Moodle Oct07 Fim Test Ans

TEMASEK POLYTECHNIC FINANCIAL INSTITUTIONS & MARKETS (BAF3009) AY 2007/08 OCT SEM MID­SEMESTRAL TEST Name

: ______________________

Adm No.: ______________________ Tut Grp: ______________________

TIME ALLOWED:

ONE HOUR

TOTAL:

40 MARKS

ANSWERS

Section A: Multiple Choice Questions 

(10 MARKS)    

Answer all questions in the box provided: QUESTION 1.1 1.2 1.3 1.4 1.5

ANSWER A A C D C

QUESTION 1.6 1.7 1.8 1.9 1.10

ANSWER B D B C D

Section B: Short Questions

(TOTAL 30 MARKS)

Answer all questions in the space provided.

QUESTION 2 (10 marks) DBS Bank has paid-up capital which far exceeds the minimum of $1,500 million stipulated by the MAS.

a)

What does 'capital adequacy' refer to? (2 marks)

•

Size and quality of a bank's capital base in relation to its assets.

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b)

Based on your understanding of capital adequacy, explain why it  is not sufficient for DBS Bank to simply maintain a high level  of capital.  (4 marks)

•

Banks need to maintain sufficient capital to assure depositors of the safety of their funds and to withstand risks of losses on its assets such as:

• • •

Credit Risk – the possibility that debts owed to the bank will not be repaid. Investment Risk – the risk that investment or other claims fall below their book value. Forced Sale Risk – the risk that the bank may be forced to sell the asset below its book value in a forced sale.

DBS Bank maintains a Capital Adequacy Ratio of 10%, the minimum stipulated by MAS which is higher than the 8% required in many other countries.

c)

What are the implications for DBS Bank in terms of: • Lending activities • Competitiveness (4 marks)

•

Since DBS is already at the minimum CAR, its lending activities will be restricted as it will not be able to lend more unless it increases its capital base. DBS' higher minimum CAR means that it may be less competitive in the international banking arena because it may have to raise profit margins by charging more on its loans unless it can reduce its operating costs.

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•

QUESTION 3 (10 marks) 'Given the current and anticipated volatility of the stock market, with short-selling likely to be aplenty, the Central Depository should act on the less-then-best-practice buy-in process now in force.' Extracted from 'Make stock buy-in process transparent to investors', Business Times dated 28 August 2007.

a)

What is the role of the Central Depository? (3 marks)

• •

•

b)

The Central Depository System was introduced to enable trading on a scripless basis It records all scripless transactions electronically and acts as a central nominee for shares held on behalf of investors.

What is 'short­selling'? How can a short seller avoid a buy­in  under the current settlement process for scripless trading?     (3 marks)

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• •

•

c)

Short-selling refers to the sale of securities one does not own in the hope of buying them at a lower price for a quick profit. To avoid a buy-in, the short seller must buy back the shares within the same trading day or arrange to borrow scrip.

Describe the trade settlement process and explain the need for  the 'buy­in process' to take place in a short sale. (4 marks)

• •

Seller will have their shares deducted from their CDP Accounts T+3 night and receives payment for the sale on T+4.

•

If the seller fails to “deliver” on due date, the SGX will buy-in on T+4 morning at minimum of 2 bids above the closing price of the previous market day, the current last transacted price or the current bid price, whichever is higher.

•

This must be done so that shares can be 'delivered' to the buyer.

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d)

Do you agree with the author's view that the 'buy­in process'  is a 'less­than­best­practice'? Why or why not? (2 marks)

Any logical answer for or against this practice eg:

• • •

Yes, this is not good practice as the buy-in market usually results in shares being bought at a price higher than that in the ready market - causing greater losses to the short seller if prices had moved against him. Yes, this is not good practice. Short seller should be allowed to buy the shares on his own in the ready market but perhaps, pay a penalty/fee for CDP to arrange for immediate debiting/crediting on T+4 so that shares can still be delivered to the buyer. No. This is good practice as the buy-in process ensures that shares can be delivered & this preserves the integrity of the trading system.

QUESTION 4 (8 marks) 'MANDARIN Oriental International, the hotel arm of Jardine Matheson Holdings, said yesterday it has arranged a US$450 million loan to refinance borrowings and provide working capital. Chief financial officer John Witt said the seven-year, HK$3.5 billion equivalent syndicated loan facility with 19 international banks is 'competitively priced' and will 'increase significantly' the average term of the luxury hotel operator's bank debt. The four main banks responsible for arranging the facility are the Bank of Tokyo-Mitsubishi UFJ, HSBC, BNP Paribas and Standard Chartered Bank. The facility was 'substantially oversubscribed', according to Mandarin Oriental.' Extracted from 'Mandarin Oriental arranges loan', Business Times dated 5 September 2007.

a)

• • • •

b)

Why   do   you   think   the   facility   had   to   be   a   'syndicated   loan'  rather than a direct loan from a commercial bank? (4 marks) Reasons: a relatively long term (7 years) and large (USD450 million) loan which Mandarin Oriental, the borrower, may not be able to obtain from the commercial banks as: the loan may breach their large single-borrower ceiling or, affect their liquidity significantly. However, a group of banks (19 in this case) may be willing to lend the required large amount as each provides only part of the funds and risk is diversified.

What   is   meant   by   arranging   a   syndicated   loan   on   an  'underwritten   basis'?  Explain   if   this   would   have   posed   a  problem in the case of the facility described in the article. (4 marks)

• •

Underwritten Basis means that the Mandarin Oriental, the client, is legally assured of the funds and once the merchant bank agrees to the terms, its professional reputation is on the line. No, this would not have been a problem in this case

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since the loan facility is said to have been "substantially oversubscribed" indicating that The banks willing to participate/amounts offered exceeded what was required.

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