You are allowed ten minutes before the start of the examination to acquaint

yourself with the instructions below and to read the question paper.

Do not write anything until the invigilator informs you that you may start
the examination. You will be given five minutes at the end of the
examination to complete the front of any answer books used.


May/June 2009 IC101 2008/9 A 001



One Answer Book
Only Texas BAII Plus series
calculators are permitted
No other calculators are permitted


THE UNIVERSITY OF READING

Final Examination for BSc,

Course in Finance and Investment Banking

Introductory Securities and Markets

Three Hours


Answer Question 1 and any two others i.e. answer 3 questions only.
In all questions, each part carries equal weight.







Page 2
1. Most commentators, regulators, central bankers and bankers themselves
were taken by surprise by the severity of the current financial crisis and
the speed with which it took hold.

a. What market, for example the US sub-prime market, do you see as
being the original source of the crisis? What does this market
attempt to do and what are the features of this market that may
explain its collapse? Were there weak links in the chain from
mortgager (borrower) to final investor and if so, how did these
contribute towards the problem in this market?
b. While the sub-prime market may have been the proximate cause of
the collapse (i.e. the initial cause which set in motion a train of
events), there would seem to be underlying issues in terms of the
structure of the banking industry and of the investment banking
industry which caused the crisis to spread and be worse than most
observers expected. Explain what you see as these structural and
financing issues within the industry and how this led to a worsening
of the initial crisis.
c. The banking system is now said to be de-leveraging. Explain what
leveraging is and how commercial and investment banks achieve
de-leveraging.
d. If all banks de-leverage and in addition increase the percentage of
their assets invested in government bonds (in order to meet new
liquidity rules), what implications might this have for the real
economy? Are there any ways in which the government could
minimise this impact?
e. Explain the different means, or combination of means, by which
banks which are potentially insolvent can be rescued by
governments buying bad debts (i.e. buying assets), putting in
fresh capital (i.e. creating new bank liabilities) or insuring assets.
What are possible differences in the implications of these different
approaches to government intervention?
f. In the case of a bank which is not insolvent but has inadequate
capital, what approaches might it take to bolster its capital ratios?
Give an example of any bank which might be doing this.




Turn Over

IC101 2008/9 A 001

Page 3
2. An execution venue is designed to allow orders to meet or for a buy or sell
order to be executed against a quotation.

a. Explain how an electronic order driven (continuous double auction)
market functions and compare it with a dealer market structure.
b. One problem of such markets is that large wholesale orders are
difficult to match against small retail orders. What are these
problems?
c. How might a dark liquidity pool (crossing market) operate? What
advantages might it give to participants? Explain all the features of
such a market mechanism.

3. Asset managers traditionally offered their clients a balanced portfolio in
which perhaps 60% of assets were invested in equities, 20% in bonds,
10% in property and 10% in cash.

a. Consider why managers may have offered this type of structure in
the past
b. Consider why today, many client funds are moving away from
balanced mandates to specialised managers
c. Alternative assets have become popular in recent years (though they
are currently less popular). Explain what is meant by alternative
and explain the structure of two alternative asset types or strategies.

4. Securities transactions have to be cleared and settled. This can in theory
be undertaken either by the same company (exchange) which offers
execution services or by a third party company.

a. Explain the operation of the settlements function in securities
markets
b. Explain the role of central counterparties.
c. Consider the advantages and drawbacks of integrating execution,
clearing and settlement in one company such as Deutsche Borse,
from the viewpoints of both the customer and the exchange.

(End of Examination)




IC101 2008/9 A 001