Name: wang xinrui

3036128298
Student No.

Financial Crisis
Common Core CCGL9030
Individual Take Home Exam
K. S. Maurice Tse
The University of Hong Kong
Fall 2023

Important Information

1. DUE DATE: By 17:00 on Wednesday, December 6, 2023.

2. Our TA, Joshua, will give you the instruction on how to submit your finished
assignment on Moodle.

3. Please submit your finished work in WORD format (PDF or any other file format WILL
NOT BE accepted).

4. Make sure you type your name and student number in the space provided at the top of
this page.

5. Please read the statement on Academic Honesty and Integrity on page 5 and type your
name in the space underlining it.

Attempt ALL SIX Questions.

Question 1 (20 points)

Read the case on “Currency Wars” and answer the following TWO questions:

(a) What are the currency wars? (10 points, no more than two pages)
currency wars are the competitive currency devaluation between nations, during which
nations intentionally devaluates their currencies in order to possess wider share of global
market. There are mainly three origins of the currency war. Firstly, global major central
banks such as US Federal Reserve remains the expansionist monetary poilicies after the end
of quantitative easing. This causes the devaluation to proceed in developed countries, and
depreciating foreign capitals are increasing in developing countries which have less
depreciation rate and are thus relatively more competitive. These “hot money” capitals
might have negative effects to the developed countries’ markets. Secondly, the devaluation
policies of developing countries such as China deteriorates the global currency war. China
stores large amounts of foreign currents and devalue its currency to increase its
competitiveness on global market, which disrupts the normal function of world market.
Thirdly, Other countries also participated in the buy in of US dollars in exchange of their
currencies in the aim of depreciating their currencies. Countries such as Switzerland and
Japan enlarges foreign currency purchase. Such competitive devaluation is conceived as
malicious and might attract retaliation.

(b) What are the likely consequences of a currency war across nations? (10 points, no more
than two pages)
This part will illustrate the consequences to developed countries, developing countries and
global financial organizations.
Considering the countries holding the currency that possess higher value in the currency
war, such as US, the outflow of currency in the war deteriorates currecny deflation in other
countries and forces countries like U.S. to adopt protectionism policies, namely, to impose
tariffs and import quotas, in fear of future retaliation. However, protectionism policies
decreases the liquidity of capitals and economic vitality of the U.S. market, which decreases
the recovery speed and might cause future stagnancy.
Considering the developing countries that have higher interest rates than developed
countries, investors are attracted by the high rate and lend foreign currencies to these
countries. The inflow of foreign currencies further deteriorates the depreciation of the
developing countries’ currencies. In addition, these countries are unable to tune down the
interest rate since a stable exchange rate, free capital mobility and an automonous
monetary policy are incompatible. To maintain a certain exchange brate to ensure a free
capital flow in order to boost economic growth and address the crisis, these countries have
to give up the latter of the “unholy trinity”. What’s more, after the stage of rapid currency
inflow, developing countries might also adopt protectionism policies which might be
accompanied by retaliatory activities against developed countries and anti-foreigners

2
 atmosphere.
Considering the global monetary organizations such as the US Federal Bank, the quantative
easing policies adopted to decrease interests in the challenge of the crisis provides a
illusionary prospect of high liquidity. This encourages the investors to take risky measures to
borrow the capitals which might evolve into a bubble.
To address the currency war and increase tenacity against future crisis, developing
countries should convert their market system to a more stable, more competitive and
efficient system, and should transfer their policies from inflation targeted policies to taxing
policies regarding cash inflow. In addition, a more powerful global organization should be
established to regulate the cross-border transactions and international currency ratio.
Besides, an international currency should be issued to ensure that the transactors have
equal identities and their welfare prospects are intertwined. This might discourage the
crrency wars that undermine the benefit of all human beings.

Question 2 (10 points)

Read “Prognosis Uncertain” of The Economist on Oct 10, 2020 and answer the following two
questions (page limit, A4-sized, double-sided and double-spaced).

