Assignment financial markets (APC 313) january 2015

Banking Academy, Vietnam
ASSIGNMENT COVER SHEET
UNIVERSITY OF SUNDERLAND
BA (HONS) BANKING AND FINANCE

Student ID: 149080615/1
Student Name: Tran Quyet Thang
Module Code: APC 313
Module Name / Title: Financial Markets
Centre / College: Banking Academy of Viet Nam
Due Date: 16 Jan 2015

Hand in Date: 16 Jan 2015

Assignment Title: Individual assignment

Students Signature: (you must sign this declaring that it is all your own work and all sources
of information have been referenced)

Finance Markets (APC 313) – January 2015


Banking Academy, Vietnam

Title page

Financial Markets
APC 313

Banking Academy, Vietnam
Submitted on January 16, 2015

Prepared by: Quyet Thang Tran
Student ID: 149080615/1

Finance Markets (APC 313) – January 2015


Banking Academy, Vietnam

Table of Contents
Question 1.a: Explain what you understand by each of the following terms .In each
case give an example relating to the financial markets to illustrate your answer. ......... 1
1.

Asymmetric information .................................................................................. 1

2.

Moral hazard ..................................................................................................... 2

3.

Quantitative easing ........................................................................................... 2

Question 1.b: With close reference to your answer in part (a) above, discuss why there
is a need to regulate financial markets. .......................................................................... 3
Question 2: Distinguish between the spot and the forward foreign exchange rates. How
these rates are related and determined in the foreign exchange markets? ..................... 4
Distinguish between spot rate and forward rate:........................................................ 4
There are several theories to determine the exchange rate: ....................................... 5
Interest rate parity (IRP): ................................................................................... 5

Law of one price: .................................................................................................. 6
Purchasing power parity (PPP): ......................................................................... 6
Question 3.a: Explain the operations and activities of the London Stock Exchange
(LSE) market. ................................................................................................................. 8
Question 3.b: With close reference to the relevant theoretical and the empirical
literature and your own financial data analysis critically assess the efficiency of this
stock exchange market. .................................................................................................. 9
There are some empirical literatures of EMH research in London Stock Exchange
(LSE) as follows: ....................................................................................................... 9
1.

Access Intelligence plc .................................................................................... 10

2.

4imprint Group plc ......................................................................................... 11

3.

Al Noor Hospitals Group PLC ...................................................................... 13

4.

Best of the Best plc .......................................................................................... 14

Question 3c: How might recent upward surges in the FTSE 100 share price index be
explained? .................................................................................................................... 16

Finance Markets (APC 313) – January 2015

Banking Academy, Vietnam
Question 4a: Explain the operation and activities of the Money Market. .................. 17
Question 4.b: Explain how a central bank might use the Money Market to conduct
monetary policy in order to target the rate of inflation. ............................................... 18
1.

Reserve Requirement...................................................................................... 19

2.

Re-discount rate .............................................................................................. 19

3.

Open market operation (OMO) ..................................................................... 19

References ................................................................................................................... 21
Appendix 1 – Close price of Access Intelligence plc’s share from 24/09/14 to
22/12/2014. .................................................................................................................. 26
Appendix 2 - Close price of 4imprint Group plc’s share from 24/09/14 to
22/12/2014. .................................................................................................................. 27
Appendix 3 - Close price of Al Noor Hospital Group plc’s share from 24/09/14 to
22/12/2014. .................................................................................................................. 28
Appendix 4 - Close price of Best of the Best plc’s share from 24/09/14 to
22/12/2014. .................................................................................................................. 29

Tables
Table 1: Sport rate among VND and some foreign currency on 18/11/2014 ................ 4
Table 2: Spot rate and Forward rate ............................................................................... 4

Table 3: The formula in the interest rate parity ............................................................. 5
Table 4: Example of Law of one price........................................................................... 6
Table 5: The formula of relative PPP ............................................................................ 7
Table 6: The formula of International Fisher effect ....................................................... 7

Figures
Figure 1: Access Intelligence plc share price change (%) 24/09/14 to 22/12/2014..... 10
Figure 2: Access Intelligence plc share price from 24/09/14 to 22/12/2014 as an
absolute amount ........................................................................................................... 11
Figure 3: 4imprint Group plc share price change (%) from 24/09/14 to 22/12/2014 .. 12
Figure 4: 4imprint Group plc share price from 24/09/14 to 22/12/2014 as an absolute
amount.......................................................................................................................... 12
Finance Markets (APC 313) – January 2015


Banking Academy, Vietnam
Figure 5: Al Noor Hospitals Group PLC share price change (%) from 24/09/14 to
22/12/2014 ................................................................................................................... 13
Figure 6: Al Noor Hospitals Group PLC share price from 24/09/14 to 22/12/2014 as an
absolute amount. .......................................................................................................... 14
Figure 7: Best of the Best plc share price change (%) from 24/09/14 to 22/12/2014.. 14
Figure 8: Best of the Best plc share price from 24/09/14 to 22/12/2014 as an absolute
amount.......................................................................................................................... 15
Figure 9: FTSE 100 index from 03/01/1984 to 08/01/2015 ........................................ 16

Finance Markets (APC 313) – January 2015


Banking Academy, Vietnam
Question 1.a: Explain what you understand by each of the following terms .In each

case give an example relating to the financial markets to illustrate your answer.


