FIN203 Commonwealth Bank of Australia is Proved Risky and More Valuabl

This project will further your understanding of how financial markets function. The assignment consists of two parts. Part A of the assignment focuses on the financial instruments of two companies, BHP Billiton (BHP) and Commonwealth Bank of Australia (CBA). Part B of the assignment focuses on debt markets and fiscal and monetary policy. To successfully complete this project, you will use/apply not only theories studied in this FIN203 but also other appropriate resources. Part A: BHP and CBA Share Price 1. What is the current price of ordinary / common shares in BHP and CBA? How has each evolved over the past 5-years? Graph each series and discuss their evolution. 2. Select one item of news that may have affected systematic (market) risk and one item of news that may have affected unsystematic (firm-specific) risk. Explain how each of the news items have moved the share prices of both BHP and CBA. Part B: Fiscal Policy, Monetary Policy and Debt Markets

1. Evaluate the current fiscal position of the Australian Federal Government. Briefly describe how you expect this to move over time. 1 2. Plot the current Australian yield curve for Commonwealth Government Securities (CGSs). At a minimum you should include the target cash rate, 90-day and 180-day rates, and the 2, 3, 5, and 10-year rates. a. Briefly explain the shape of the yield curve, using Expectations Theory and the Segmented Markets Theory b. How would you expect the movements in the fiscal position identified in B.1) to influence the yield curve?

3. Briefly describe the movements in the target cash rate from 2001 to 2017. How has the movements in the cash rate influenced the value of the Australian dollar in the foreign exchange market? Some suggested sources that you may find useful: CHAPTER 13 & 16 OF TEXT BOOK: Viney, C. and Phillips, P. (2015). Financial Institutions, Instruments and Markets. 8th edition. Australian Office of Financial Management – Presentation and Lodgement Further details on the presentation and lodgement requirements for the Assignment and penalties for late lodgement, along with the rubric for assessment purposes, are set out in the Subject Outline (SO), pages 7- 9. Within the context of section (e) of Presentation on page 9 (SO), it is recommended that the body of your essay contain 5 numbered sections, in line with the Marking rubric, viz., Introduction; Research (a literature survey); Analysis; Recommendations; and Conclusion.

You should follow the following typing conventions:

• Times New Roman font (at minimum, 12 pitch)

• 1.5 line spacing

• Top, bottom, left and right margins to be at least 2.5 cm from the edge of the page

• A4 paper; and

• Length – 2,500 words + / - 10%. 2 Research and Referencing You should begin by seeking references relating to the topic and subject content via Google or another search engine. It is suggested that you familiarize yourself with the Australian financial system by reading appropriate chapters in the text-book. You will need to discover at least 6 other references. This should include at least one other book and one journal article. Search the web-sites suggested in the text and the SO. Use Harvard referencing! Marking Guide See Subject Outline, pages 7 – 9. Remember plagiarism = severe penalties. Submission of Assignments. A soft copy is to be submitted to Moodle by Sunday, 20 May 2018 at 11:59 pm. Please submit to your Tutor a hardcopy Monday 21 May 2018 during tutorial, including a KOI Cover Sheet (see Moodle) and TURNITIN validation, showing the Similarity score

Answer:

1. The current price of ordinary / common shares in BHP and CBA and evolvement of each over the past 5-years

The current price of ordinary shares in BHP is $51.36 (BHP Ltd, 2018) and of CBA is $70.77(CBA, 2018)

