CHP 21 Flashcards
Other influences on investment markets
- Demand factors
- Investors’ incomes
Amount of money available for investment by institutional investors can have a major impact on market prices.
This is very true for changes in flows of funds into institutions with tightly specified investment objectives. The good returns that will result because of the increase in demand might then set off a spiral of growth.
The reverse of this can also happen.
Other influences on investment markets
- Demand factors
- Investors’ preferences
This can alter by:
• Change in liabilities
• Change in regulatory or tax regimes
• Uncertainty in the political climate
• “fashion” or sentiment altering – sometimes for no reason
• Marketing
• Investor education undertaken by suppliers of a certain asset class.
Other influences on investment markets
- Demand factors
- The price of alternative investments
All investment assets can be viewed to a certain extent as substitute goods. Thus there is a strong correlation between prices of different asset classes.
Other influences on investment markets
1. Demand factors
Demand for an asset will change in one of two main circumstances:
• Investors’ opinion remains the same but external factors alter the demand for that asset. E.g. investor’s income and preference, price of other assets
• Investors’ perceptions of the characteristics of that asset change, principally risk and expected return.
Other influences on investment markets
- Supply factors
- Equity markets
Increase in supply (lost of new shares issued) will put downward pressure on prices.
Other influences on investment markets
- Supply factors
- Bond markets
In government bond markets the supply is largely controlled by the fiscal deficit and its strategy for financing the deficit.
Other influences on investment markets
- Supply factors
- Other investment markets
Sometimes supply in increased by technological innovation.
E.g. derivative markets where better understanding of pricing and reserving for complex products have allowed investment banks to supply then to end users more cheaply, thus increasing the quantity demanded.
Risk mitigation techniques
FAT SIR Further research Avoid Transfer Share Insure Reduce
Identification of sources of risks?
PNE FC PB
Political (government change, 3rd parties)
Natural (storm, earthquake)
Economic (interest rate, currency movement)
Financial (financing problems, costs too high)
Crime (fraud)
Project (poor design, runs behind time)
Business (competition, loss of key personnel, insolvency of contractor)
Risk identification tools
DR RUB Desktop analysis Risk analysis Risk register Upside as well as downside risks identified Brainstorming
Contents of written strategy document
PROSE
Policies (financial, legal, tech, risk management, communications, IT)
Roles and responsibilities of sponsor and 3rd parties
Objectives identification, how to measure, quality standards and financial
Schedule of milestones and key points
Expected cost including insurance
Criteria assessed in initial appraisal
SPURS Synergies with other projects Political constraints Upside potential Results (financial) Scare resources
Characteristics of well run projects
PROJECT CRAMPS Planning (full) Risk analysis is thorough Objectives are clear and meet customer needs Judge (monitor) development Excellent communications Conflict management Thorough testing
Critical path analysis
Relationships with suppliers challenging and stable
Appropriate pace so right things are done on time
Milestone review schedule
Performance and quality standards are set and measured
Supportive environment
Expenses incurred by a product provider?
RAPID COST Renewal admin Asset management Profits Initial admin e.g. put on computer system Design of contract costs Commission Overheads Sales/advertising Terminal (benefits payouts)
Contract design factors?
Ample Direct Factors Admin systems Marketability Profitability Level and form of benefits Early leaver benefits Discretionary benefits Interests and needs of customers Risk appetite Expenses vs charges Competition Terms and conditions of contract Financing (capital requirements) Accounting implications Consistency with other products Timing of contribution to premiums Options and Gtees Regulatory requirements Subsidies (cross)
