BAFI 3271 Money and Debt Markets Semester 1, 2023
BAFI 3271 Money and Debt Markets Semester 1, 2023
Assessment Task 2 Guidance: Individual Research Report
Weighting: 40%
Due date: Friday 05 May, 2023
Format:
This is a case study style of report where the students are given a particular topic or issue and they are respond in the style set out in Assessment details on Canvas.
The following structure is required for each case study for your report:
Statement of problem or issue
Interpretation and critical analysis
Results of the research/recommendations
Reference list
The rubric and the weighting for each Case Study are available on Canvas and follow the structure outlined above. The questions are prompts to guide them to the type of issues/analysis we want them to address.
Case Study 1: Monetary policy
What are the objectives of monetary policy in Australia?
How does the Reserve Bank of Australia deliver changes in monetary policy?
What indicators does the Reserve bank use to make policy decisions about the setting of monetary policy?
Recommendation: What is the future direction for monetary policy?
Statement of problem or issue
The RBA charter is central to providing the context of this case study.
Interpretation and critical analysis
The critical issue is how does the RBA make these decisions.
The role of Open Market Operations in achieving the targeted cash rate.
Discussion of the mechanisms of monetary policy channels and the reasons for the movements in interest rates.
Income (wages) and wealth (change in asset prices) effects.
Consumer and business sentiment which affects spending and investment patterns.
Results of the research/recommendations
Students should provide a clear view about the direction and magnitude of cash rate movements in the future by the RBA to meet their objectives.
Discussion should include a discussion of current and future changes in key indicators that will influence the RBAs decision about the future cash rate. This discussion can , include, but is not limited to, discussion of:
The current and prospective level of inflation look for discussion of the recent changes of the inflation rate after Covid, supply chain constraints, the impact of the Russia/Ukraine conflict and economic sanctions.
The current state of the labour market in Australia, the level of unemployment, employment growth and the participation rate.
Conditions in the domestic housing market.
Conditions in the financial markets including the equity, currency and bonds.
Importance of the role of trade-offs
Reference list:
Reserve Bank of Australia 2021, 'RBA Statement of Monetary Policy February 2021
Text book references: Viney et. al. and/or Kidwell
Video Role of the Cash Rate by RBA Governor
Any other relevant source from academic, RBA or non-RBA articles.
Case Study 2: Credit Ratings Agencies (CRA)
What issues emerged for the CRAs during the Global Financial Crisis?
What are conflicts of interest, when might these conflicts of interest arise for CRAs and how might they mitigate these risks? Discuss the effectiveness of the mitigants.
Recommendation: What role will regulators play in the future with surveillance of conflicts of interest?
Statement of problem or issue
Students should provide a brief overview of the circumstances of the Global Financial crisis, including, but not limited to.
The asset bubble in the US and UK housing markets
Asset quality issues for financial institutions and poor risk management practices and cheap financing and risk (e.g. low FICO scores for borrowers).
Market greed and psychology of profits at all costs.
Poor lending practices by lenders in those markets
The role of securitisation in facilitating asset price inflation
The role of the Credit Ratings Agencies in providing inaccurate ratings for securitisation structure
CRAs had:
A significant proportion of their income contributed to rating securitisation transactions leading up to the GFC.
Used flawed ratings models, in particular the copula formula, for rating complex securitisation structures.
Interpretation and critical analysis
The central analysis is that CRAs have an inherent conflict of interest, students student analyse this point elaborately with empirical or anecdotal evidence.
Results of the research/recommendations
There is no single clear solution to the issue of CRA conflict of interest and we should expect the students response to reflect this fact.
Student responses may pose a variety of solutions including, but not limited to:
A different model for rating remuneration e.g. investors should pay for the completion of the rating.
Regulators provide an independent assessment of the quality of ratings.
Financial penalties for significant errors in ratings
Duty of care legislation for CRAs and Boards of CRAs
The quality of response should be assessed on the amount of research that the students have completed and the depth of thought about their potential solution to the problem.
Reference list:
Text book references: Viney et. al. and/or Kidwell
Any other relevant source from academic literature.
