptions mentioned as follow
Monetary demand is stable function which comprises of predictable movements (if any). This assumption is considered to be quite accurate because demand is dependant on a handful of economic factors and their subsequent effects which are therefore easier to assess hence resulting in stability of the demand function.
Output and employment in an economy will eventually reach their optimum level in the long run.

Monetary authorities operating in a country cannot clear or equilibrate the effect of balance of payment surpluses or deficits.

Arbitrage ensures that prices of similar goods remain similar in the long run after provision has been made for transportation and tariff costs.

Characteristics of the Monetary Approach
The Monetary approach deals with both money supply and demand and the money supply process. It assumes that balance of payments and exchange rate movements arise due to changes in supply and demand. It has numerous characteristics which have been discussed below in detail
This approach operates in a fixed exchange rate mechanism.

Surpluses or (deficits) in the money account provide the rate at which money balances are accumulated or (reduced) on a domestic level. In other words, balance of payment (BOP) flows are among different mechanisms which adjust money balances to their requisite levels.

This approach asserts that inflow or (outflow) of international reserves are associated with BOP surpluses or deficits and these balance of payment flows cannot be cleared in the long run.

Balance of payment flows also impact the monetary base of a country and will fluctuate both money supply and demand such that it will bring the level of money balances and balance of payments into equilibrium.
This approach is largely concerned with the ultimate effect of changes in trade and capital balances and not with how those changes occur.

Under the monetary approach, balance of payments system is considered to be a reflection of economic decisions taken by a country i.e. either to accumulate money balances (surplus) or reduce them via spending (deficit).

Those transactions which affect both domestic and foreign monetary bases and supplies are considered to be below the line, whereas all other transactions are considered to be above the line.

MBOP mechanisms are based on the efficient market hypothesis (EMH) assumption, according to which markets are risk free in the long run and function in an appropriate manner. Similarly, under this approach it is assumed prices of goods in different countries might vary in the short run but would remain more or less the same in the long run.

MBOP theory comprises an automatic adjustment process according to which any disequilibrium in balance of paymentsor exchange rate movements will show a corresponding dissimilarity in actual and expected money balances and will eventually correct themselves.

This approach is focused on the long run and holds the short run analysis as insignificant, probably because it views the matters to be inconclusive and hence unfit to be analyzed.

It also has an underlying concept of a reserve currency country (RCC). A reserve currency country is a country whose currency can be used by other nations as means of accumulating international reserves. This concept helps in providing countries with a framework through which they can assess the impact of monetary disturbances which occur around the globe.

Role Played by the Monetary Approach in the Determination of Payments
Excess demand for monetary balances and balance of payments has a crucial relationship with respect to economic growth, probably because increases in growth rate for income affect demand for real income i.e. monetary balances. Hence balance of payments and economic growth always increase simultaneously once effect of changes in money supply generated from domestic sources has been taken into consideration.

Implications of the MBOP Theory
In a fixed rate regime, domestic monetary policy cannot control the countrys money supply and this is true of the monetary approach since it is based on the fixed exchange rate.

Excessive monetary expansions occur which result in an inflow of international reserves which will subsequentlyforce the money supply to return to its previous level. The levels of international reserves available are an uncontrollable aspect of a country monetary base.

Increase in international reserves which are uncontrollable will result in a BOP deficit.

Although the inflationary or deflationary effect of the domestic monetary policy on the local economy is reduced, it has an increased impact on the global economy.

On the other hand, domestic economy is more affected by economic decisions taken by other countries which might either have an inflationary or deflationary on it.

Conclusion
When using the monetary approach for the balance of payments, issues are usually analyzed through the relationship between demand and supply of the money and are therefore accurately reflective of the balance of payments system since they are themselves monetary in nature.

Q. Do you feel the Helms 9500 liquid balance is adequate Explain.
In the current downward trend in the economy the losing of job is not very unlikely. 5,000 is the Helms combined monthly income. In general, a family should have ample liquidity equivalent to the 4 to 5 months monthly income. Helm required less liquidity because of no family obligation. In case of any urgency or job lost, they should need a liquidity of at least 3 months time. If both lose their job at a time then they will be in a state of financial distress. As a result, 9,500 is not sufficient enough for Helms. In addition, their earning is 5,000 per month and their total saving is 9,500 which gives an idea that their outlay is almost equal to the generated income means at breakeven level. In this scenario, Helms should require a liquid balance of 3 months salary.   

