Final exam paper
BUS329, S1/TJD 2020
 

• (a) How would you evaluate the informational role of financial market during the recent COVID-19 pandemic around the globe? (6 Marks)

 
 
 
 
 
Because of COVID-19
Circuit breaker
Cities Shutting down
 
 
The informational role: stock prices reflect the collective assessment of investors regarding firms’ current performance and future prospects. If the investors believe that a firm is performing better than other firms and the expected return on firm’s stock is higher, they will purchase the stocks of that firm. Demand for that firm’s stock will rise. The firm can raise more capital at this higher price and make more feasible investments. In this way capital flows to the productive firms. In other words, financial markets channel funds to the most efficient use.
 

• Economy downturn
• Stock Price = Firms current performance/valuation
• Investors will look at the best prospect and invest in a company
• Negative of pandemic
• Companies affected by the pandemic will

• (b) Can you transfer/defer your today’s consumption into the future? Explain the mechanism of how this can be done (4 marks)

YES
 
Consumption timing: Financial markets help consumers to defer their consumption. If the consumers decide to consume more at future, they will save more now and invest in financial assets, which they can liquidate in future and consume. Thus consumers can shift their consumption over the course of their lifetime. That is, they can plan their consumption so as to give the highest level of satisfaction.
 
Use securities to store wealth and transfer consumption to the future
 

• (a) Stock market around the world is affected by COVID-19 pandemic. As an experienced investor you decide to take the advantage of it. Currently the stock of ABC Ltd. is selling for $40 per share, which was trading at $45 one week earlier and you are certain that the price will fall further. To take the advantage of this downward price momentum you sell short 1000 share of ABC Ltd at the current market price. You want to make $5000 profit from this short selling. You place an order with your broker to purchase the shares at a certain price to cover the position. What type of order did you place with your broker and at what price? Explain why. (5 marks)

• Find the 4 types of options order
• Price will be (Formula) to find what price the share need to drop to achieve 5k profit
• Definition of the order you used and mechanism of the order