TASK 1 (1,800 words) 60 marks
A diversified financial conglomerate has four units (subsidiaries), with each unit focussing on
its own specialisation:
• Insurance operations
• Pension fund operations
• Mutual fund operations
• Commercial bank operations
As a financial analyst for the conglomerate’s holding company in the U.K., you have been
asked to assess all of the units and to indicate how each unit will be affected as economic
conditions change. You are a “Central Bank watcher” who constantly monitors any actions
taken by the Central Bank to revise monetary policy. The Central Bank is scheduled to meet
in one week to assess economic conditions and set monetary policy.
The last time the Monetary Policy Committee met, it decided to raise interest rates. At that
time economic growth was very strong, and inflation was relatively high. Since the last
meeting, economic growth has weakened, and the unemployment rate will likely rise by one
percentage point over the quarter.
Some economists are concerned about the possibility of a recession. Yet some industries are
experiencing high growth, and inflation is higher this year than in the previous five years.
Although you will consider the economists’ opinions, you plan to make your own assessment
of the Central Bank’s future policy.
Answer these questions:
1. Given the circumstances, is the Central Bank likely to adjust its monetary policy? If so,
what would you expect? (10 marks)
2. Recently, the Central Bank has allowed the money supply to expand beyond its longterm target range. Does this affect your expectation of what the Central Bank will
decide at its upcoming meeting?
(10 marks)
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3. Suppose the Central Bank has just learned that the Treasury will need to borrow a
larger amount of funds than originally expected. Explain how this information may
affect the degree to which the Central Bank changes its monetary policy.
(10 marks)
4. You believe that if the Central Bank does not revise its monetary policy, the economy
will continue to decline. If the Central Bank stimulates the economy at this point, you
believe that stocks would outperform bonds. Based on this information do you think
the company should switch their bond holdings to stocks? Consider the typicalsources
and uses of funds at each unit of the company. Explain how your recommendation will
affect each unit’s performance.
(20 marks)
5. What is your forecast of how recent, existing or potential regulations will affect each
unit’s performance?
(10 marks)

TASK 2 (1,200 words) 40 marks
Answer only one of the following:
Q1. INSURANCE COMPANIES
a. Select a publicly traded insurance company of your choice. Go to its website and
retrieve its most recent annual report or use any relevant information to answer the
following questions:
i) Summarise the company’s main business and its performance over the past five
years. How does the insurance company allocate its funds? (That is, what is its
asset composition)?
(10 marks)
ii) Explain why its performance was higher or lower than the norm. What reasons
are given for the particular level of performance?
(10 marks)
b. Statistically, teenage drivers are more likely to have an automobile accident than
adult drivers. As a result, insurance companies charge higher insurance premiums
for teenage drivers. Suppose one insurance company decided to charge teenagers
and adults the same premium based on the average risk of an accident for all drivers.
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Using your knowledge of the problems associated with asymmetric information,
discuss whether you think this insurance company will be profitable.
(10 marks)
c. How might the insurance industry be affected by climate change and other forms of
environmental damage? What risks and opportunities are there for the insurance
industry?
(10 marks)
Q2. PENSION FUNDS
a. As a consultant to a state’s underfunded pension fund, you have been asked to
search for solutions to prevent underfunding in the future.
i) One explanation for the underfunding of the defined-benefit plan is that the
economy was weak recently, and financial markets were weak, and this was the
cause of the underfunding. If so, the underfunding may not be a problem in the
future. Do you think this explanation is sufficient, such that there is no need to
search for an alternative solution? Explain.
(10 marks)
ii) Some state workers prefer to be on a defined-benefit plan because they will
likely make poor investments if they are forced to manage their own funds (as
they would with a defined-contribution plan). Is that a sufficient reason to force
a state to remain on a defined-benefit plan?
(10 marks)
iii) Suppose some state workers have a defined-contribution pension plan. As they
go through their working life, in what order would you recommend them to have
the following portfolio allocations: (a) 100 percent bonds and money-market
instruments, (b) 100 percent stocks, (c) 50 percent bonds and 50 percent stocks?
Provide some rationale to support your recommendation.
(10 marks)
b. Green finance is a growing phenomenon, in particular with the recent introduction
of the UN Sustainable Development Goals. What might be the tensions between
making green and sustainable funds greener and making those funds more accessible
or attractive to large asset owners like pension funds?
(10 marks)
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Q3. MUTUAL FUNDS
a. The mutual fund industry publishes a fact book containing exhaustive data on the
historic and current state of mutual funds. Assess the Investment Company Institute’s
website www.ici.org:
i) What have been the trends in the assets invested in worldwide mutual funds in
the past 10 years?
(10 marks)
ii) What are the factors that led to the increase in index funds as a share of the fund
market in the past 10 years?
(10 marks)
b. Consider the prevailing conditions that could affect the demand for stocks, including
inflation, the economy, the monetary policy, political conditions, and the general
mood of investors. Based on the current conditions, recommend a specific type of
stock mutual fund that you think would perform well. Offer some explanation to
support your recommendation.
(10 marks)
c. A number of green/sustainable cryptocurrencies are available, including Bitcoin Green
and Energy Coin. Pick one of these, or find another online. What are the similarities
and differences as compared to SolarCoin? Which do you believe has the greatest
potential to support the growth of green finance?
(10 marks)
Q4. COMMERCIAL BANKING
a. Negative Interest Rate Territory
i) The interest rate paid by the European Central Bank (ECB) on excess reserves
declined below zero in 2014 (and remained there as of 2022). What was the
rationale behind this move to a negative deposit rate, and why would banks be
willing to pay to keep deposits with the ECB?
(10 marks)
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ii) Suppose immediately after the ECB began charging banks a fee for holding their
excess reserves, the banks switched to holding cash in their vaults (rather than
holding excess reserves), and also began charging customers for holding their
deposits. Do you think the ECB would have kept the deposit rate in negative
territory? Explain your answer.
(10 marks)
b. Implementing a structural separation of commercial banking and investment banking
activities is a way to reduce systemic risks when a potential bank failure threatens an
entire economic system. Do you think separating banking service industries from
other financial service industries is a good idea? Explain your argument.
(10 marks)
c. How might commercial banks be negatively affected by climate change? What might
the opportunities be for green and sustainable banking?
(10 marks)
Q5. CENTRAL BANK
a. What are the advantages and disadvantages of quantitative easing as an alternative
to conventional monetary policy when short-term interest rates are at the effective
lower bound?
(15 marks)
b. If “inflation is always and everywhere a monetary phenomenon,” why did the huge
expansions of central bank money by the Federal Reserve, the ECB, and the Bank of
Japan between 2007 and 2018 not result in high inflation in those economies?
(15 marks)
c. Following the coronavirus pandemic in March of 2020, the Federal Reserve announced
that it reduced the reserve requirement to zero as the size of the Fed’s balance sheet
approached $6 trillion. What might be the rationale for implementing such a change?
(10 marks)

BEAM033 Final Assignment 2022

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