FSC521: Describe financial markets and systems, including the specific roles of key market participants: The Financial Services Industry Assignment, OP, New Zealand

Learning outcomes

This assignment assesses the following learning outcomes:

• Describe financial markets and systems, including the specific roles of key market participants.
• Analyze how key factors in the economic environment impact participants in the financial services sector

Task 1: Financial institutions and the tax system

Sanjay currently earns $95,000 per annum and his total income has exceeded $90,000 for the past two years. He has inherited $50,000 and wants to place the money on a term deposit for 12 months. He’s asked you for advice on the range of financial institutions that offer this product.

a) To illustrate the range of providers for Sanjay:

• Select three different types of financial institutions currently operating in the
New Zealand financial services industry that Sanjay can place his money on
term deposit with.

• For each financial institution, state their name and type of financial institution,
and provide a link to the page promoting term deposits.

• Discuss the similarities and differences between the three financial
institutions you selected in terms of:

• their structure/ownership
• how they’re regulated
• the services they provide.b) You explain to Sanjay that with some providers, he has the option of placing his $50,000 on a term deposit or in a PIE Term Deposit Fund for 12 months. Both products currently offer interest at 4% per annum and there are no fees payable for either option.

Assume Sanjay invests for the next 12 months, and that his salary remains at
$95,000. Also, assume his income is derived only from his salary and this
investment. Calculate his total after-tax income (salary + interest) for each
investment option and clearly highlight which option provides him with the higher after-tax income. Show all your workings.

Task 2: The impact of natural disasters and changes in the OCR

Aroha runs a small business exporting cut flowers and foliage. A year ago, you helped Aroha purchase her first home using a revolving credit facility. The current balance outstanding on this facility is $451,250. She has a sum insured home insurance cover with Aotearoa Insurance.

Aotearoa Insurance has a reinsurance treaty with Swiss Re.
Aroha has seen the following two newspaper headlines:

• Headline 1: ‘Inflation is rising and is expected to reach 5–6% in the
next eighteen months

• Headline 2: ‘Hurricane Fred in the United States and the earthquake in Japan set to impact homeowners.

She seeks advice from you on how these factors will affect both her business
and her personal financial situation.

a) Headline 1: Analyse the impact of rising inflation on Aroha.

You are required to:

• Predict the action the Reserve Bank of New Zealand will take in
response to rising inflation.

• Analyse how and why the Reserve Bank of New Zealand’s action will
impact Aroha’s personal financial situation in terms of her home loan.

• Analyse how and why the Reserve Bank of New Zealand’s action will impact
Aroha’s business in terms of its export earnings.

b) Headline 2: Analyse how and why these overseas disasters will impact Swiss
Re, Aotearoa Insurance and Aroha, as the insured under a home insurance
policy.

Task 3 Financial markets and the impact of the business cycle

Last year you helped Eliana choose the right KiwiSaver fund. She knew little about financial markets and you provided her with some background information on managed funds to help her make a decision about which fund to select. She chose the Aotearoa Investments Balanced KiwiSaver Scheme.

Last week she received the latest Aotearoa Investments Balanced KiwiSaver Scheme fund update. This has prompted her to ask you to help deepen her understanding of where her KiwiSaver funds are invested. You decide to use Aotearoa Investments’ top 10 investments to illustrate the main markets her funds are invested in.

Here’s an extract from Aotearoa Investments Balanced KiwiSaver Scheme’s Top 10 investments:

a) Investment 1 and Investment 2
Describe the markets in which Investments 1 and 2 are traded. You are required
to:

(i) For Investment 1:

• Identify the market in which Investment 1 is traded, and the typical
timeframe for investing in this market.

• Give one reason why the government issues this type of investment in
this market.

(ii) For Investment 2:

• Identify the market in which Investment 2 is traded, and the typical
timeframe for investing in this market.

• Give one reason why companies like Spark New Zealand Ltd issue this
type of investment in this market.

(iii) Both markets consist of a primary market and a secondary market.

• Explain the difference between the primary market and the secondary
market.

(iv) Aotearoa Investments may have invested in Investment 1 and Investment
2 through an exchange or over the counter (OTC).

• Explain two differences between the way exchange and an OTC
market operate.

• Identify the exchange where Aotearoa Investments can trade-in Investment 1 and the exchange where Aotearoa Investments can trade-in Investment 2.

(v) Explain the role of NZX in facilitating Aotearoa Investments’ trading in
Investment 1 and Investment 2.

(vi) Explain the role of NZDM in the issue of Investment 1.

(b) Investment 3

Describe the market in which Investment 3 is traded. You are required to:

(i) Identify the market in which Investment 3 is traded and the typical
timeframe for investing in this market.

(ii) Give one reason why banks such as Rabobank issue certificates of deposit
into this market.

(iii) This market consists of a wholesale market and a retail market. Explain
the difference between a wholesale market and a retail market and identify
which one applies to Aotearoa Investments’ trading in Investment 3.

(iv) Identify whether this market operates as an exchange or OTC market.

(c) Investment 4

Describe the market in which Investment 4 is traded. You are required to:

(i) Identify the market in which Investment 4 is traded and the typical
timeframe for investing in this market.

(ii) Outline the key difference between a listed and unlisted property
investment.

(iii) Identify and explain one way to invest in listed property and one way to
invest in unlisted property.

(d) Using the investment clock concept, discuss how changes in the business cycle impact the four financial markets you identified in which investments 1-4 are traded.

For each phase in the business cycle you must:

• identify the most attractive market during that phase
• give two reasons why that market is the most attractive during that phase.

Task 4: Regulators

You’ve been asked to write an article for an online magazine that focuses on the financial services industry. The article is called:

‘The Reserve Bank and the FMA – who regulates what in the financial services
industry?’

Write the article, describing the four roles of the Reserve Bank of New Zealand
and the four roles of the Financial Markets Authority in regulating the financial
services industry.

In your article you are required to:

• Focus on the following roles:
• Licensing and supervision.
• Anti-money laundering.
• Financial market infrastructure oversight.
• Crisis management.
• Conduct regulation.
• Where roles overlap between the two regulators, clearly highlight which
  responsibilities are shared and which responsibilities differ