Finance Asian Financial Crisis

Question: Discuss about the Financefor Asian Financial Crisis. Answer: Solution: The Asian financial crisis occurred in 1997-98 provided valuable lessons which are as follows: There is a need to receive debt in terms of foreign currencies at low level as overborrowing in foreign currencies results in the occurrence of financial crisis. This has led to low external debt to GDP ratio and low corporate short term external debt. Therefore it is advisable to the companies to hold debt in terms of foreign currencies at low level. In addition to this, the financial crisis of Asia also results in the provision of flexibility in the Asian currencies. The main reason behind it is that the financial crisis occurred due to loss of value of various Asian currencies to 50% during the financial crisis (Wolf, 2007). In addition to this, many Asian countries have forced to bailout to International Monetary Fund due to which in recent years countries focused on building up its foreign exchange reserves as a buffer to cover approximately 15 months of imports. Liquidity in the domestic bond market provide an opportunity to Asian markets to borrow for finance spending. The financial crisis in 1997-98 has provided a lesson to offset capital outflows by maintaining current account surpluses. Besides this, decline in the commodity prices have helped in increasing the trade surpluses as the Asian countries are net importers of commodities. After 1997, the Asian countries manage their short term liquidity problems by making a multilateral currency swap agreements. This also helps in increasing the transparency in the information related to finances of the countries (Carney, 2009). Solution: Credit risk is a default risk on a debt when a borrower fails to make the payment of the debt. It is the risk in which a lender may lose the payment to be received as a principal and interest associated with the loan. This risk arises due to the expectation of the borrower to utilize future cash flows to repay the current debt (Wagner, 2008). Solution: There are two approaches used by banks to measure the credit risk capital adequately as a component of pillar 1 namely standardized approach and internal ratings based approach. Under the standardized approach, credit risk is measured in a standardized manner as supported by external credit assessments. In the internal rating based approach, there is a requirement of explicit approval of the supervisor of a bank in which the internal ratings systems is used to calculate credit risk (Musch, et al. 2008). Solution: Under Standardized approach, there is a set of credit risk measurement techniques under the capital adequacy rules of Basel II for banking institutions. Under this approach, commercial banks are required to use the ratings provided by external credit rating agencies for the purpose of quantify the required capital for credit risk. In this method a capital ratio is calculated by the use of regulatory capital and risk weighted assets. Besides this, the capital ratio must not be lower than 8%. Besides this, risk weighted assets are calculated by multiplying the capital requirements related to market risk and operational risk by 12.5 and addition of the figures obtained to the sum of risk weighted assets for credit risk (Musch, et al. 2008). Solution: Nowadays, it is mandatory for the companies to disclose the relevant and material information related to the business activities by the companies listed on stock exchanges which are sensitive to the movement of stock prices on stock exchange. The main reason behind it is that the disclosed information results in affecting the decisions of the investors. It is required for the companies to disclose important information related to it such as corporate restructuring, expansion of the business, disclosure of financial information and so on which has a direct impact on the investment decisions of the investors. Such information has a direct impact on the stock prices of the companies listed on the stock exchange (Westbrook, 2014). It is necessary for the companies to provide information related to the changes made in the organization for the purpose of attracting investors to make investment in the companies which in turn helps in raising funds for the company. Thus, information is consi dered as the lifeblood of an efficient stock exchange. Solution: A company that has a knowledge that a particular piece of information has a significant impact on the prices of the stock of a company are required to be disclosed to ASX. The information disclosed by the company would be considered material if the people that commonly invest in the securities are likely to be affected by the piece of information as per the Corporations Act. Besides this, such information is also considered material if it has a significant influence on the buying and selling decisions of the investors. In addition to this, it is also important for the companies listed on ASX to provide continuous reporting of the events carried out by the company in order to provide full information to the investors in a quick manner so that they can make effective decisions in a quick manner (Plessis, McConvill, and Bagaric, 2005). Solution: Five pieces of information that are being regarded as material and should be reported to stoick exchange include the following: It is essential for the companies to disclose information related to a transaction that results in bringing a significant change in the nature of the activities of an entity. It is also essential for the company to provide the information related to under subscription and over subscription of an issue of securities. The information related to the termination, variations and entry into material agreement. Such information entails the grabbing of an opportunity by the company and has a significant impact on the financial position of the company. The information related to appointment of a administrator or liquidator by the company. The information related to discovery of