Q.  Explain the relative risks and potential advantages of CDs. Explain under what condition(s) you would recommend them for the Helms.

The main advantages and pros of CDs are stated below
CDs are much safer in comparison with the investment in the stock market.
CDs pay higher return or high rate of interest in contrast with the Helms current saving account. 
CDs are not liquid like the checking account. Initial detachment from CDs attracts penalization. In addition, CDs are paying  4.5 interest while money market is paying interest  4. As a result, CDs are less attractive than the money market. It is not recommended that Helm invest some money in CDs because of less liquidity. Although, the CDs paid the interest at higher percentage but in the end it will not help to achieve the long term goals. At the age of 30, they should pay attention on the long term investment alternatives.      

Q.     Do you agree with Phil that some of their funds should be invested in the stock market Explain.

Over the years there is a tendency that stock market pays the highest return as compare with any other long term investment. At the age of 30, they should pay attention on the long term investment alternatives which will create wealth. Stock market is the best viable long term option available for them. In the real sense, any person wants to capitalize his income then he should invest in the stock market. At their current saving scenario, they are not in a position to invest in the stock market but they are able to invest almost 15 of their monthly income in the stock market. They should choose the option of mutual fund which is feasible for them to invest in the stock market.

Q.    What are your recommendations for a cash management plan for the Helms In other words, considering the options available to them, what action should they take

After the thorough assessment of the case it is concluded that firstly they should cut down their major expenditures which in the end save some money for them and also their liquidity balance is inadequate and insufficient. Now, they should consider the liquidity balance. One should recommend that not to invest any money in CDs and close Mid Citys checking account and invest some money in the money market. It is strongly suggested that they should not invest any money in the stock market from their current saving position rather than they should inject and invest some percentage of their monthly income in the stock market via mutual funds. Moreover, they should contribute in the money market account in order to increase the balance.

14-1. What are financial markets What function do they perform How would an economy be worse off without them

Financial market is a place where buyer and seller easily interact with each other by trading different stocks, bonds and securities. The role of financial market is very pivotal in building the economy of any country and it is the barometer of the economy. The functions of financial markets are stated below
It provides a hub where investors buy and sell their securities.

Financial market helps in transfer of funds from one place to other and transfer the risk associated with.
Without financial market it is not possible for and financial analyst to assess the performance of any countrys economy. If financial market not exists than it is not feasible for an investor to evaluate the risk, inflation, prices of any commodity, etc.

14-3. Distinguish between the money and capital markets.
Money market is a place where short term liquid securities are transact. The life of those securities is less than a year such as CDs, T-Bills, Commercial Paper, etc. In money market the role of banks, mutual funds, etc is very significant.

Capital market is a place where long term liquid securities are transacts in form of bonds, stocks, etc. In addition, capital market is a place where either the corporate firms or government raises its long term funds.

c. 14-4. What major benefits do corporations and investors enjoy because of the existence of organized security exchanges

Some of the major benefits that the corporations and investors enjoy due to the existence of organized security exchanges are stated below

It provides a guarantee that over the investment of the potential investor.

It provides a space where to the businesses where they motivate the potential investors to invest in any particular security.
 
Where new companies raises its capital through an IPO.
15-12A.

COMPUTATION OF BREAKEVEN IS STATED BELOW

STEP 1 COMPUTE MARGIN
Margin x Operating asset turnover  Return on operating assets
Margin x 5  0.25
Margin  0.05

STEP 2 COMPUTE SALES
Sales  Operating assets  Operating asset turnover
Sales  20,000,000  5
Sales  20,000,000 x 5
Sales  100,000,000

STEP 3 COMPUTE EBIT
EBIT  Margin x Sales
EBIT  0.05 x 100,000,000
EBIT  5,000,000

STEP 4 COMPUTE REVENUE BEFORE FIXED COSTS
Revenue before fixed costs  Degree of operating leverage x EBIT
Revenue before fixed costs  4 x 5,000,000
Revenue before fixed costs  20,000,000