Asymmetric information



Moral hazard



Quantitative easing (QE)

Answer:
1. Asymmetric information
Asymmetric information – a situation that arises when one party’s insufficient
knowledge about the other party involved in a transaction makes it impossible to make
accurate decisions when conducting the transaction (Mishkin & Eakins, 2012). For
example, in stock market, managers of a corporation have more information about
business activities and results which impact share price than investors.
Risk is the connection between asymmetric information and market failure (Howells,
2010). When asymmetric information happen, lenders lack information about what
actually borrowers will do with their money. Therefore, lenders will charge high
interest for loans for all borrowers to cover credit risk. However, borrowers are not the
same, some are very risky and some are not. It means that for risky borrowers, this
interest is still low while borrowers taking loans for legitimate purposes are charging
highly. This seems to be unfair. The asymmetric information causes moral hazard and
adverse selection.
There are many cases about asymmetric information in stock markets. For example, the
case of Bach Tuyet Cotton Corporation (BBT) in Vietnam stock exchange, its financial

reports showed that the company was profitable, netting VND2.25 billion ($136,360)
in 2006 and VND3 billion ($181,820) in 2007 while in actuality, combined losses
exceeded VND17 billion ($1 million) (Nguyen, 2008). This company only announced
good reports so investors lost their money. Investors did not have right information
about performance of BBT, they had to pay high price for low value shares. This
problem leads investors to lose the truth in investing.

Finance Markets (APC 313) – January 2015

1


Banking Academy, Vietnam
2. Moral hazard
Moral hazard arises after the transaction occurs: The lender runs the risk that the
borrower will engage in activities that are undesirable from the lender’s point of view
because they make it less likely that the loan will be paid back (Mishkin & Eakins,
2012). In addition, the regulation itself may promote moral hazard (Howells, 2010). For
example, central banks play an important role as lender of last resort. It means that
banks would be provided reserves to prevent bank failures from spinning out of control
(Mishkin & Eakins, 2012). Therefore, commercial banks could take risky activities
without fear of running out of money. During the 2008 financial crisis, Fed Chairman
Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into
depression included lending banks and other companies as much as $1.2 trillion of
public money confidentially (Keoun & Kuntz, 2011). Some analysts said that banks
received emergency cash infusions during the crisis may now believe the Fed will
always be there to bail them out of trouble, the thinking goes (Eichler, 2011). Herring,
the University of Pennsylvania professor, added some banks may have used the
program to maximize profits by borrowing from the cheapest source, because this was
supposed to be secret and never revealed’ (Keoun & Kuntz, 2011).

3. Quantitative easing
Quantitative easing (QE) is an unconventional form of monetary policy where a Central
Bank creates new money electronically to buy financial assets, like government bonds
- this process aims to directly increase private sector spending in the economy and
return inflation to target (Bank of England, 2014). During financial crisis, central banks
want to reduce interest rate to stimulate businesses to make loans and consumers
spending more instead of saving. However, interest rate cannot be cut below zero
because banks still need to make a profit and lenders want a greater return for the
additional risk of granting a loan when times are tough (Financial Times , n.d.). In the
case of Bank of England, inflation target is set about 2% to encourage business and
consumer confidence. About £325 billion of assets like government bonds of insurance
companies, banks…were purchased after 3 rounds of QE (RT, 2012). By doing this,
the price of assets increase and the yield fall so the cost of borrowing goes down while
spending and investment rises. It means that businesses have money for operating and
GDP and employment can raise. However, there are some negative impacts on

