International Finance: Case Study Pt 2

welcome back everyone so for today what we're going to do carrying on from what we've done last time we'll we'll have some few exercises we'll go through a case study and give you a little bit of an Insight of how you can prepare for your tests uh today's case study is about a financial institution that is based in the US this financial institution has few subsidiaries under its belt and the question and the main theme Here is around Financial technology so fintex cryptocurrencies it's also around money laundering and compliance and compliance issues so this is going to be the main predominant theme of the case here today again as we've done last week what I would recommend is that you go through the case analyze its merits have a have a notepad near you just take some of the important issues note them down keep them handy so that when the questions come you know exactly how to answer them without further Ado let's start with the very first question so one of the companies that are owned by Porto is called jam and Jan is thinking about implementing new the new measures new appropriate anti-money laundering measures and so for us and for this particular question the company or the financial institution wants to basically the very first question is about one of the subsidiaries owned by PTO so subsidiary is Jan and Jan is basically implementing a new anti-money laundering measures um now the question here is asking us about the importance of adapting new measures and why should we care about implementing onti anti-money laundering measures now here what you'll have to do you'll have to go through the material that we studied in Unit 10 and you'll have to remember what are the consequences of allowing dirty money to be floating in within the EC economy and of course one of the main side effects or one of the main consequences if we allowed dirty money to be floating in the economy is basically higher inflation thus the answer to this particular question is a now moving on to the next question the next question is about the compliance the compliance Department in peachree again another uh subsidiary of portal the question here is asking you to position yourself as a member of the compliance department and here what you need to do is basically you'll have to pot some of the dirty money that's been coming in and here what you need to look into is the question is trying to ask you about a specific um frame or about a specific stage in the phase of uh washing or laundering Dirty Money And as you remember there are three main stages or three main uh levels for uh money laundering and for the money to be integrated within the financial system the first one starts basically with the placement and then we go into the layering phase and then after this into the integration phase and so here very much what we are looking into is the layering phase and so what you'll have to keep in mind is what is the definition or what are actions that fall under the layering phase now normally within the layering phase it is when you try to hide the source of the money so here you are trying to relocate and disguise basically the source of the of the dirty money just to basically make it look as if it is legitimate so the answer to this question is basically number B what I would recommend of course is for you to go again through the material through Unit 10 try to understand the differences between the different layers and between the different stages of uh washing dirty money and how money laundering takes place this will help you understand the how to answer this particular question now as we move forward this particular question is asking us about fat about the recommendations and specifically recommendation number nine that is implemented by fat and here what you are basic what the question is trying to ask you is to to position yourself as the senior compliance officer within tree and to implement the recommendation number nine of fact and so this is a very straightforward question so the only thing that you'll have to remember is what is recommendation number nine all about and if you look at the answers you'll understand basically that some of them are trying to trick you three of them are trying to get you to answer the wrong way and of course as part of the recommendation the fat recommendation number nine you as a compliance officer will have to request to to basically report transactions that are above $1,000 $15,000 us and so the answer to that question is basically number D now this particular question that we're dealing with right now is about the regulatory framework that the financial institutions so peach tree in our case is expected to to comply with now peach tree is basically considering to keep the same level of equity that they have now and so what you are meant to be is trying to advise Peach Tree how they can comply with that with the regulat with the regulatory Frameworks all while basically they keep the level of equity in the same way that it is uh currently and what we need to keep in mind what we need to understand here is that what are the consequences of increasing equity and how does increasing Equity or decrease Equity basically fall in line within the different regulatory Frameworks now the some of the answers here are trying to take you into the wrong direction so some of them you as you'll see are citing the dot Frank act some of them are citing the SEC recommendations and SEC regulations or some issue or some recommendations by the FED now the main focus and if you remember from what we studied together in unit number 10 and from unit number 10 and number six if you would remember from that basically the main predominant theme or the regulator in that respect is going to be the basil three recommendations and so the company or the financial institution will have to comply and take into accordance or into