Date	Close
1-Apr-18	46.75
8-Mar-18	0
1-Mar-18	44.43
1-Feb-18	46.5
1-Jan-18	49.02
1-Dec-17	45.99
1-Nov-17	41.55
1-Oct-17	40.98
7-Sep-17	0
1-Sep-17	40.53
1-Aug-17	43.5
1-Jul-17	41.66
1-Jun-17	35.59
1-May-17	35.09
1-Apr-17	35.6
8-Mar-17	0
1-Mar-17	36.32
1-Feb-17	37.82
1-Jan-17	41.29
1-Dec-16	35.78
1-Nov-16	37.54
1-Oct-16	35.02
1-Sep-16	34.65
31-Aug-16	0
1-Aug-16	30
1-Jul-16	29.69
1-Jun-16	28.56
1-May-16	26.97
1-Apr-16	31.34
9-Mar-16	0
1-Mar-16	25.9
1-Feb-16	22.61
1-Jan-16	21.91
1-Dec-15	25.76
1-Nov-15	26.68
1-Oct-15	32.89
9-Sep-15	0
1-Sep-15	31.62
1-Aug-15	36.83
1-Jul-15	38.37
1-Jun-15	40.71
1-May-15	44.63
1-Apr-15	51.29
11-Mar-15	0
1-Mar-15	46.47
1-Feb-15	52.52
1-Jan-15	46.33
1-Dec-14	47.32
1-Nov-14	51.63
1-Oct-14	59.44
3-Sep-14	0
1-Sep-14	58.88
1-Aug-14	68.63
1-Jul-14	71.09
1-Jun-14	68.45
1-May-14	67.88
1-Apr-14	70.54
5-Mar-14	0
1-Mar-14	67.77
1-Feb-14	68.9
1-Jan-14	63.95
1-Dec-13	68.2
1-Nov-13	68.22
1-Oct-13	70.69
4-Sep-13	0
1-Sep-13	66.5
1-Aug-13	63.28
1-Jul-13	62.73
1-Jun-13	57.66
1-May-13	65.32
1-Apr-13	67.22
6-Mar-13	0
1-Mar-13	68.43
1-Feb-13	74.86

(Data Source: BHP Ltd, 2018 from Yahoo finance)

Date	Close
12/31/2012	0
1/31/2013	66.9075
2/28/2013	67.6435
3/31/2013	73.0542
4/30/2013	66.4997
5/31/2013	68.8072
6/30/2013	73.8101
7/31/2013	72.4475
8/31/2013	70.8263
9/30/2013	75.67
10/31/2013	77.4006
11/30/2013	77.3808
12/31/2013	73.83
1/31/2014	74.2577
2/28/2014	77.0227
3/31/2014	78.4748
4/30/2014	81.1503
5/31/2014	80.4442
6/30/2014	83.2987
7/31/2014	80.8818
8/31/2014	74.8843
9/30/2014	80.0463
10/31/2014	80.285
11/30/2014	85.1885
12/31/2014	88.8486
1/31/2015	91.4247
2/28/2015	92.8967
3/31/2015	88.3911
4/30/2015	84.6315
5/31/2015	84.6712
6/30/2015	87.0882
7/31/2015	76.36
8/31/2015	72.72
9/30/2015	76.73
10/31/2015	79.43
11/30/2015	85.53
12/31/2015	78.67
1/31/2016	70.14
2/29/2016	74.92
3/31/2016	73.89
4/30/2016	77.43
5/31/2016	74.37
6/30/2016	77.35
7/31/2016	71.81
8/31/2016	72.4
9/30/2016	73.39
10/31/2016	78.65
11/30/2016	82.41
12/31/2016	81.66
1/31/2017	82.32
2/28/2017	85.91
3/31/2017	87.4
4/30/2017	79.65
5/31/2017	82.81
6/30/2017	83.73
7/31/2017	75.8
8/31/2017	75.25
9/30/2017	77.63
10/31/2017	79.43
11/30/2017	80.34
12/31/2017	78.87

2. News that have affected systematic risk and news that have affected unsystematic risk and its impact on share prices of both BHP and CBA.

According to the study of Macro axis, BHP Billiton Company is taken as less risky an entity as an investment in this company will result into higher returns as this attracts a lot of investors towards thus entity which further increases the share price of the BHP shares (Damodaran, 2018). The efficiency of the firm is identified with the help of Sharpe ratio which is of 0.24 which, in turn, shows the return generated for per unit of risk for the previous 1 month.