Finance Markets (APC 313) – January 2015

2


Banking Academy, Vietnam
annuities, pensions and inflation. For example, annuity rates have fallen from 7.855%
for a level income for a 65-year-old man in 2008 to 5.743% in 2012 (Insley, 2012).
Question 1.b: With close reference to your answer in part (a) above, discuss why there
is a need to regulate financial markets.
Because of asymmetric information in financial markets, depositors or investors will
know less information compare to the one who use funds. Therefore, some regulations
are carried out to reduce the problems of asymmetric information. One issue is the
unclear information in financial reports. In Vietnam financial markets, investors say

that financial reports are not clear enough, especially the reports of state-owned
enterprises, while the quality of the information provided by financial institutions is
low (VietNamNet Bridge, 2014). Due to lack of information transparency, investors
cannot carry out the right management strategy. Therefore, they lost the confidence in
financial markets. These problems happen in many financial markets not only in
Vietnam. To protect investors, regulators need to design the legislations for listed
companies to transparent information. For example, EU Transparency Directive
(2004/109/EC) requires a regular flow of information issuers of securities traded on
regulated markets such as yearly, half-yearly and quarterly financial information, inside
information has to be made public as soon as possible to the market, etc. (European
Commission , 2011). These regulations will help investors have better information for
decision making about trading activities.
Furthermore, one of the main reasons for regulating financial markets is to stabilize
financial market or reduce systemic risk. Systemic risk is risk to the entire financial
system rather than to individual firms or investors (Hubbard & O’Brien, 2012). For
example, in banking systems, depositors have the right to withdraw their money in the
banks whenever they want. If there is any problems for banks, this will make depositors
worry about their savings. Therefore, they will withdraw all money in banks at the same
time and it leads banks to become insolvent. About £2bn has been withdrawn for a short
time, when Northern Rock applied to the Bank of England for emergency funds because
savers fear for their deposits (Eaglesham, et al., 2007). In addition, banks take deposits
and lend not only firms, individuals but also other banks. This means that the collapse
of one bank could cause the failure of whole banking system and bring a lot of negative
impacts to the whole economy.

Finance Markets (APC 313) – January 2015

3

Banking Academy, Vietnam
Question 2: Distinguish between the spot and the forward foreign exchange rates. How
these rates are related and determined in the foreign exchange markets?
Answer:
Spot rate: the immediate (two-day) exchange of bank deposits (Mishkin, 2013)
Currency code Currency name

VND

AUD

AUST.DOLLAR

18,562.56

EUR

EURO

26,573.03

GBP

BRITISH POUND 33,352.10

JPY

JAPANESE YEN

182.54

USD

US DOLLAR

21,360.00

Table 1: Sport rate among VND and some foreign currency on 18/11/2014

Source: Vietcombank, 2014
Based on this table, 1 USD can be exchanged to 21,360VND on spot day 18/11/2014
or within 2 two days as from 18/11/2014.
Forward rate: the exchange rate of bank deposits at some specified future date (Mishkin,
2013).
Distinguish between spot rate and forward rate:
Spot rate
Maturity

Forward rate

Make payments during 2 days Make payments in 1 month, 3 months
after the rate is quoted today

or 6 months after rate is quoted today

Make payments for import or Demand for payments, transfer money
export activities, services…

or invest

Purposes
Demand foreign currencies for Hedging exchange rate fluctuations
studying, working or holiday
Table 2: Spot rate and Forward rate

All the transactions in the spot date or 2 days later could follow the spot foreign
exchange rate. It means that if your transaction happens today, you can use the spot rate
to make payments today or tomorrow or 2 days later. While the forward rate could be

Finance Markets (APC 313) – January 2015

4


Banking Academy, Vietnam
used for future payments or hedge funds to avoid fluctuation of exchange rate. For
example, you export a machine that cost $1,000 to US on 18/11/2014 and your customer
will pay back a month later on 18/12/2014, so you can make a forward contract with a
commercial bank to ensure that you can change $1,000 which you receive to VND by
the exchange rate quoted on 18/11/2014. This action will help to prevent the exchange
risk.
There are several theories to determine the exchange rate:
Interest rate parity (IRP): The currency of the country in which interest rates are
higher will be trading at a forward discount; the currency of the country with the lower
interest rates will be at a forward premium (Howells & Bain, 2007).
To prevent riskless arbitrage of investors, one currency will be regulated by increasing
or decreasing the forward rate which depends on spot rate today.
The formula in the interest rate parity:
Forward rate =

1+𝑖𝑠
1+𝑖𝑝

× spot rate

is is the interest rate on secondary
Where:

currency
ip is the interest rate on primary currency

Table 3: The formula in the interest rate parity

(Howells, 2010)
For example: An investor has $10,000 and the interest rate in US and VN is respectively
3% and 14% per year. Suppose that spot rate is USD/VND = 20.000. If this investor
deposits $10,000 for a month, on due date he will receive $25 (equal to 500.000VND).
In other case, the investor exchanges this money to 200 million VND and deposits it
into a Vietnam commercial bank for a month like in US; on due date, the investor can
get about 2.33 million VND. If the exchange rate after a month does not change, the
investor can have profit (more than 1.5 million VND) by depositing in VND. In order
to reduce the exchange risk, the investor could take a contract with a bank with a
forward rate after 1 month. However, this riskless arbitrage will be prevented by
adjusting the forward rate after a month following the formula above.