account the recommendations set forth within the basil 3 within within the basil 3 and so for this reason the answer to this particular question is basically B now as we move forward the next question is asking us about central bank backed digital currencies and here what we're looking into is basically whether the FED should consider allowing or issuing a central bank backed Central Bank currency a digital currency or not and for us what we need to look into within this sphere here is the what are the consequences of issuing digital currencies and so one of the main things that we need to keep in mind when issuing digital currencies and as we begin to phase out traditional currencies is that we don't leave segments of the society or some members of the society behind and so integrating the digital currencies and allowing it to be circulated through the mass and by the mass is going to be key and thus the answer to this particular question as you can see is basically number c now moving forward the this question is basically asking us about some of the situations or uh economic downturns and financial downturns that one of the countries where Porto the financial institution has invested in is experiencing and so this particular question is about Argentina is about the case of Argentina and is asking us basically what kind of of measure we need to look into what is the situation basically that Argentina is suffering from and how do we understand the consequences that we might experience due to this particular uh situation that the country is going through and as you can see there are a few uh different options here one of them is citing hyperinflation another is citing hyper deflation one is just discussing normal Rising normal raise in inflation while other normal decline in deflation now of course based on the mirrors that we have here in the question we can see that this case is very much related to infl to to inflation however the question that we need to look into or perhaps the analysis that we need to make further is whether this inflation is a normal type of inflation or is it hyperinflation and so the analysis that we need to do is based on that and also what we need to understand is the answers that are provided the question so the answers that we have here we've limited them to basically A and C now you need to take this a little bit further and you need to read a and C carefully to understand which one basically applies now as hyperinflation is when you have a rapid increase or a rapid inflation infl inflammatory rate in in within the within the economy of a particular country and here the money basically loses its value rapidly so the money becomes worthless and because of that any Investments that have been made within this particular region or within this particular economy that is suffering from hyperinflation is likely to suffer from sufficient losses and So based on that answer number a is basically the most accurate answer to describe the situation in Argentina and to describe basically the consequence that the Investments made by portal would have based on the economic situation or the current economic situation in Argentina within this particular question now in here in this question again where we are asked about one of PTO subsidiaries peach tree and here we are thinking and what we're doing is basically we're trying to understand whether Peach Tree as an organization is regarded as a systemically important financial institution or not now if you remember from unit number 10 and from unit number six when we discussed the interconnectedness of financial institutions we explained that financial institutions are very much interconnected with one another and so whatever uh touch whenever something whenever a one of the financial institutions suffers from a particular downturn this may affect other financial institutions whether on a national or International level and so they are very much in a way interconnected to one another thus since peach tree is basically considered to be one of these financial institutions they are Bas they are going to be interconnected so they are systemically important financial institutions they are interconnected with other financial institutions and they'll have to be basically overseen by the financial services oversight and the correct answer for us for this particular question is number B now here in this question again we are looking at peach tree and a peach tree is asked to flag suspicious transactions now these suspicious transactions that is basically the company is asked to flag you have different you have basically different scenarios on how you can spot these suspicious transactions and as one of the very first things that we need to keep in mind is the amount of money that is being transacted and the persons that are involved within these transactions and basically their backgrounds and what they do and to whom the funds are going to and based on these mirit every time there is a transaction we need to ask clients whoever they may be who are making these large transactions questions about the reasons for these transactions who uh ultimate beneficiary from the transaction is thus if we are to that direction as you can see the answer for this question would be number c now Central Bank digital currencies and the question here that we are trying to answer is basically if issuing Central Bank digital currencies would have an effect on the interest rates that are paid by the financial institution in our case study basically portal and you are presented with numerous options or with numerous different possible scenarios one of these scenarios basically revolve around whether the whether portal would have to basically be sorry I'm mixing this up now now as you can see for this question we are again discussing the issue of central banks digital currencies and here what we're looking into is basically