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Question ci Global stock markets slump due to worry on global economic depression under prevalence of COVID-19. Therefore, fund companies face tremendous redemption demand from
Question ci Global stock markets slump due to worry on global economic depression under prevalence of COVID-19. Therefore, fund companies face tremendous redemption demand from their investors. To order to meet the redemption demand, fund companies have to sell large amount of risky assets (e.g. corporate and government bonds) and commodities (e.g. gold). It leads to further drop on financial assets' prices. Meanwhile, investors demand for the U.S. dollars as a safe heaven in the volatile financial market. U.S. Dollar Index, representing the exchange rate of the U.S. dollars relative to other major currencies, hit the 3-year high since early 2017. Besides, it is noticed that the market is lacking loanable fund supply amid increasing risk of financial market. A global strategist in an investment bank claimed that many oil exploration companies do not have sufficient cashflow for repaying interests of the bonds issued before as they are on the edge of bankruptcy after recent tumble in oil price. Therefore, they increase their borrowings from banks for daily operation by using the existing lines of credit. Various banks are considering whether to impose constraints for lending those companies so as to control their risks. Required: (a) Identify and explain THREE risks faced by banks regarding to the use of existing lines of credit by oil exploration companies. (6 marks) (b) Some fund companies plan to forbid fund redemption requested by fund investors. Explain the rationale behind. (3 marks) (C) It is noticed that many U.S. banks have overseas operations. (i) Identify and explain briefly TWO motives for overseas expansion. (4 marks) (ii) Explain how these banks were affected by recent change on exchange rate of the U.S. dollars. (2 marks)
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