HD and Dean's List Full Course Notes

Description

HD and Dean's List Extensive Complete Course Notes. Covering every topic and lecture for the whole term. Topics covered: Week 1 (Introduction to Financial Systems): Role and functions of the financial system (channelling funds, risk sharing, liquidity provision, price discovery, payments system), direct vs indirect finance, financial intermediaries vs financial markets, asymmetric information problems (adverse selection and moral hazard), the lemons problem (Akerlof), agency costs, transaction costs, economies of scale. Overview of Australian financial system structure: Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC), Australian Competition and Consumer Commission (ACCC). Types of financial intermediaries: banks (ADIs), insurance companies, superannuation funds, managed funds, finance companies. Types of financial markets: money markets, bond markets, equity markets, derivatives markets, foreign exchange markets. Week 2 (The Reserve Bank of Australia and Monetary Policy): RBA structure and mandate (Reserve Bank Act 1959 (Cth): stability of the currency, full employment, economic prosperity and welfare), the RBA Board and its members, the Statement on the Conduct of Monetary Policy. Monetary policy tools: open market operations (OMOs), the cash rate as the operational target, corridor system for the overnight money market (Exchange Settlement Accounts, deposit rate, lending rate), the cash rate and its transmission to other interest rates. The monetary policy transmission mechanism: six channels (interest rate channel, asset price channel, exchange rate channel, credit channel, balance sheet channel, expectations channel). RBA communication and transparency: Statement on Monetary Policy, post-meeting statements, Parliamentary testimony. Inflation targeting: the 2 to 3 percent target band, headline vs underlying inflation (trimmed mean, weighted median), the history of Australian inflation targeting from 1993. Quantitative easing in Australia: the 3-year yield curve control introduced in 2020 and its termination, the Term Funding Facility (TFF), bond purchase program. Week 3 (Commercial Banks and the Banking System): Structure of Australian banking (four major banks: ANZ, CBA, NAB, Westpac; regional banks; foreign bank branches), the Australian Deposit-taking Institutions (ADI) framework under the Banking Act 1959 (Cth). Balance sheet of a commercial bank: assets (cash, government securities, loans, other assets), liabilities (deposits, wholesale funding, equity). Deposit types (transaction accounts, savings accounts, term deposits). The money creation process and the money multiplier (simple deposit multiplier: 1/reserve ratio, limitations of simple model). Bank profitability: net interest margin (NIM = interest income rate minus interest expense rate), non-interest income, operating costs, loan losses. Return on assets (ROA) and return on equity (ROE). Net interest margin trends in Australia (compression from competition and low rates). Off-balance sheet activities: loan commitments, standby letters of credit, derivatives, securitisation, fee income. Shadow banking: definition, money market funds, securitisation vehicles, repurchase agreements (repos). Week 4 (Bank Regulation and Prudential Standards): Rationale for bank regulation (systemic risk, deposit protection, asymmetric information, too big to fail). The Basel Accords: Basel I (1988: 8% minimum capital ratio, risk weights 0/20/50/100%), Basel II (three pillars: minimum capital requirements, supervisory review, market discipline; IRB vs standardised approach; operational risk capital charge), Basel III (introduced post-GFC: higher capital requirements, capital quality, leverage ratio, liquidity standards). Capital adequacy: Tier 1 capital (CET1 and AT1), Tier 2 capital, risk-weighted assets (RWA), CET1 ratio, Tier 1 ratio, total capital ratio. APRA's implementation of Basel III in Australia: APRA Prudential Standards APS 110 to 117. Liquidity standards: Liquidity Coverage Ratio (LCR = HQLA/Net Cash Outflows over 30 days, minimum 100%), Net Stable Funding Ratio (NSFR = Available Stable Funding/Required Stable Funding, minimum 100%). The leverage ratio (Tier 1 Capital/Total Exposure, minimum in Australia). APRA's heightened capital requirements for Australian major banks (unquestionably strong CET1 target of ). Deposit protection: Financial Claims Scheme (FCS), $250,000 guarantee per ADI per depositor. The too-big-to-fail problem and Total Loss Absorbing Capacity (TLAC). Week 5 (Money Markets): Definition and role of money markets (short-term, wholesale, highly liquid instruments), participants (RBA, banks, corporations, government, fund managers). Key Australian money market instruments: Exchange Settlement (ES) balances, repurchase agreements (repos: structure, haircuts, GC vs specific