Finance Markets (APC 313) – January 2015

5

Banking Academy, Vietnam

Forward rate = Forward rate =

1+3%
1+14%

× 20.000 = 19.789

Law of one price: If two countries produce an identical good, and transportation costs
and trade barrier are very low, the price of the good should be the same throughout the
world no matter which countries produces it (Mishkin & Eakins, 2012). This theory
means that if there is the same goods in the different countries, its price will be the
same.
For example:
Products

Costs

A shirt in Vietnam 400.000 VND
A shirt in US

$20

Table 4: Example of Law of one price

Based on this theory, 400.000VND should equal to $20. It means that the exchange rate
USD/VND = 20.000.
Purchasing power parity (PPP): The exchange rate between two currencies depends
on the purchasing power of each currency in its home country and the exchange rate

changes to keep the home purchasing power of the two currencies equal. (Howells &
Bain, 2007)
For example: the spot rate is USD/VND = 20.000. The price of a shirt in Vietnam is
400.000 VND but in US it costs $30 (equal to 600.000 VND). It can lead US citizens
go to Vietnam to purchase shirts so the demand for shirts in Vietnam will increase and
the price also increases while in US, it is opposite. These things will cause USD/VND
to decrease. This is called absolute form of PPP.
However, the basket of goods and their quality in each country is different so the
absolute PPP cannot illustrate the accurate spot rate. Therefore, the changes in exchange
rate between two countries are depended on the inflation rate - this is the idea of relative
PPP (RPPP) (Howells, 2010).

Finance Markets (APC 313) – January 2015

6


Banking Academy, Vietnam
The formula is as follows:
𝑒
𝜋𝐷𝑒 − 𝜋𝐹𝑒
𝐸𝑡+1
− 𝐸𝑠
=
𝑒
1 + 𝜋𝐹
𝐸𝑠

Where: 𝜋 is the rate of inflation
D and F indicate domestic and foreign

e indicates an expected value
𝐸𝑠 is the spot exchange rate expressed in direct quotation
Table 5: The formula of relative PPP

(Howells, 2010)
For example: Spot rate: VND/USD = 20.000
Expected inflation in Vietnam for next year: 8%
Expected inflation in US for next year

: 3%

According to RPPP formula, the forward rate for the next year can be calculated as
follows:
𝑒
𝐸𝑡+1
= [

𝑒
𝑒
𝜋𝐷
− 𝜋𝐹
𝑒
1+ 𝜋𝐹

] × 𝐸𝑠 + 𝐸𝑠 = [

0.08−0.03
1+0.03

] × 20.000 + 20.000

= 0.049 × 20.000 + 20.000 = 20.980
 Forward rate for next year: VND/USD = 20.890
The exchange rate also determined based on the interest rate. International Fisher
effect (IFE): Nominal interest consist of two elements: the real rate of interest, and the
expected rate of inflation. It follows that differences in expected inflation rate provide
one cause of differences in international interest rates (Howells & Bain, 2007).
The formula based on this theory: Where:
𝑒
𝑖𝐷 − 𝑖𝐹
𝐸𝑡+1
− 𝐸𝑠
=
1 + 𝑖𝐹
𝐸𝑠

i is the nominal rate of interest

Table 6: The formula of International Fisher effect

(Howells, 2010)
It means that the countries which have high nominal interest rate, the value of these
currency might reduce in the future.
Finance Markets (APC 313) – January 2015

7


Banking Academy, Vietnam
In conclusion, all three including IRP, PPP and IEF assume that the market is perfect,

no transaction costs, no government intervention…However, IRP shows the relation
between spot rate and forward through interest rate while RPPP and IEP illustrate
determination of spot rate through inflation and nominal interest rate.
Question 3.a: Explain the operations and activities of the London Stock Exchange
(LSE) market.
London Stock Exchange is one of the world’s oldest stock exchanges and can trace its
history back more than 300 years. Starting life in the coffee houses of 17th century
London, London Stock Exchange quickly grew to become the City’s most important
financial institution. Over the centuries following, London Stock Exchange has
consistently led the way in developing a strong, well-regulated stock market and today
lies at the heart of the global financial community. (LSE, 2015)
The London Stock Exchange has four core business areas:


Equity markets – the main market for listed companies and the Alternative
Investment Market (AIM) for unlisted securities



Trading services – trading platforms that are used by broking firms around the
world to buy and sell securities



Market information – the provision of prices and news



Derivatives - a recent diversification beyond the core equity markets. In
collaboration with the Nordic exchange group OMX, the London Stock