According to the leading news article, Commonwealth Bank of Australia is proved as less risky and more valuable investment for its investment. This theory is explained with the help of beta of an entity as the existing beta of CBA is of 0.63 (Commonwealth bank of Australia’s market risk, 2017). The beta shows the efficiency of an entity as this less volatile as compared to all other stock indexes lies in the market (Cheng and Li, 2018). Ann investor will get its principal along with the higher returns by investing the share of this company (Hoepner and et al., 2018). With this action of the company, the share price of the firm will get higher which arouses the interest of all other investors (Kim, Kim, Kim and Bang, 2018).

PART B

1. Evaluation of the current fiscal position of the Australian Federal Government and description of this movement over time.

The current financial position of the Australian Federal government is stable as due to the introduction of new policies by the government will result into greater savings and higher cash flow balance for the year 2016-17 (Bedi, 2018). The budget will improve to get a budget limit of $1.7 Billion which results in balancing the budget to get rid of all the difficulties (Australian Federal government position, 2018).

The Australian government is keeping all it’s spending under the control which in return will induce the overall gross domestic product of the overall economy of Australia (Hugo, Isenring Sinclair and Agarwal, 2018).

2. Plot the current Australian yield curve for Commonwealth Government Securities

2-May-18	0	1.5
4-Apr-18	0	1.5
7-Mar-18	0	1.5
7-Feb-18	0	1.5
6-Dec-17	0	1.5
8-Nov-17	0	1.5
4-Oct-17	0	1.5
6-Sep-17	0	1.5
2-Aug-17	0	1.5
5-Jul-17	0	1.5
7-Jun-17	0	1.5
3-May-17	0	1.5
5-Apr-17	0	1.5
8-Mar-17	0	1.5
8-Feb-17	0	1.5
7-Dec-16	0	1.5
2-Nov-16	0	1.5
5-Oct-16	0	1.5
7-Sep-16	0	1.5
3-Aug-16	-0.25	1.5
6-Jul-16	0	1.75
8-Jun-16	0	1.75
4-May-16	-0.25	1.75
6-Apr-16	0	2
2-Mar-16	0	2
3-Feb-16	0	2
2-Dec-15	0	2
4-Nov-15	0	2
7-Oct-15	0	2
2-Sep-15	0	2
5-Aug-15	0	2
8-Jul-15	0	2
3-Jun-15	0	2
6-May-15	-0.25	2
8-Apr-15	0	2.25
4-Mar-15	0	2.25
4-Feb-15	-0.25	2.25
3-Dec-14	0	2.5
5-Nov-14	0	2.5
8-Oct-14	0	2.5
3-Sep-14	0	2.5
6-Aug-14	0	2.5
2-Jul-14	0	2.5
4-Jun-14	0	2.5
7-May-14	0	2.5
2-Apr-14	0	2.5
5-Mar-14	0	2.5
5-Feb-14	0	2.5
4-Dec-13	0	2.5
6-Nov-13	0	2.5
2-Oct-13	0	2.5
4-Sep-13	0	2.5
7-Aug-13	-0.25	2.5
3-Jul-13	0	2.75
5-Jun-13	0	2.75
8-May-13	-0.25	2.75
3-Apr-13	0	3
6-Mar-13	0	3
6-Feb-13	0	3
5-Dec-12	-0.25	3
7-Nov-12	0	3.25
3-Oct-12	-0.25	3.25
5-Sep-12	0	3.5
8-Aug-12	0	3.5
4-Jul-12	0	3.5