(1) Why is it easier to contain the financial crisis than COVID-19 pandemic?
Because firstly, containing a pandemic requires a well-constructed healthcare system
supported by enough capitals (for example, the medical insurance service). This
complicated system demands large investments and is difficult to be well-rounded as it
includes the joint effort of hospitals, trained healthcare personnels and medical supply
logistics to sustain. The operation of this system is especially hard for countries under
poverty such as Brazil. in addition, the virus itself has the attribute of being volatile and
unpredicable. What’s more, pandemics usually break out rapidly, which means that most
medical organisations are unprepared. In contrast, the current global financial system is
more solid against crises, which is proved by the fact that prganisations like FED are able to
exert its regulating even facing a market crash. Besides, the world financial
organisations are better prepared for the crisis since they implement programs that store
sufficient capitals for emergency. For example, the IMF is able to lend a considerable
amount of 89 billion dollars to aid countries facing the crisis.

(2) What are the possible reasons that COVID-19 has not brought on an emerging-market
crisis?
This part will illustrate the possible reasons in the aspects of the capital storage of global
monetary organisations and the global organizations’ regulatory policies.
Firstly, the global financial organisations have enough capitals stored for emergency. The
IMF is able to lend a considerable amount of 89 billion dollars to aid countries facing the

3
 crisis, which proves that these organizations’ storages are sufficient to regulate the financial
marjet under crisis for limited time.
Secondly, the regulatory policies of global organizations like FED provides support to
commercial entities facing a break down, thus boosting their confidence. The passage noted
that FED offers capital support, permits currency swap lines and provides American
Treasury exchange services to countries under poverty and suffering from the crisis shock.
These policies guarantees support to these countries which might face the collapse of
finance system, and raised those countries’ confidence to restore their markets. Thirdly,
bond purchases of countries affected by the crisis provides capital to regulate and restore
their markets, boosting their confidence.

Question 3 (10 points)

The lecture on “Bubbles and Crashes” discussed the lesson learnt from the “Dotcom Bubble” in
March 2000. Describe one method that can be used as an indicator to tell whether a bubble is
being formed in a particular sector of the stock market, say the bio-tech industry. (10 points)
one method is to look at whether the stock price of the bio-tech industry is rapidly increasing
within a short limit of time, deviating from the long-term average price. For example, within
year 2020, the USD price of bit coins see a rapid rise from an average of around 5000 to a
striking high of 60205 within 8 months. The abnormal increase lingered and fluctuated at a high
range for 3 months and rapidly crashed down within a short time. Therefore, whenever a
sudden deviation from the common price appears in the stock price, a bubble might be
forming.
Admittedly, an upward shift of the market might also be a good investing opportunity to be
seized. Therefore, an overall investigation of the contributing factors to the deviation and a
rational prediction to the market’s futrure growth should be implemented before deciding
whether to make investments or to avoid the bubble.

Question 4 (20 points)

The Excel file “Dataset for Take home Fall 2023” contains the monthly data for Hang Seng
Index, the monthly price and rental index for Office properties in Hong Kong from January 1993
to December 2022.

Consider the three major financial and pandemic crises in the last three decades below:
 Asia Financial Crisis 1997-1998
 Global Financial Crisis 2008Q1-2012Q3
 Pandemic 2020-2022

Following our discussion in class on measuring and gauging the impact of a financial crisis on
asset prices, evaluate the impact of each of the three crises on the Hong Kong stock and the
office market.