Exchange created EDX London in 2003
(Oxford, 2008)

To join Main Market, the company will need the approval of prospectuses and
admission of companies to the Official List from the UK Listing Authority (UKLA)
and the admission to trading from the Exchange. Moreover, to achieve a successful
listing and admission to trading, companies must deliberate over many considerations
so they need to have different types of adviser including sponsor, bookrunner, lawyers,
reporting accountant, financial PR, other advisers like registrars, financial printers and
remuneration consultants. (LSE, 2015)
SETS is the London Stock Exchange’s flagship electronic order book, trading
FTSE100, FTSE250, FTSE Small Cap Index constituents, Exchange Traded Funds,

Finance Markets (APC 313) – January 2015

8


Banking Academy, Vietnam
Exchange Trading Products as well as other liquid AIM, Irish and London Standard
listed securities. For SETS order book, auction starts the day at 8:00; continuous trading
/ order entered 8:00 to 16:00; auction closes the day at 16:30. SETS developments also
support a wide array of order types such as passive only, stop orders, stop limit orders,
hidden limit orders… (LSEG, 2015)
Question 3.b: With close reference to the relevant theoretical and the empirical
literature and your own financial data analysis critically assess the efficiency of this
stock exchange market.
The efficiency market hypothesis (EMH) state that financial markets make a best use
of all available information in determining a share’s price (Howells & Bain, 2007). To
become an efficient market, there are many participants who have full information and

work independently in analyzing and price the securities so that they can adjust the
share’s price quickly based on the information.
According to (Fama, 1970), EMH is divided into three levels:


Weak form: the information set is just historical prices



Semi-strong form: the concern is whether prices efficiently adjust to other
information that is obviously publicly available (e.g., announcement of annual
earnings)



Strong form:

the concern is whether given investors or groups have

monopolistic access to any information relevant for price formation.
There are some empirical literatures of EMH research in London Stock Exchange
(LSE) as follows:
According to findings of (HUDSON, et al., 1996) by testing the daily returns from
FTSE 30 of LSE for a long time, they shown that the technical trading rules have
predictive ability if sufficiently long series of the stock indices are considered. The
results of their studies are seen as supporting the weak form efficiency of financial
markets.
In the works of (AL-LOUGHANI & CHAPPELL, 1997), they shown that the weak
form of the efficient markets hypothesis is certainly not valid for the FTSE 30 share
index; the series does not follow a random walk.

Finance Markets (APC 313) – January 2015

9


Banking Academy, Vietnam
However, the studies of (MILIONIS & MOSCHOS, 2000) evaluated the weak form of
the efficient markets hypothesis and a random walk based on the works of (ALLOUGHANI & CHAPPELL, 1997). And then, they carried out a contrast conclusion
that the hypothesis of weak form market efficiency of LSE cannot be rejected.
The data about daily share price from some quoted companies on LSE will be collected
to access the EMH of this stock exchange market.
1. Access Intelligence plc
Access Intelligence plc is a United Kingdom-based company which provides software
and computer services to critical compliance and legislative driven businesses in both
the public and private sectors (FT, 2015).
Figure 1: Access Intelligence plc share price change (%) 24/09/14 to 22/12/2014
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
24-Sep-14

10-Oct-14

26-Oct-14

11-Nov-14

27-Nov-14

13-Dec-14

Source: Modified from Yahoo Finance, 2014
Based on data about daily share price in 90 days, the correlation between change in
share price and time is calculated as r = -0.086 – very low value nearly to 0. This means
that the movement of share price and time are independent. Furthermore, it can be seen
clearly that the levels of share price change fluctuates randomly and do not follow any
rules. For example, at the highest point, share price increases by 29.87% on 02/12/14
and at the lowest point, it goes down by 12.08% on 19/11/14 the future share price
cannot be indicated by past share price. This means that LSE have weak form EMH.

Finance Markets (APC 313) – January 2015

10


Banking Academy, Vietnam
Figure 2: Access Intelligence plc share price from 24/09/14 to 22/12/2014 as an
absolute amount
Pence Sterling (GBX)
3.6
3.4