if having or issuing Central Bank digital currencies will have an effect on the interest rates that are paid by the financial institution subject to our case study portal or not now what we need to keep in mind is that Central Bank digital currencies could if they are interest bearing basically or if they are interest bearing they might have an effect on the interest pay interest rates paid now the reason being is because again financial institutions that are holding these digital parenes they are also holding other liquid lowrisk instruments and so there would be an effect on how on the interest rate that is paid by the financial institutions holding these digital currencies and thus for this reason answer number B answer number D is the correct answer in our case now moving forward uh to the next question as you can see the next question is about Porto and and what you are doing here is you are advising portal on whether they could uh use the blockchain technology and how it could help them uh with it it could help them raise their International Trade into a new level now here it's very much all about blockchain technology and what you need to know you need to recall the material that we study together in unit number 10 you'll have to remember some of the benefits of using blockchain technology within the financial industry and one of the main things that this technology allows us to do is basically to have better transparency and allows even better access or more enhanced access for smaller organizations or smaller firms to do to access International or Global markets now with that in mind yes these are some of the main benefits of the of the blockchain technology however the transactions that take place within the blockchain technology or using the blockchain technology are very much slow and as you can see the correct answer in our scenario is going to be answer number D moving on to the next question the next question is again about cryptocurrencies and what we're thinking what we're doing here you are having a chat with the board of director you discussing with the board of directors of PTO the financial institution that you're working with about some some of the negative the negative sentiments That central banks have about on cryptocurrencies and what you're trying to do is you're trying to represent to to present the point of view of central banks as to why digital currencies or cryptocurrencies are not a good option and here it's very much all about you trying to recall the material that we studied in units number seven and unit number trying to understand the nature of cryptocurrencies and some of the criticism that was made to cryptocurrencies and as you can remember many states basically or many countries do not believe or do not tra treat cryptocurrencies as a medium of trade or as a medium of payment they do not give it the same treatment as they give to money thus it is not considered as a monetary element or as a monetary as a monetary instrument rather it does not meet the criteria according to these states and based on that analysis as you can see the correct answer is going to be B for this particular question now the next question that we're handling is basically about a possible um now we are presented with specific data about this new member state or this new candidate to become a member State some of the data that we have is that this this new potential member state has a 2% annual growth of 2% annual government deficit they have a 59% of governmental debt and they have a long-term interest rate of 3% now what you are asked to do is to provide recommendation for this particular country as to whether they meet the criteria set forth within within the EU or not now here to answer this question you'll need to recall what we said together in unit number eight and you'll need to recall the criteria for member States to become for potential candidates to become a member state of the EU as you remember me potential member states should have their interest rate reduced to 2% and so that because of that and since this potential member state within this particular case within this particular question has an interest rate of 3% the application should be rejected until they are able to reduce the interest rate limit to two % thus the correct answer here is going to be number D now as we move to the next question is about the different types of currencies and so here this question is trying to ask you about what kind of currency do you think is a fixed currency that is allowed to slowly appreciate by the central bank now you may remember we have different types of currencies we have we have fixed currency We have basically peed currencies we have unpe currencies or free floating currencies we also have currency boards and what you are meant to be doing here is explain what do you think this question is related to now if we're looking at a currency that is that has a fixed rate and that rate is slowly is slowly allowed to appreciate by this Central Bank what we're looking into is basically a crawling Peg type of currency and thus the cor answer is answer number a now as we continue on to move forward again this question is all about currencies now here the difference is the question is asking you what you believe is going to be a better solution are do you think that pegging a currency is a is a is a is a viable solution or dollarization is a viable solution for the question that we are uh basically handling now here as you will see the answers are very much mixed up just to to confuse you and so you'll have to analyze and you'll have to have a deeper understanding of the differences between Tech currencies and the differences between and have a deeper understanding of dollarization and how dollarization works and if you analyze the different possible answers for this question you're going to notice that the correct answer is going to be