STEP 5 COMPUTE TOTAL VARIABLE COST (TVC)
 Sales  TVC  20,000,000
100,000,000  TVC  20,000,000
TVC  80,000,000

STEP 6 COMPUTE FIXED COSTS
Revenue before fixed costs  Fixed costs  5,000,000
20,000,000  Fixed Costs  5,000,000
Fixed Costs  15,000,000

STEP 7 COMPUTE SALES PER UNIT  VARAIBLE COST PER UNIT
Price per unit  Sales  Units
Price per unit  100,000,000  10,000,000
Price per unit  10
Variable cost per unit  TVC  Units
Variable cost per unit  80,000,000  10,000,000
Variable cost per unit  8

STEP 8 COMPUTE BREAKEVEN
Sales  Variable expenses  Fixed expenses  Profits
10Q  8Q  15,000,000  0
2Q  15,000,000
Q  15,000,000  2 per unit
Q  7,500,000 Units
e.      15-13A.

A. BREAK-EVEN POINT (In Units)
Sales  Variable expenses  Fixed expenses  Profits
180Q  126Q  540,000  0
54Q  540,000
Q  540,000  54 per unit
Q  10,000 units

B. BREAK-EVEN POINT (In Dollars)
Breakeven units x Selling Price per Unit
10,000 Units x 180
1,800,000

C.
UNITS12,00015,00020,000Sales  1802,160,0002,700,0003,600,000Less Variable Cost  1261,512,0001,890,0002,520,000Contribution Margin648,000810,0001,080,000Less Fixed Costs540,000540,000540,000EBIT108,000270,000540,000

D.
UNITS12,00015,00020,000Contribution Margin (a)648,000810,0001,080,000EBIT(b)108,000270,000540,000Degree of Operating Leverage (a b)6 times3 times2 times

Q.1    hat is the capital market How is the primary market different from the secondary market In your opinion, are these markets efficient Why or why not

The term Capital Market refers to those markets where only broad and long term range of financial products and services like Mortgages, Treasury Notes and government Bonds and Corporate Bonds etc. are traded. This is the place where companies and government raise their funds by issuing long term bonds where any potential investor or company buys a bond for certain time period and issuing bond authority promised to pay higher return to that person.

THE BASIC DIFFERENCE BETWEEN THE PRIMARY AND SECONDARY MARKET
Newly issued securities firstly offer in the primary market to the investors. In this type of transaction investments banks are engaged and settle all the arrangements of IPOS (Initial Public Offering). Secondary market is quite different from primary market because in this market existing and outstanding securities are traded in stock exchange.

Yes, these markets are efficient and investors shown great deal of interest in it. Basically, these markets provides information to the potential investors about the stocks, bonds etc. of the companies and importantly allows them to trade securities under the one roof.

Q.2    What is three primary roles of the SEC How does the Sarbanes Oxley Act augment the SECs role in managing financial governance Do you think that businesses are more ethical after the passing of the Sarbanes Oxley Act What examples are there to support you answer.
   
The three objectives of Sarbanes Oxley Act are to provide a guarantee that securities market is functioning in a comfortable and organized manner. Securities industry specialists are dealing clearly with their customers. Corporations provide all material information to public so that investors made sound and accurate decisions about investments. Sarbanes Oxley Act enhanced the role of financial governance by mandating companies to disclose the financial information in front of investors. The act contains 11 sections ranging form additional corporate board responsibilities to criminal penalties. These all sections empowered and ensured the finance governance. After the implementation of this act companies are more ethical about the facts and figures. Because all financial information must be disclosed in front of the investors and if there is any sort of manipulation occurred in the financial information which in the lead towards penalties. For instance, investors are more relying on this act and if company manipulates their financial information that leads the investors to make a wrong decision. In the end, potential investor sues over the company in the court of law.

Q3    Which ratios measure a corporations liquidity What are some of the problems associated with using financial ratios How would the DuPont analysis overcome some of these problems

The following are the below ratios measure the Liquidity of the company
Current Ratio
Quick Ratio Net
Working Capital Ratio
Some problems associated with using financial ratios
Ratio analysis just deals with numeric values printed on financial statements and dont examine the other factors that affected the performance of the company.

It is difficult to predict whether certain ratio is good or bad. Like, the high current ratio of the company that showed an excellent liquidity position but on the other hand this shows that company is holding excessive amount of cash.