3.2
3
2.8
2.6
2.4
2.2
24-Sep-14

10-Oct-14

26-Oct-14

11-Nov-14

27-Nov-14

13-Dec-14

Source: Yahoo Finance, 2014
On 08/12/14, Access Intelligence plc announce about issuing new Convertible Loan
Notes to increase the working capital of company. Furthermore, the trading update
shows that sales and profit will be at similar levels to those achieved in the
corresponding period last year and the year-end cash position in line with market
expectations and will be significantly enhanced by the completion of the issue of the
new CLNs. Additionally, research analysts at Sanlam Securities suggest a potential
upside of 180.00% from the company’s current price (Bidgoli, 2014). These
information show the good future of share price of ACC. In fact, share price increases
from 2.75 on 05/12/14 to 2.88 on 08/12/2014 and peak at 3.42 on 09/12/14. As above,
change in share price of Access Intelligence plc already show the weak form EMH.
Furthermore, the share price moves based on the current information. This illustrates

the semi-strong EMH of LSE.
2. 4imprint Group plc
4imprint Group is a UK listed leading international direct marketer of promotional
products supplying promotional products under the brand name 4imprint. The Group's
strategy is to deliver profitable organic growth, gaining market share in the large and
highly fragmented markets in which it operates. (4imprint Group, 2015)

Finance Markets (APC 313) – January 2015

11


Banking Academy, Vietnam
Figure 3: 4imprint Group plc share price change (%) from 24/09/14 to 22/12/2014
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
24-Sep-14

10-Oct-14

26-Oct-14

11-Nov-14

27-Nov-14

13-Dec-14

Source: Modified from Yahoo Finance, 2014
The correlation (r) between change in 4imprint Group plc share price and time equal to
0.014 – no correlation between two items. This means that change in share price does
not depend on time. The figure also shows that the increase and decrease of share price
are not the same in the different time. It means that there is no trading rule for investors
to make more profits. It means that MHE of LSE is weak form.
Figure 4: 4imprint Group plc share price from 24/09/14 to 22/12/2014 as an absolute
amount
Pence Sterling (GBX)
900

850

800

750

700

650
24-Sep-14

10-Oct-14

26-Oct-14

11-Nov-14

27-Nov-14

13-Dec-14

Source: Yahoo Finance, 2014

Finance Markets (APC 313) – January 2015

12


Banking Academy, Vietnam
On 24/10/2014, 4imprint Group plc announce an interim management statement about
the financial performance for the third quarter (29/07/2014 – 27/09/2014). This report
shows the strong growth of revenue by 16% compare to the last year. Furthermore, the
outlook of revenue is also considerable raise. This information makes investors become
more confident with 4imprint’s shares. Therefore, the share price also increase
significantly from 688 on 23//10/2014 to 785 on 24/10/2014. Furthermore, on
18/12/2014 share price falls down from 824 to 800 because of the change in board of
directors. It makes investors become reserved in trading.
3. Al Noor Hospitals Group PLC
Al Noor Hospitals Group PLC is an integrated private healthcare service provider in
the Emirate of Abu Dhabi. The Company also provides core medical, surgical and
emergency services (FT, 2015).

Figure 5: Al Noor Hospitals Group PLC share price change (%) from 24/09/14 to
22/12/2014
5.00%
3.00%
1.00%
-1.00%
-3.00%
-5.00%
-7.00%
24-Sep-14

10-Oct-14

26-Oct-14

11-Nov-14

27-Nov-14

13-Dec-14

Source: Modified from Yahoo Finance, 2014
The relation between change in share price and time is shown through correlation index
r = -0.116. This is low value so change in price and time do not correlate with each
other. Additionally, this figure illustrates that the share price moves freely and does not
provide any rule for indicating future price change. This shows the weak form EMH.

Finance Markets (APC 313) – January 2015

13

Banking Academy, Vietnam
Figure 6: Al Noor Hospitals Group PLC share price from 24/09/14 to 22/12/2014 as an
absolute amount.
Pence Sterling (GBX)
1,100
1,080
1,060
1,040
1,020
1,000
980
960
940
920
24-Sep-14

10-Oct-14

26-Oct-14

11-Nov-14

27-Nov-14

13-Dec-14

Source: Yahoo Finance, 2014
On 30/10/2014, Al Noor Hospitals Group Plc release interim management statement to

show a summary of key financial for three months to September 2014. This report
shows that the revenue of this company increases by 20.5% from Q3 2013 to Q3 2014.
It leads investors to have more confidence about development of the corporation in the
future. Therefore, share price goes up from 993 on 29/10/2014 to 1,022 on 30/10/2014.
It means that LSE is semi-strong EMH.
4. Best of the Best plc
Best of the Best Plc displays luxury cars as competition prizes in rented retail space
within airport terminals, at shopping centers, and online in the United Kingdom. It
primarily conducts supercar, watch, PC, holiday, handbag, camera, TV, free, instant
win, and casino competitions. (Businessweek, 2015).
Figure 7: Best of the Best plc share price change (%) from 24/09/14 to 22/12/2014
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
24-Sep-14