a material, mineral or hydrocarbon. Such type of information has a direct influence on the stock prices and decisions of the investors in a significant manner (Plessis, Hargovan and Bagaric, 2010). Solution: In the dividend reinvestment schemes, the investors receive additional shares in place of cash dividend. These shares are issued at a discount on the current market price of the shares of the company. In addition to this, due to occurrence of capital gain tax, the investor receives a cash dividend and then buys the addition shares. It has many advantages as a source of equity funding. The companies can retain its capital by providing dividends in the form of shares rather than in cash which can be used to pay debt or make investment to expand the business operations (Brigham and Houston, 2012). Solution: The main advantage of the dividend reinvestment scheme from the viewpoint of the company is that it results in the retention of the capital of the company in order to make investments in expansion of the business activities or paying off of the debt of the company. In addition to this, from the view point of the investor or shareholder is that there is no need to make the payment of the brokerage fees by the shareholder. Besides this, this also results in increasing the savings of the investors as they do not the dividend in the form of cash so that they can spend rather their profit is being reinvested in the company in an automatic manner to generate more profits (Damodaran, 2010). Solution: There is a possibility that the company has limited investment opportunities due to which there is no requirement of the additional funds raised through dividend reinvestment scheme due to which companies suspend the schemes from time to time. This may also results in diluting the earning per share of the company (Lumby and Jones, 2003). Solution: The strategy adopted by the company is that the company has save the amount to be paid in cash related to dividend by issuing one bonus share on three shares held by the investor. Such funds can be utilize for making investment in expansion of the business or paying off the debt of the company. The term cum-dividend refers to the payment of the dividend to shareholder in the near future. In this, the company has made the announcement of making a payment of the dividend but it has yet to be paid. Under this, if a shareholder has sold the shares of cum dividend then they are not entitled to receive a dividend on the sold shares. In case of ex-dividend, the shareholder is entitled to receive the dividend even if it sells the ex-dividend shares to another person. In this case the new owner of the shares is not entitled to receive dividend on the shares (Steiner, 2012). Solution: The theoretical price of the share after the bonus issue and the dividend payment occurred is ($14.70-$0.45) $14.25. Solution: First of all, the share prices have been assumed for a company for 6 months and then a line chart has been drawn. In addition to this, a return has been calculated by subtracting the share price of next month with previous month and divided by the share price of previous month. In this manner return has been calculated for 6 months. After that a line chart has been drawn. Solution: The head and shoulder pattern is the most popular pattern in the trend line. It is a reversal pattern which is formed and moved against the previous trend. The top of a head and shoulder signals that a price of security tends to fall once the pattern is completed and is formed at the peak of an upward trend. The inverse head and shoulder pattern signals that the prices of security is tend to rise and forms during a downward trend (Cheng, 2007). Solution: During the analysis of trend lines, the five reasonably reliable generalizations are as follows: If a trend line is long and tested more number of times then it has a greater validity. Along with this, if there is an occyurrence of indecisive break due to carrying out three or four tests at the time the trend line is long then the original trend is retained and there is an ignorance of penetration. When the established trend line is broke due to intra- day trades then it signalizes weakening trend if break out is on high trading volumes. If the chartist has not attained well established trend on return line that it would result in the deterioration of the trend. If a trend is break at the downside then fall in the prices from it often make a return move towards the line. This provides a good selling point to the trader if it has not sold it at a break of the trend (Acar and Satchell, 2002). References Acar, E. and Satchell, S. 2002. Advanced Trading Rules. Butterworth-Heinemann. Brigham, E.F. and Houston, J.F. 2012. Fundamentals of Financial Management. Cengage Learning. Cheng, G. 2007. 7 Winning Strategies For Trading Forex: Real and actionable techniques for profiting from the currency markets. Harriman House Limited. Damodaran, A. 2010. Applied Corporate Finance. John Wiley Sons. Lumby, S. and Jones, C. 2003. Corporate Finance: Theory Practice. Cengage Learning EMEA. Musch, F.C. et al. 2008. Basel II Implementation in the Midst of Turbulence. CEPS. Plessis, J.D., McConvill, J. and Bagaric, M. 2005. Principles of Contemporary Corporate Governance. Cambridge University Press. Plessis, J.J.D., Hargovan, A. and Bagaric, M. 2010. Principles of Contemporary Corporate Governance. Cambridge University Press. Steiner, B. 2012. Mastering Financial Calculations: A step-by-step guide to the mathematics of financial market instruments. Pearson UK. Wagner, N. 2008. Credit Risk: Models, Derivatives, and Management. CRC Press. Westbrook, I. 2014. Strategic Financial and Investor Communication: The Stock Price Story. Routledge. Wolf, M. 2007. The lessons Asians learnt from their financial crisis. [Online]. Available at: https://www.ft.com/cms/s/0/efb6e612-08ca-11dc-b11e-000b5df10621.html?ft_site=falcondesktop=true#axzz4Ub04hTao [Accessed on: 2 January 2017]. Carney, R. 2009. Lessons from the Asian Financial Crisis. Routledge.