repos, tri-party repos), bank bills (bank accepted bills: BABs, drawing, accepting, endorsing, discount yield formula, face value formula), bank bills vs commercial paper, certificates of deposit (CDs), Treasury Notes (T-Notes). Interest rate benchmarks: BBSW (Bank Bill Swap Rate) as the Australian benchmark (1-month, 3-month, 6-month tenors, calculation methodology, waterfall approach, BBSW manipulation scandal and ASIC enforcement), transition away from LIBOR globally, SOFR (Secured Overnight Financing Rate) in the US, SONIA in the UK. Repurchase agreements in detail: legal structure (title transfer vs security interest), open vs term repos, the repo rate and its relationship to the cash rate, repo market in Australia (interbank, RBA open market operations). Money market funds: structure, net asset value (NAV), constant NAV vs variable NAV, run risk, GFC experience (breaking the buck), post-GFC regulation. Week 6 (Bond Markets): Types of bonds (government bonds: Commonwealth Government Securities (CGS) and State government bonds; semi-government bonds; corporate bonds; asset-backed securities; covered bonds; inflation-linked bonds). CGS market structure: Australian Office of Financial Management (AOFM), Treasury Bonds (fixed coupon, semi-annual payments), Treasury Indexed Bonds (capital-indexed, linker structure), Treasury Notes (short-term). Bond pricing: present value of coupon payments and face value, coupon rate vs yield to maturity, price-yield relationship (inverse), bond price formula with semi-annual convention. Duration: Macaulay duration (weighted average time to receive cash flows, formula), modified duration (percentage price change for 1% yield change, formula: D_mod = D_mac/(1+y/m)), convexity (curvature of price-yield relationship, second-order approximation, positive convexity benefits holder), dollar duration and DV01 (dollar value of 1 basis point). Credit risk and spreads: investment grade vs sub-investment grade, credit rating agencies (S and P, Moody's, Fitch), credit spreads, spread widening during stress, the z-spread and OAS. Australian corporate bond market: structure, domestic vs offshore issuance (Kangaroo bonds), covered bonds under the Banking Act 1959 (Cth) s 31A. Yield curve: shapes (normal, inverted, flat, humped), theories (pure expectations, liquidity premium, preferred habitat, market segmentation), the Australian yield curve and its use as a policy signal. Week 7 (Equity Markets): ASX structure and function, equity market participants, types of equity securities (ordinary shares, preference shares, convertible notes, stapled securities, ETFs, LICs). Equity issuance: IPO process (prospectus requirements under Corporations Act 2001 (Cth) Chapter 6D, bookbuild, pricing, underwriting, stabilisation), secondary issuance (rights issues: renounceable vs non-renounceable, TERP formula, value of a right formula, theoretical ex-rights price calculation with worked example; placement; SPP). ASX trading: CHESS (Clearing House Electronic Subregister System), T+2 settlement, continuous trading, market orders vs limit orders, dark pools and off-market trades, HFT and market microstructure. Short selling: covered vs naked short selling, securities lending, buy-in risk, ASIC reporting obligations. Indices: S and P/ASX 200 (composition, free-float adjusted market cap weighting, rebalancing), S and P/ASX 300, All Ordinaries, sector indices. Equity valuation: Gordon Growth Model (P0 = D1/(r minus g)), P/E ratio, EV/EBITDA, price-to-book, dividend yield, worked valuation examples. Market efficiency: weak, semi-strong and strong form EMH (Fama), evidence for and against (anomalies: value, size, momentum, earnings surprise), implications for active vs passive management. Dividends and franking credits: dividend imputation system, franking credit formula, grossed-up dividend, effective tax rate for different investors, international investor disadvantage, debate over abolishing imputation. Week 8 (Foreign Exchange Markets): FX market structure (decentralised OTC market, spot, forward, swap, options), participants (banks, corporations, central banks, funds, retail), the Australian dollar (AUD) as a commodity currency, AUD/USD as the most traded Australian pair. Spot FX: bid-ask spread, pip, cross rates (triangular arbitrage), value date (T+2 for most pairs). Exchange rate determination: purchasing power parity (absolute and relative PPP: %change in S = inflation_A minus inflation_B), interest rate parity (covered IRP: F/S = (1+r_d)/(1+r_f), uncovered IRP, forward premium/discount), the balance of payments approach, the asset approach. Currency risk: transaction exposure, translation exposure, economic exposure. Hedging with FX forwards (forward rate formula with worked example, locking in a rate, comparison of forward rate to expected spot), FX swaps (near leg and far leg, swap points), currency options (call and put, premium, hedging with options vs forwards). RBA intervention in FX markets: history, objectives, mechanics. Week 9 (Derivatives: Futures and Forwards): Definition of derivatives (value derived from underlying asset), uses (hedging, speculation, arbitrage), types (forwards, futures, swaps, options). Forwards: OTC, customised, counterparty credit risk, settlement at maturity. Futures: exchange-traded, standardised contracts, clearing through central counterparty (ASX Clear), daily mark-to-market (variation margin), initial margin and maintenance margin, margin call process, convergence of futures and spot price at expiry. Futures pricing: cost of carry model (F0 = S0 x e^(r-q)T for continuous compounding, F0 = S0 x (1+r-q)^T for discrete), basis (spot minus futures), basis risk. Australian futures market: ASX 24 (formerly SFE), key contracts (90-Day Bank Bill Futures: contract structure, DV01, hedging a floating rate loan with worked example; 3-Year and 10-Year Treasury Bond Futures: contract structure, price = 100 minus yield, DV01, duration hedging, hedge ratio formula; SPI 200 Futures: index futures, fair value, basis, index arbitrage; AUD/USD Futures). Hedging with futures: hedge ratio (N = (Dollar Duration of Portfolio)/(Dollar Duration per Futures Contract) or N = (Portfolio Value x Duration)/(Futures Price x DV01 x 100)), worked examples for interest rate and equity hedging. Week 10 (Derivatives: Options): Option fundamentals (call and put, American vs European, moneyness: ITM, ATM, OTM), payoff diagrams for long/short call and put (with worked numerical examples), basic option strategies (covered call, protective put, bull spread, bear spread, straddle, strangle), put-call parity (C minus P = S minus PV(K), derivation and arbitrage enforcement). Option pricing: the Black-Scholes-Merton (BSM) model (assumptions, formula: C = S x N(d1) minus K x e^(-rT) x N(d2), P = K x e^(-rT) x N(-d2) minus S x N(-d1), d1 and d2 formulas, interpretation of N(d1) and N(d2)), the Greeks (delta: rate of change of option price with respect to underlying; gamma: rate of change of delta; theta: time decay; vega: sensitivity to volatility; rho: sensitivity to interest rates), implied volatility and the volatility smile/skew. Binomial option pricing: one-period and two-period models, risk-neutral pricing, replicating portfolio approach, worked numerical examples. Exchange-traded options in Australia: ASX options, contract specifications, exercise and assignment. Options on futures: structure and pricing. Week 11 (Swaps): Interest rate swaps (IRS): plain vanilla fixed-for-floating swap (structure, pay-fixed vs receive-fixed, notional principal, settlement as net payment, settlement frequency), IRS valuation (as a series of FRAs, or as fixed bond minus floating bond), the swap curve and its relationship to government bond yields and BBSW, swap spread, day count conventions. Cross-currency swaps: structure (exchange of principal at initiation and maturity, exchange of interest in different currencies), uses (liability management, asset-liability mismatch, synthetic currency borrowing), comparison with FX swaps. Credit default swaps (CDS): protection buyer and seller, reference entity, credit event definitions (bankruptcy, failure to pay, restructuring), CDS spread as proxy for credit risk, CDS index (CDX in US, iTraxx in Europe and Asia-Pacific), CDS settlement (physical vs cash). Total return swaps. The role of swaps in the GFC: synthetic CDOs, AIG, central clearing mandate post-GFC (ISDA, LEI requirements, APRA CPS 226 clearing mandate for AUD IRS). ISDA Master Agreement: schedule, CSA, netting, closeout provisions. Week 12 (Securitisation and the Financial Crisis): Securitisation: definition, structure of a basic securitisation (originator, SPV, tranching, waterfall, credit enhancement), types (RMBS: residential mortgage-backed securities, CMBS: commercial mortgage-backed securities, ABS: auto loans, credit cards, student loans, CDO: collateralised debt obligations, CLO: collateralised loan obligations), Australian securitisation market structure (AOFM as investor during GFC), the originate-to-distribute (OTD) model and its incentive problems. The Global Financial Crisis (GFC): timeline (US housing bubble, subprime mortgage origination, CDO structuring, rating agency failures, ABCP market freeze August 2007, Bear Stearns collapse March 2008, Lehman Brothers September 2008), the role of structured products (CDOs squared, synthetic CDOs), the repo market run (Gorton and Metrick), AIG and CDS counterparty risk, the TED spread and LIBOR-OIS spread as stress indicators. Post-GFC regulatory reforms: Dodd-Frank Act (US), Basel III (global), OTC derivatives central clearing mandate, Financial Stability Board (FSB), G20 reform agenda, Australian response (APRA capital and liquidity reforms, ASIC market integrity rules).