answer number c about dollarization and the reason being is that the this particular answer have embod have included the correct details about what dollarization is all about unlike the other answers unlike the other potential or possible answers that had the details a little bit mixed up and for this question you for a question like these you'll have to have a deeper analysis of each of the possible answers to understand which one applies and how it applies which one is correct and basically for you to under I mied that part up although it was going good so it's good sure yeah that would be good I think if we can just remove the last part when I was saying okay you just have to analyze maybe if we can stop it from there and just keep going what do you think that's great okay I think I'm ready and ready to move on also to the next question as well as you can see now are discussing another subsidiary invest and invest is basically a hedge fund company and this hedge fund company is considering to implement an event driven strategy and as you remember we have different strategies that financial institutions will deploy now this question is very much asking you to look at what the meaning of event driven strategy is and how event strategies are basically deployed and if you remember event driven strategies are very much related to when when an organization or financial institutions a financial institution buys the debt of companies that are suffering from severe financial distress and these particular institutions or the companies that they're buying into are on the verge of bankruptcy and have indeed have indeed filed for bankruptcy and so for this reason you will know notice that correct answer for this particular question is answer number c now again this question the the question that we have on the screen right now is also about another strategy that is implemented by financial institutions now this time we are discussing a merger Arbitrage investment and the question that we have in front of us is asking us about the measures that we need to consider before we Implement a merger Arbitrage investment strategy and as you can notice all of these answers are very much logical and will be correct in theory however there is something there is one of those that would Stand Out Among the others and I think you are able to notice which one so question the answer number c estimating the likelihood of a government or antirust organiz of a government antitrust investigation is something that is very much going to be the center of attention and it is going to be very important for us to consider thus the answer for this question is going to be basically answer number c now moving on to to to to the next question the next question is basically discussing a recommendation that you made to Porto the financial institution that they use a currency hedging investment strategy now what you're trying to do and what you're trying to explain to Porto is some of the effects that Porto should expect as a result of deploying the currency hedging investment strategy and what you'll need to do here is to recall the material that you learned in units seven and units five you'll need also to understand what is currency hedging and what are some of the the impacts of implementing currency hedging and as you remember currency hedging is all about moving large sums of money over a short period of time and so here what you're trying to do is basically to sorry for that I think after I've I've presented the question I think from there we can basically start again great now as you can remember from the material that we studied together in unit7 in unit in unit five about currency hedging currency hedging is all about moving large amounts of money within a short time frame thus due to this you can see see that the answer or the correct answer for this particular question is number eight now the next question is again you trying to assume a position of advocacy to port and you are trying to to advise portal on using head uh hedged and unhedged strategies what you're trying to do here is basically recommend something uh that would help them gain better better position in foreign bonds and so what you're going to have to do is to remember and to recall again units number seven and units number five and in particular you have to remember what unhedged and hedge strategies are all about now in our case because we're looking into into bonds basically into foreign bonds what you remember that unhedged portfolios basically would have higher type of volatility or higher rate of vol volatility just due to their nature now because of this you can see that the correct answer here that we have is answer number c now the other answers that were presented here are very much have inaccurate data and inaccurate information and thus your analysis is going to be very crucial and your deeper understanding of what hedged and unhedged strategies are all about is also going to be important so keep that in mind as you ansers as you answer questions like these now as we move forward the next question is about some of the strategies that you could recommend to Porto sorry can we stop for a second just as I was catching my momentum exactly sometimes in in my lectures I would be drinking three or four bottles of water ah no I think it's a valid hypothesis to be fair perfect let me check okay just so we are which of the F investment strategies recommend okay so we still have here okay ready for now so I'm gonna get now for this okay sorry don't worry about it don't worry about it now for this question uh again we are asked about different investment strategies that you could recommend to PTO and here as you can see there are different options most of these options as you will notice have Inc inaccurate information so they are represented inaccurately just to try to confuse you and so you have to be a little you