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Financial Institutions and Markets

1.Discuss some of the manifestations of the globalization in the capital market of Kingdom of Saudi Arabia (2Marks)

2a. What is a simple loan?(1Mark)

2b. If Ahmed borrows 100SAR from his father and next year his father wants 110SAR back from him ,what is the yield to maturity on this loan? (2Marks)

The more risk-averse people are, the more likely they are to diversify. Is this statement true, false, or uncertain? Explain your answer(2Marks)

4.Can you think of any financial innovation in the past ten years that has affected you personally? Has it made you better or worse off? In what way?(3Marks)

Sample Answer

The Saudi capital market has experienced significant globalization in recent years, driven by several factors:

Foreign investment: The Saudi government has opened up its capital market to foreign investors, leading to increased inflows of capital and diversification of the market.
IPO of Saudi Aramco: The initial public offering (IPO) of Saudi Aramco, the world’s largest oil company, in 2019 was a major milestone in the globalization of the Saudi capital market.
Listing of foreign companies: Several foreign companies have listed their shares on the Saudi Stock Exchange (Tadawul), enhancing the market’s diversity and attractiveness to international investors.

Full Answer Section

Adoption of international standards: The Saudi market has adopted international standards and regulations to align with global best practices and attract foreign investment.

2a. What is a Simple Loan?

A simple loan is a type of loan where the borrower repays the principal amount plus a fixed interest rate at the end of the loan term. There are no intermediate payments or compounding of interest.

2b. Yield to Maturity Calculation

Given:

Principal amount (PV) = 100 SAR
Future value (FV) = 110 SAR
Time period (n) = 1 year

Formula for Yield to Maturity (YTM):

YTM = (FV / PV)^(1/n) – 1

Calculation:

YTM = (110 / 100)^(1/1) – 1 YTM = 1.1 – 1 YTM = 0.1 or 10%

Therefore, the yield to maturity on the loan is 10%.

3. Risk Aversion and Diversification

The statement is true. Risk-averse investors are generally more likely to diversify their portfolios to reduce risk. By investing in a variety of assets, they can spread out their risk and reduce the impact of any single investment’s performance on their overall portfolio. This is because diversification can help to offset losses in one asset with gains in another.

4. Financial Innovation and Personal Impact

One recent financial innovation that has personally affected me is the widespread adoption of mobile banking and digital payments. These technologies have made it easier for me to manage my finances, pay bills, and make transactions. For example, I can now easily transfer money between accounts, pay bills online, and use contactless payments for purchases. Overall, these innovations have made my financial life more convenient and efficient.

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