4
(a) Hong Kong stock market. (10points)

During the Asia Financial Crisis of 1997-1998, The Hang Seng Index, which represents the
stock market performance in Hong Kong, experienced a plunge. The crisis originally attracts
investors due to seemingly positive market growth. However, considering the irrationality of
the herd-following investment trend of investors and a lack of accurate risk calculating
model, the investors’ confidence was fragile. Therefore, when the bubble was beginning to
break, investors retrieve large amounts capitals in a frenzy, resulting in the stock price
plunge. Subsequent impacts include depreciation of the Asian currencies, increased
unemployment and the bankruptcy of central companies.
The Global Financial Crisis of 2008-2012 also creates a plunge after the bubble in the Hong
Kong stock market breaks. The data of the asset’s market price indicates the significant
decline of the index, resulting in the turmoil of the global financial market. The currencies in
developing countries experience depreciation, which cause these countries to adopt the
buy-in of foreign currencies, mainly US dollars. The capitals of developed countries
experience an out-flow, which becomes “hot money” which experience increased risk of
value expiration. In addition, the economic activities are suppressed which leads to
stagnancy in developing countries.

The Pandemic of 2020-2022 also contributes to the decrease of Hong Kong stock market
price. The crisis undermines the financial security of HongKong, discouraging financial
transactions and undermining the vitality of the market. Various sectors such as
entertainment, export and transportation is suspended or depressed, which decreases the
area’s capital income. These impacts slows down the recovery of the area after the

5
 pandemic
(b) Real estate market consisting of office price and rent. (10 points)

As for the Asia Financial Crisis of 1997-1998, property values decreased sharply due to the
depreciation caused by the crisis and the reduced transacting activities of investors. The
oversupply of office space and weakened demand results in a decrease in office prices and
rents. Many real estate projects were halted or canceled due to insufficient capital, which is
experienced by the Indonesian market with a nearly 60% decline in the number of proceeding
asset projects.
The Global Financial Crisis of 2008-2012 also triggers a plunge in value of office prices and
rental. The financial stress brought by the crisis decreases economic activities, reducing the
companies’ demand for office space. With supply of office places exceeding demand, the office
market tunes its price down to attract more people to rent offices.
However, the Pandemic of 2020-2022 increases the price of offices. The reason for this impact
is that a large portion of businesses transfer from working off-line to online working during the
lock-down, and office places are required to posit computers for remote connection. The
experience of this pandemic and future predictions of more epidemic outbreaks contributes to
companies reconsidering their need for future office space, therefore increasing the office
demand and office rental.
In conclusion, the financial crises influence the demand-supply relationship between office
suppliers and people who rent offices. When demand exceed supply, office rental price
increases, and when demand is less than supply, the price decreases.

You can use graphs and/or tables to present your findings.

Question 5 (20 points)

6
In class discussion, the formation of an asset bubble is likened to a Ponzi scheme.

(a) What are the essential elements for the success of a Ponzi Scheme? (10 points, No more
than ONE page)
To begin with, a Ponzi Scheme is an investment fraud that pays existing investors with funds
collected from new investors.
1. the promise of unrealistic future return: Ponzi Schemes normally entice investors by
providing unrealistically promising future illusions, thus increasing the investors’ confidence in
the program as well as their risk-taking invstment bahaviors.
2. unlicensed sellers: Ponzi Scheme operators usually adopt fabricated financial documents or
reports to show the credibility of their backgrounds.
3. overly consistent returns: investment values and operation revenues normally oscillates
with the status of the market, but Ponzi Scheme operators sometimes provides overly
consistent amounts of paybacks to show their operation’s stability and credibility.
4. little or no regulation: Ponzi Schemes are usually without official and credible organisation.
5. lack of transparency: Ponzi Schemes involves the repetitive transfer of one risk-bearing
project among old and new investors, thus the origin of the risk is hard to trace. In addition,
the Ponzi operators often reject revealing information of the organization or reveal half of the
truth, for instance, revealing only the timely revenues of a project but not revealing the
historical status of the project.
6. continuous efforts to attract new investors: Ponzi Scheme operators use the above
marketing skills to entice new investors to raise capital and transfer the risk within a project to
other investors.

(b) Do you see any similarities between the formation of a financial bubble and a Ponzi
Scheme? Briefly explain. (10 points, No more than ONE page)
Considering the origin of the crisis, they are both partially initiated by seemingly positive
investment products which encourage risky investments and the overly inflow of capitals to the
market. The 2015 Chinese stock market initiates with the seemingly positive growth of market
and subsequent excessive investment of stockholders, and McDolf, one of the most famous
Ponzi operators during the 2008 crisis, attracts investors by giving them promises of future
returns that is impossible to realize.