10-Oct-14

26-Oct-14

11-Nov-14

27-Nov-14

13-Dec-14

Source: Modified from Yahoo Finance, 2014

Finance Markets (APC 313) – January 2015

14


Banking Academy, Vietnam
There is no correlation between the change of share price with time due to correlation
index r = 0.128 (a small value nearly to 0). Moreover, through this figure, it can be seen
that share price of this company move unpredictably and do not follow any rules. It
means that LSE is weak form EMH.
Figure 8: Best of the Best plc share price from 24/09/14 to 22/12/2014 as an absolute
amount.
Pence Sterling (GBX)
90
85
80
75
70
65
60
24-Sep-14

10-Oct-14

26-Oct-14

11-Nov-14

27-Nov-14

13-Dec-14

Source: Modified from Yahoo Finance, 2014
According to LSE, on 13/11/2014, after announcing the result of general meeting – the
resolution put to shareholders duly passed without amendment, share price increases by
3.98%. It means that share price reflects the current information. Another example is
when the company releases Special Dividend & Capital Reduction, Best Of The Best
shares were up 2.2% to 87.93 pence per share on Wednesday afternoon – 10/12/2014
(Warner, 2014).
In conclusion, based on the results of analyzing the daily share price of five listed
companies on LSE, it can be seen clearly that the share price change is reflected by
price in the past and do not follow any rules or frequencies. It means that LSE is weakform EMH. Furthermore, the current share price also shows the current information
such as announcements, annual reports…Therefore, LSE also represents semi-strong
form EMH.

Finance Markets (APC 313) – January 2015

15


Banking Academy, Vietnam
Question 3c: How might recent upward surges in the FTSE 100 share price index be
explained?
The Financial Times Stock Exchange (FTSE) 100 share index; an average of share
prices in the 100 largest, most actively traded companies on the London Stock
Exchange (FT, 2015).
Furthermore, FTSE 100 index, representing approximately 80% of London’s stock
market capitalization, has taken over from the older FT Ordinary share index which
was also based on just 30 shares (Galitz, 2013). By comparing the shares in portfolio
and FTSE 100 index, investors can evaluate how well the performance of share that

they hold is.
Figure 9: FTSE 100 index from 03/01/1984 to 08/01/2015
6900
5900
4900
3900
2900
1900
900
03-Jan-84

03-Jan-89

03-Jan-94

03-Jan-99

03-Jan-04

03-Jan-09

03-Jan-14

Source: Yahoo Finance, 2015
It can been seen clearly that the current upward surges in the FTSE 100 share price
index is period from 2010 to now. This is also the time that Bank of England use
quantitative easing (QE) to repurchase gilts in order to stimulate whole economy.
Beside the primary purposes such as growing economy, increasing employment;
quantitative easing also makes the share prices increase and causes stock market to
boom. According to Mr Ralfe, by the end of the first round of QE1 in January 2010,

FTSE had risen a massive 42% to 5,188 and when QE2 began and in the interim period,
the FTSE had crawled up by 7% to 5,544 (Cohen, 2012). There are several reasons to
explain why QE can help stock market go up.

Finance Markets (APC 313) – January 2015

16


Banking Academy, Vietnam


Firstly, QE provides money for the businesses with low interest rate so that their
works and operations can be rehabilitated. This leads the securities more
attractive for investors especially stocks of big companies in FTSE 100.



Secondly, QE brings a lot of positive impacts for economy so investors become
more confident in stock market and take more trading activities. This action
leads stock price to increase.



Third, banks also are supplied more money through QE operations so beside
lend to the businesses, banks can invest in strong securities in FTSE 100.

In conclusion, with the support of QE operations, the stock market is helped and
recovered. By using extra money from QE investing in good performance of securities
especially in 100 largest companies, FTSE 100 index is leaded to go up.

Question 4a: Explain the operation and activities of the Money Market.
Why is there a need for such a market?
Answer:
Financial markets are divided into two different types of market by considering the
maturity of financial assets which are traded in these markets. The money market is a
market place for instruments which have a very short maturity when initially issued,
generally less than three months (Howells & Bain, 2005). On the other side, there is
capital market for medium and long term instruments to meet the capital demands for
long-term investments of corporations.
In money markets, funds can move from lenders to borrowers by a second route, called
indirect finance because it involves a financial intermediary that stands between the
lender-saver and the borrower-spenders and helps transfer funds from on to the other
(Mishkin, 2013). The financial intermediaries include commercial banks, investment
banks, credit unions, insurance company, etc. Through money markets, surplus funds
will be invested for a short time and borrowers can raise temporary funds with low cost
but high liquidity and low default risk. However, the value of securities on money
market are usually numerous. In the United States, for example, commercial paper is
issued in maturities of 1 to 270 days, and in denominations that are deemed too large
for retail investors (typically $1 million, but sometimes as small as $10,000) (Dodd,
2012).