6-Jun-12	-0.25	3.5
2-May-12	-0.5	3.75
4-Apr-12	0	4.25
7-Mar-12	0	4.25
8-Feb-12	0	4.25
7-Dec-11	-0.25	4.25
2-Nov-11	-0.25	4.5
5-Oct-11	0	4.75
7-Sep-11	0	4.75
3-Aug-11	0	4.75
6-Jul-11	0	4.75
8-Jun-11	0	4.75
4-May-11	0	4.75
6-Apr-11	0	4.75
2-Mar-11	0	4.75
2-Feb-11	0	4.75
8-Dec-10	0	4.75
3-Nov-10	0.25	4.75
6-Oct-10	0	4.5
8-Sep-10	0	4.5
4-Aug-10	0	4.5
7-Jul-10	0	4.5
2-Jun-10	0	4.5
5-May-10	0.25	4.5
7-Apr-10	0.25	4.25
3-Mar-10	0.25	4
3-Feb-10	0	3.75
2-Dec-09	0.25	3.75
4-Nov-09	0.25	3.5
7-Oct-09	0.25	3.25
2-Sep-09	0	3
5-Aug-09	0	3
8-Jul-09	0	3
3-Jun-09	0	3
6-May-09	0	3
8-Apr-09	-0.25	3
4-Mar-09	0	3.25
4-Feb-09	-1	3.25
3-Dec-08	-1	4.25
5-Nov-08	-0.75	5.25
8-Oct-08	-1	6
3-Sep-08	-0.25	7
6-Aug-08	0	7.25
2-Jul-08	0	7.25
4-Jun-08	0	7.25
7-May-08	0	7.25
2-Apr-08	0	7.25
5-Mar-08	0.25	7.25
6-Feb-08	0.25	7
5-Dec-07	0	6.75
7-Nov-07	0.25	6.75
3-Oct-07	0	6.5
5-Sep-07	0	6.5
8-Aug-07	0.25	6.5
4-Jul-07	0	6.25
6-Jun-07	0	6.25
2-May-07	0	6.25
4-Apr-07	0	6.25
7-Mar-07	0	6.25
7-Feb-07	0	6.25
6-Dec-06	0	6.25
8-Nov-06	0.25	6.25
4-Oct-06	0	6
6-Sep-06	0	6
2-Aug-06	0.25	6
5-Jul-06	0	5.75
7-Jun-06	0	5.75
3-May-06	0.25	5.75
5-Apr-06	0	5.5
8-Mar-06	0	5.5
8-Feb-06	0	5.5
7-Dec-05	0	5.5
2-Nov-05	0	5.5
5-Oct-05	0	5.5
7-Sep-05	0	5.5
3-Aug-05	0	5.5
6-Jul-05	0	5.5
8-Jun-05	0	5.5
4-May-05	0	5.5
6-Apr-05	0	5.5
2-Mar-05	0.25	5.5
2-Feb-05	0	5.25
8-Dec-04	0	5.25
3-Nov-04	0	5.25
6-Oct-04	0	5.25
8-Sep-04	0	5.25
4-Aug-04	0	5.25
7-Jul-04	0	5.25
2-Jun-04	0	5.25
5-May-04	0	5.25
7-Apr-04	0	5.25
3-Mar-04	0	5.25
4-Feb-04	0	5.25
3-Dec-03	0.25	5.25
5-Nov-03	0.25	5
8-Oct-03	0	4.75
3-Sep-03	0	4.75
6-Aug-03	0	4.75
2-Jul-03	0	4.75
4-Jun-03	0	4.75
7-May-03	0	4.75
2-Apr-03	0	4.75
5-Mar-03	0	4.75
5-Feb-03	0	4.75
4-Dec-02	0	4.75
6-Nov-02	0	4.75
2-Oct-02	0	4.75
4-Sep-02	0	4.75
7-Aug-02	0	4.75
3-Jul-02	0	4.75
5-Jun-02	0.25	4.75
8-May-02	0.25	4.5
3-Apr-02	0	4.25
6-Mar-02	0	4.25
6-Feb-02	0	4.25
5-Dec-01	-0.25	4.25
7-Nov-01	0	4.5
3-Oct-01	-0.25	4.5
5-Sep-01	-0.25	4.75
8-Aug-01	0	5
4-Jul-01	0	5
6-Jun-01	0	5
2-May-01	0	5
4-Apr-01	-0.5	5
7-Mar-01	-0.25	5.5
7-Feb-01	-0.5	5.75

2. The current Australian yield curve for Commonwealth Government Securities (CGSs)

a) Explanation of the shape of the yield curve, using Expectations Theory and the Segmented Markets Theory

Expectation theory tests the Australian yield curve by showing expected short-term rates as according to this theory yield of two year period is considered as one year bond of current as well as the future period (Adorno, 2018). This theory says that declining state of above yield curve shows the short-term rates to decline in the future.

