Question2 Yesterday, the Hong Kong Monetary Authority (HKMA) announced the tende

Question

Question2 Yesterday, the Hong Kong Monetary Authority (HKMA) announced the tender results for its new issue of the Exchange Fund Bills (EFB). Standard Chartered Bank, one of the Eligible Market Makers (EMM) recognized by the HKMA, was successfully allotted 150 units of the 28-day EFB with the final bid yield of 1.24% pa a Without transaction cost, what is the total amount the bank has to pay to HKMA for such a purchase? (12 mark) b Financial markets provide platforms to exchange financial assets. As frequently traded in an efficient way. What economic roles do financial markets play in general? Use the Hong Kong stock market as a reference to illustrate your points. (18 marks)

Explanation / Answer

a) The Standard Chartered Bank has to pay to HKMA the agree price for 150 units. Since the agree price is not given we assume it to be $ x. Therefore the total amount the Standard Chartered Bank has to pay to HKMA would be $ 150x.

b) The Stock exchange of Hong Kong is the Asia's third largest stock exchange interms of market capitalisaation. The stock market has developed rapidly along side the pace of economic growth. The policies of the Hong Kong Stock Market (HKSM) are very unique and contribute to sustainable economic growth. Stock markets ensure liquidity allowing investors to trade in financial assets in a less risky manner. Market liquidity paves the way for companies to draw capital for operational purposes. Stock markets are needed to facilitate the flow of world portfolios from safer low-return capital to riskier high-return capital. This has substantial welfare gains through the expected consumption growth channel. Moreover stock markets are effective in promoting the quality of corporate governance by addressing the principal-agent problems thereby enhancing business activities.

In contrast stock markets may adversely influence economic activities in a number of ways. Stock markets provide access to liquidity which may hamper the savings rate by enhancing the return on investment. Stock markets reduce the uncertainity linked to investment thereby making the investment more enticing to risk averse agents and reducing the demand for precautionary savings. Also the incidence of excessive stock price volatility may contribute to an inefficient resource allocation and increses the interest rate in response to higher uncertainity. This will compromise the quality and productivity of investment, by which the grwoth is hampered.

Therefore any stock market has to make suitable policies which are flexible and promote the sustainable growth of the economy.

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