Finance Markets (APC 313) – January 2015

17


Banking Academy, Vietnam
Because of high value transactions and high reputable quality of financial instruments,
there are only few key participants such as governments, large corporations,
commercial banks…in money markets. For example, commercial banks can sell T-bills

to raise funds for a temporary lack of cash. Furthermore, banks can hold money market
instruments like an investment without fear of running out of cash for both expected
and unexpected demands. Governments sell T-bills in order to raise funds for national
debts. For instance, recently Vietnam sold $1 billion of 10-year securities abroad for
the first time in almost five years to refinance the existing debt (Karunungan & D’silva,
2014).
In addition, the money market have to fulfil two functions: firstly, achieving a primary
function of obsorving new issued securities, which enable borrowers to raise new funds;
secondly, carrying out a secondary function of allowing holders of existing securities
to sell them to those who wish to buy (Howells & Bain, 2007). For example, T-bills
will be issued in the primary market by treasury. While in secondary market, some
trading activities can happen such as investing, arbitrating, and speculating.
One of the importance of money market is a distinct cost advantage over banking
industry because banks have to obtain server requirement. This means that banks cannot
lend out all of money that they collect from depositors. It leads expense of banks to
increase so to cover this extra expense, banks have to set the lending rate higher for
ensuring profitability. While in money market, borrowers are not charged this type of
expense, therefore they can take cost advantage over banks.
In addition, money market also play an important role as a framework for central banks
conduct monetary policy. Monetary policy involves the management of interest rates
and the quantity of money, also referred to as the money supply (defined as anything
that is generally accepted in payment for goods and services or in the repayment of
debt) (Mishkin & Eakins, 2012).
Question 4.b: Explain how a central bank might use the Money Market to conduct
monetary policy in order to target the rate of inflation.
Answer:
To implement the monetary policy, State Bank could use some money market
instruments to influence the rate of interest. These instruments include: reserve
requirement, re-discount rate and open market operation (OMO).
Finance Markets (APC 313) – January 2015

18


Banking Academy, Vietnam

1. Reserve Requirement
All banks have to hold some of the funds they acquire as deposits in an account in
Central Banks (Mishkin, 2013). It means that the banks cannot lend out all the money
that they collect from savers. Changes in reserve requirements affect money supply by
causing the money supply multiplier to change (Mishkin, 2013). Its impacts can be seen
as follows:


Firstly, a raise in reserve requirements, the banks need to put more money in the
account in Central bank so the ability to make loans will be reduced and lead
money supply in the economy decrease.



Secondly, reserve requirements act as a tax on bank intermediation because
central banks do not pay interest for this deposits and it causes cost increase
(Howells & Bain, 2007). Therefore, the banks have to raise the interest rate.

However, changes in reserve requirements have such large effects on money supply
and interest rates (Mishkin, 2013) so this is less flexible instrument.

2. Re-discount rate
This is also called the discount window – the situation where central banks lend directly
to banks (Howells & Bain, 2007). To use this instrument, central banks have to consider

carefully about the rate and the conditions. However, if there is no shortage of reserve,
banks will not need to borrow from the discount window and loan rate will not rise
(Howells & Bain, 2007). The changes in the discount rate can impact to demand for
reserve of banks. If for commercial banks the rate is ‘low’ relative to what they can
charge for loans, they are likely to borrow a great deal of reserves and expand their
lending rapidly (Howells & Bain, 2007). Furthermore, with “low” discount rate, cost
for funds of banks will decrease, so they could reduce lending rate and it leads to the
increase in demand of credit. In addition, central banks have to post or announce the
rate for discount window borrowing (Howells & Bain, 2007), so the future monetary
policy – expansion or contraction - can be foreseen.

3. Open market operation (OMO)
“Open market operations are the most important conventional monetary policy tool,
because they are the primary determinants of changes in interest rates and the monetary
base, the main source of fluctuations in the money supply” (Mishkin & Eakins, 2012).

Finance Markets (APC 313) – January 2015

19


Banking Academy, Vietnam
If central banks want to increase the money supply, they will inject money to the
markets by purchasing bills. This will make serves of banks increase, so they will be
able to make more loans with low-interest rate. In opposite, selling activities will cause
the interest rate raise. The instruments can be used in OMO market could be
government bonds, T-bills, repurchase agreements…This is a flexible tool for central
banks to conduct monetary policy.
In conclusion, by applying these financial instruments, central banks can directly
impact the interest rate and the money supply in the economy so that the macro targets

such as stabling inflation, increasing employment and growing economy can be
achieved.

Finance Markets (APC 313) – January 2015

20