have to pay a little more attention and you'll have to recall everything that you studied in unit 7 and unit 5 now for us what we need to look into is basically a triangular Arbitrage which is the correct answer because the answer here for triangular Arbitrage is very much the exact definition of what triangular Arbitrage is all about now as you can see triangular Arbitrage as it was represented here is basically one of of the one of the strategies that would allow portter to take advantage of the exchange rate discrepancies if basically it was performed quickly and in large sizes and so if you look at the other at the other options you will see that they have been misrepresented on purpose keep stay focused and pay close attention to the answers read them carefully so that you can spot where the answer is inaccurate now the next question is again about Porto and Porto is considering to use a value investing strategy now the question here is how would you implement a value investing strategy as you recall from the material that we learned in unit five a value investing strategy is all about trying to filter the stocks that have been that have not been presented within their proper value so they have been underestimated within the market and thus the correct answer for this particular question is answer number B now the next one or the next question is about growth investing now here what you are asked is you are asked to present the reasoning behind why you would have suggest growth investing as a suitable investment strategy for quto and again what you'll need to remember you'll need to recall the data and the information you know about growth investing and as growth investing basically leads to higher growth rates to higher Revenue growth when you invest in small companies that have basically high potential and thus the correct answer here for this case is number c now moving on to the next question we are we are discussing again another investment strategy an investment strategy that represents or resembles momentum investing here what you have to do is try to remember what momentum investing is all about and what it does and its consequences to implement a proper momentum a momentum investing strategy what you'll need to do is to watch the yield curve the treasure yield curve and use the data that you collect from the treasure yield curve as a signal for you to for entries and exits from for entries and exits and as you can see the correct answer here is basically uh number eight now the next question is about the profit that portal is likely to see if they use a momentum investment strategy like the previous question here you'll have to again consider the data and the knowledge that you have on momentum investing and as if you were to deploy a momentum investing strategy some of the profits that you you will see are going to be generated from buying and selling short Securities whenever they are strongly traded and thus the correct answer in our scenario is going to be number D now the next question is about a recommendation that you made to portter to invest in money markets and why you recommended money markets over Capital markets now here you'll have to remember the the differences between money markets and capital markets and what are the benefits of investing in either of these markets as well these are things that we studied together in unit number four and as you remember in invting in capital markets could be a little volatile as compared to money markets and also what you what you may remember is that money markets provide an extra layer of security or better security as compared to money markets thus if we look at the answers or the possible answers that we have here we can find out that answer number a is the correct answer or the most suitable answer now the next question again is about one of the countries that Porto has invested within so Porto invested in the Argentinian currency and the Argentinian government because of the economic situation that they were going through they've introduced what is known as a Tobin tax now as a result of this Tobin tax what you're expected to do here is explain why do you think Argentina introduced a Tobin tax and thus you'll have to recall the data that we've learned together about what Tobin tax is when Tobin tax is deployed or implemented and as you remember we've also gone through an example while we studied Tobin taxes on during unit 7 that Italy even implemented the Tobin tax to control its inflation now recall the data about toping tax and try to analyze it and to help and and use it to help guide you to answer the to to choose the correct answer now if you recall what we've said about tobing tax uh especially here now in the case of Argentina what you may need to consider is that when it's used to control curreny it's basically used to regulate and penalize short-term currency trading speculation the reason being here is that if the country is going through hyperinflation and we are trying to control the currency what we want to do is we want to C down on speculation and thus introducing a measure that would help us to cut down on speculation and shortterm trading is something that is Meant to Be an Effective measure thus the correct answer for our case is going to be ter number a now as we move forward the next question is about one of the subsidiaries of Porto Porto so sand basically is a hedge fund organization or hedge fund financial institution that in that is considering to invest in a new startup the startup here is called wind now as sand is considering to invest in Wind they are presented with uh few options a few stock options to recommend that that may that they may opt for investing within and here what you're looking into is basically what are these different options and why should they basically recommend within the stocks of wind now for our particular case and for this question