Different accounting procedures may affect the analysis of the ratio. Currently there are four commonly used methods to measuring the inventory. (1) Specific identification (2) FIFO (3) LIFO (4) Weighted Average. Different Depreciation methods to calculate depreciation like (1) Straight line (2) Diminishing Method etc.

The affect of inflation is not properly proposed in financial statements and figures based on historical numbers.

The differences in approaches to analyze the ratio also create the hurdle in elaborating the clear and fair finding of the ratio.

DuPont analysis means assets are measured on the basis of gross book value instead of net book value in order to show the higher return on equity (ROE). This analysis gives a plat form to resolve the some problems regarding the interpretation of the ratio like taken the assets on gross book value provide a higher return on equity. It avoids the effect of accounting depreciation method that resulting in higher ROE.

The acquisition of YouTube by Google came as a no surprise to many analysts in the technology industry. Google has developed a habit of buying companies that are based on a great idea and have a potential of becoming cash cows in the future once their development costs are recovered. Or in Googles case once the acquisition costs are covered these companies stand to benefit Google immensely.

On a strategic level Google has been successful because they know that re-inventing the wheel is a far more difficult and expensive task than just buying the whole idea from another creator. It has few basic advantages firstly it reduces competition and secondly it is a quick way of getting into a market. The 1.65 billion dollar move to buy YouTube might look expensive for the year 2006 but what Google knew about YouTube was more then what others could eve think about.

Lets see what YouTube offered Google when it might have thought of acquiring the company. In our opinion YouTube had a lot in common with what Google did a few years back when it was starting up. YouTubes simple and powerful idea of video-sharing allowed customers to challenge norms and interact with the world in an absolute new way such that just a click on upload will let their videos be seen by anyone else in the world. Just like Google the simple concept of video-sharing and giving power to the customers led to a phenomenal growth in the customer base of YouTube secondly because of the potential of the service we saw that a number of brands were attracted to sponsor YouTube.

Although this basic understanding of how Google and YouTube have similar business models is good for both the companies in terms of compatibility and direction but one wonders that to keep the creativity juices going how the working arrangements will be developed between these two companies Luckily for both the firms when Google was buying YouTube the deal was measured in Google stock and the Google management also announced that YouTube will continue working just as a separate company though Google will provide technological support to improve YouTubes ability to handle more powerful camera videos and other technological challenges.

Such an arrangement is of great help and strength for the YouTube management as they keep the all important product development and idea creation departments in their control the subsequent advantage of such a move is that Google is spared the need for hiring and nurturing a brand new team for YouTube. All Google needs to do is to keep the current YouTube employees happy and give them enough control and autonomy that are interested in staying with both the brands.

Another important aspect that justifies the price tag for YouTube is the similarity between Google and YouTubes revenue models. Both the companies rely on their large and growing customer bases and their potential ability of viewing in-text advertisements. By acquiring YouTube, Google gave a huge boost to its already massive customer base. This fundamental reason will ensure that the Google and YouTube relationship will bear great fruit for both the companies in the near future.

It must be understood here that certain industries have a unique growth model compared to other industries. The technology sector requires firms to grow at a phenomenal pace in order to survive competition and continue making revenues. The birth of Google was one of the greatest inventions of our time though we can not expect another similar product from the creators therefore to keep the company liquid and moving the firm has to expand its product base and either buy new ideas or create further ones.

The advantage that Google has is the huge clout over the internet market and its massive financial backing therefore buying a reasonably successful idea in its early years is a very good way of expanding Googles business interests. Just look at how an acquisition by Google of YouTube in 2006 will lead to future cash inflows that will cover all costs and result in profits as well. According to one analyst revenues from YouTube will come at a 7.5 million per month after the acquisition. Another independent analyst puts these revenue forecast figures at 150 million annually.

The benefits that Google has achieved from the buyout of YouTube more than compensate for the costs this is because a company like Google is dependent on customer base for revenue generation and YouTube has exactly been the product lately which has attracted large amounts of customer and fan base. The revenue sharing model between customers uploading videos and YouTube has given the companys revenue generation ability a completely new dimension.

We also must understand why YouTube has a long-term sustainability factor such that revenues will increase in the next few years. Firstly, YouTube offers customers the ability to watch what they like and search using filters and other options. Secondly with the stepping in of Google we see that YouTube has become more users friendly and accessible from a number of different sources. YouTube videos have become more searchable and through search engine optimization and other related technologies Google has strengthened the technology side of YouTube.