Market segmentation theory states the shape of the above yield curve that the above yield curve is the humped curve as the middle part of the above curve is showing higher rates as compared to the starting and ending part (Cooke, Freisthler and Mulholland, 2018).

b) Influence of movements in the fiscal position identified above to influence the yield curve

Increasing spending in the budget of Australian government will reduce the cash rate which will results in the declination in the yield curve as it is related to the cash rate (Wellmann and Trück, 2018). Due to increasing cash outflows, the cash balance will get affected which shows negative influence of the changes in the fiscal position on the overall yield curve.

3. Description of the movements in the target cash rate from 2001 to 2017 influence of movements in the cash rate on the value of the Australian dollar in the foreign exchange market

Movement of cash rate from 2001 to 2017 is the most fluctuating position observed in the above line chart as the cash rate initially starts with higher rate then gets increases and then decline shows that cash rate is highly affected by the external market factors affecting the overall performance of an entity (Chen, Zhang, Tam and Wu, 2018).

The changes take places in the cash rates will directly affect the Australian dollar traded in the foreign exchange market. Increase in the cash rate will also increase the value of an Australian Dollar which allows investors to invest in the Australian economy to boost up its overall returns (Influence of ash rate on the Australian dollar, 2017).

REFERENCES

Books and journals

Edeling, A. and Himme, A., 2018. When Does Market Share Matter? New Empirical Generalizations from a Meta-Analysis of the Market Share–Performance Relationship. Journal of Marketing. 82(3). pp.1-24.

Damodaran, A., 2018. Equity Risk Premiums (ERP): Determinants, Estimation and Implications–The 2018 Edition.

Cheng, C. and Li, J., 2018. Early default risk and surrender risk: Impacts on participating life insurance policies. Insurance: Mathematics and Economics. 78. pp.30-43.

Kim, W., Kim, Y. M., Kim, T.H. and Bang, S., 2018. Multi-dimensional portfolio risk and its diversification: A note. Global Finance Journal. 35. pp.147-156.

Hoepner, A. G., and et.al., 2018. ESG shareholder engagement and downside risk.

Bedi, R., 2018. Cowen and Zines's federal jurisdiction in Australia [Book Review]. Ethos: Official Publication of the Law Society of the Australian Capital Territory, (247), p.59.

Hugo, C., Isenring, E., Sinclair, D. and Agarwal, E., 2018. What does it cost to feed aged care residents in Australia?. Nutrition & Dietetics. 75(1). pp.6-10.

Wellmann, D. and Trück, S., 2018. Factors of the term structure of sovereign yield spreads. Journal of International Money and Finance. 81. pp.56-75.

Adorno, T. W., 2018. Kant's critique of pure reason. John Wiley & Sons.

Cooke, A., Freisthler, B. and Mulholland, E., 2018. Examination of Market Segmentation among Medical Marijuana Dispensaries. Substance use & misuse, pp.1-5.

Chen, Y., Zhang, H., Tam, K.L. and Wu, M., 2018. The Making of Contemporary Australian Monetary Policy-Backward-or Forward-Looking?. International Journal of Economics and Finance. 10(6). p.127.

Queiroz, M., and et. al., 2018, January. The Complementarity of Corporate IT Alignment and Business Unit IT Alignment: An Analysis of Their Joint Effects on Business Unit Performance. In Proceedings of the 51st Hawaii International Conference on System Sciences.

Australian Federal government position, 2018.

Cash rates of Australia, 2018. Available

CBA, 2018.

Common wealth bank of Australia’s market risk, 2017.

Influence of cash rate on Australian dollar, 2017.

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