now the company sand is one of the active investors and as an active investor what they need to do they want to have a control over the organization so they want to have a say in the organization and having and and using or or investing in common shares is something that would provide sand with the opportunity to control and to have a say in the decision making of uh wind as an organization thus the correct answer here is going to be answer number a so remember the different answers or the possible answers that were presented here we're trying to mix the data about or trying to confuse you about the difference between per common shares and preferred shares so you have to have a deeper understanding of what is a common share and the attributes of common shares and the same thing what kind of Rights and obligations are attached to Preferred shares these are things that we studed together in unit number four so try to recall them and as you go through this particular question alone and try to read it you will notice and you will an while while you analyze it you will notice where the discrepancies lie and why we chose basically answer number eight now the next question here is asking you to position your yourself as an advisor that or as an expert that was commissioned by the FED to conduct a systematic risk risk assessment now as you do a systematic risk assessment this question is trying to basically ask you about the very first step that you would do to implement a risk analysis to to implement a systematic risk assessment now from among the different options that we have here the very first thing that you want to do is to define the critical elements of the financial system and then based on that you can see that answer number c is the correct answer now again try to recall whatever we studied together in unit number six um it will help you understand the different steps associated with uh conducting a systematic risk assessment which ones comes first and why and what are they related to the next question is again asking you to be in a position as a financial expert and again recommend to the FED on on how they are implementing basically their risk their systematic risk assessment but now what you are meant to be doing is basically to use the bank of England's wheel of Misfortune now what you'll have to do again you'll have to recall the material that we studied in unit six and you'll have to remember what are the components of the wheel of Misfortune that is basically introduced by the bank of England and if you remember the one of Thee elements of the wheel of Misfortune is basically distinguishing between the internal damages to the financial system and the damage to the real economy and thus the answer here for this question is number c now as we move forward we are we are looking at another subsidiary of portal Mark and you are working with Mark on identifying different risks that Mark may be experiencing or that they may encounter the question here is asking you to choose which of these different risks that are presented are going to be the most prominent type of risk again the different options that are presented here they have been misplaced and Mis they have been misplaced in a way to try to confuse you into choosing them so you'll have to have a deeper understanding of each of these components and you'll have to recall again the data that we studied together in unit number six now for our uh particular uh for this particular case you'll have to think about what credit risk is all about what default risk is what is operational risk and finally get to understand moral hazard and as moral hazard is all about when you take risk or when you're comfortable taking risk because you know that you'll have the the backing of of another institution that will help you or that will save you in case you failed and here you're taking bigger risk than you normally would do and this is what moral hazard is all about and thus the correct answer for that question is going to be number c now for this question which is our final question what we're looking into we're looking at the peach tree again one of the subsidiaries of of of Porto and here what you're doing you are assuming a position within the Fed so you're trying to advise the FED whether Peach Tree who is currently experiencing somewhat ult situations somewhat difficult Financial situations are they considered to be should they be considered for bailing out or not now again the bailout is going to be again what you'll have to consider here is the basil three recommendations and how you think the total loss observing capacity could affect phach tree here you're going to have to recall the material that we've learned in unit number six you'll have to recall the data about the total loss of in capacity what it means what it stands for and how it would connect to the decision making as to whether peachree is is deserves to be saved as a financial institution or it should be allowed to fail now after analyzing the different possible answers that you have or that you've been presented with you can notice that the answer number c which is the correct answer is basically provides the correct analysis of the total loss observing capacity and its consequence now here the way it was presented to us as Peach Tree being as big as it is considered as a too big to fail financial institution and because it is considered as AIT too big to fail financial institution we may have to save it because not saving it could lead us to basically Financial losses to sign ific Market chaos and thus answer number c here as we mentioned is the correct answer now I hope you have a better clarity as to how you can analyze the case studies that you are presented with and how you can analyze the answers and choose the correct answer and I wish you all the best of luck with your studies and I hope to see you again very soon good luck