What we gather from the Google strategy here is that acquisition is the next big way in the technology sector for expanding and diversifying customer base. But a worrying aspect is that will companies like Google, Yahoo and Microsoft eventually become the big three of the industry and stifle competition and start on aggressive buyouts and increase barriers to entry. This can be detrimental to the technology industry since it thrives on the inventions and product-led approaches of many of the start-up entrepreneurs.

Analysis
Googles buyout of YouTube has set a major pattern in the technology sector. Companies like Yahoo, Microsoft, and Google are all vying up to buy successful startups and extremely good prices. This is an encouraging sign for many of the developers and investors who see the emergence of a potential exit strategy though we must ask crucial questions about the aggressive nature of these takeovers and is this acquisition model sustainable in the long-run

On a strategic level a company like Google wants to buy a company like YouTube, even at a higher than expected price tag, because the benefits in the future are so large that todays cost would look very small after a few years. In the technology sector it is all about the market share and how much money one can gain from each increasing customer. The media involvement and the entertainment aspect to the internet have increased so rapidly in recent times that we might see forums like YouTube take over the television market as well. This is because YouTube plans to launch major sporting and other events on YouTube which will not only give people the liberty of watching whenever they want to but also the ability to select different versions and quality offerings.

Another crucial aspect of the Google-YouTube deal was the way control and management would be run and organized. We believe that Google took a great step by deciding on only acting as a technology supplier and back-stage actor for YouTube and allowed its management the right to product development and other aspects that control creativity of YouTube. By adapting such a methodology both the companies have led the path to a new sort of partnership and understanding of how to solve each others problems and cater to each others needs. The strategy would have long-lasting impact on the motivation levels of the management as well as the specialization of both the companies as providers of certain specific services to each other. Google stated after the acquisition that it would want YouTube to continue working as an independent organization this was a great boost to a company like YouTube which is far smaller in size and financial strength than Google.

We also see that Google has understood the strategic importance of acquiring reasonably successful start-ups which have been regarded as acceptable by the market. Google buys such companies for a premium price although this strategy will work for the company but it also needs to focus on its core competencies and develop powerful products that could counter some of its rivals such as Yahoo and Microsoft. Product development is considered extremely crucial in the long-run since that would determine the rate at which the company has successfully generated returns from retained or invested profits. Another important aspect to product development is that fact that most technology products have a short life span which leads to the need for greater development of products and services.

From the standpoint of finances this was a good move because even forecasted revenues are such that the return would be eminent within 5-7 years. This total return of investment also highlights an important factor during this time Google has lessened an important competitor for the all important customer base that is so dear to companies like Google. Essentially, what Google has achieved is a way of going forward which has its pros and cons but so far it has been an effective way of staying ahead of competitors such as Microsoft and Yahoo.

In the near future what we can expect from these stalwarts of the technology sector is a trend toward more aggressive buyout strategies and a possibility of synergies across different industries which might require technological products offered by some of these companies. Partnerships and strategic alliances across industries and within industries seem to be the future way forward for companies in the hi-tech sector.

This is because in the technology sector the need for higher profits means that better products are produced at lower prices so that more and more people leave older products in favor of these new products. This is a crucial factor in the technology sector that companies must defeat the market of their own products with the inventions and development of new products. We also must realize that mergers and acquisitions in the technology sector are important way of providing exit strategy for entrepreneurs and start-up owners.

Google has given a lot of product developers and entrepreneurs a new reason to develop a business that Google might buy and they subsequently will become billionaires such a dream is well worth the try for most entrepreneurs. This is precisely the reason why we might see a large number of start-ups in the near future that stands to benefit the technology sector and increase the ability of new ideas to be given an opportunity to develop.

Another important question that one must ask is the fact that Google will continue to grow by acquisitions but does that mean that a decade later we have monopoly like situation in the internet arena. Well for some this might not be a problem but for the others this means that the revolutionary path of improvement and better products might just fade away as a result of a shift from total competition in an industry to a form where Google dominates everything in the technology sector.

Whichever way we look at it Google is moving from strength to strength and it will continue doing so as more new businesses are up for grabs which offer better customer base and product idea that is much like that of Google.