Besides, they are both amplified by the herd-following psychology of investors. Due to the lack
of a mature evaluation system of the investment company managers’ professional skills and the
fact that the mainstream investment methodologies only focus on calculating short-term
returns, there is a lack of confidence in an investors’ judgment of the market status or the
credibility of the Ponzi operators, as well as a lack of well-established systems to accurately
evaluate and predict the changes of market in the long-term. Therefore investors and managers
tend to follow the trend and make investments when there is a seemingly upward shift of the
stock price or when the Ponzi operators seems credible.
Furthermore, the aftermaths of the crises both involves the disruption of the financial market.
The irrational behavior of investors mentioned above continues once there is a downward shift
of the market. They extract the large amount of capitals invested before in a frenzy of

7
fear,which could cause the collapse of major financial organizations supported by these funds.
This is illustrated by Thailand during the 1997 Asian Financial Crisis, causing over 16 central
companies to cease operation. This collapse might trigger further distorted commodity prices,
unemployment, and stagnancy.
In conclusion, a financial bubble and a Ponzi scheme is similar in their formation, expansion and
aftermath.
Question 6 (20 points)

What are the advantages of mortgage-backed securities? (10 points)

1.Predicable cash flows: MBS is a program which extracts a portion of the value of fixed assets
to form the capital pool which is used to generate security capitals. The cash flows generated is
more stable and predicable due to the fact that the price of properties like buildings or lands
are predicable.
2.flexibility: MBS can procide diversified investment portfolio choices, since they are not
directly tied to the stock market.
3.liquidity: the MBS are traded in secondary markets. The trade of secondary markets are
mostly carried out as insubstantial, namely to trade securities among investors, which
guarantees more liquidity to the transaction.
4.higher returns: Compared to fixed-income securities such as government bonds, MBS often
yield higher returns.
5.low credit risk: MBS revenues are cultivated from mortgage pools, which is supervised by
government. The regulation of law over MBS services reduces the risk for investors.
Despite these advantages, MBS still contains the risk such as payment and credit risk. Therefore
investors are advised to thoroughly check the credibility of MBS corporations before making
investments.

Based on our discussion in class, provide FOUR consequences of mortgage securitization that
triggered the subprime crisis and led to the eventual financial crisis 2008. (10 points)
1. the decrease of lending standards: Considering the liquidity when transfering mortgages and
its risks from lenders to investors, lenders can easily decrease their risk burden, and are thus
less strict when setting the credibility standard of investors. Those investors lacking credibility
might become new lenders and repeat this loop, thus undermining the overall credibility of
participants involved in the transactions. The lack of strict credibility restrictions invites risk,
which lay the basis for the 2008 market default.
2. the encouragement to lenders’ risk-taking behaviors
Since flawed mortgages could easily be sold off, lenders face less individual risk when MBS flaws
happen, and are thus encouraged to take up risks in further mortgage investments.
3. lack of transparency: since the mortgages can be transacted with great liquidity to transfer
risk and responsibilities to the next holder, it is difficult to trace the source of risk embedded in
the transferring process. In addition, previous holder is likely to conceal negative risk analysis of
the MBS project in order to sold off the project. A lack of transparency about the true risk of
MBA product is thus involved, which lay the foundation for risks to accumulate and evaporate
as the eventual crisis.

8
4. the risk expansion effect: since the mortgage securitization distributes the risky bonds from
one investor to various investors, the depreciation of an asset that is included in a mortgage
program can be amplified to wide areas. This is experienced during the 2008 crisis in which the
instability in the market becomes contagious with the amplifying effect of mortgages.

Academic Honesty and Integrity

The University Regulations on academic dishonesty will be strictly enforced. Please check
the University Statement on plagiarism on http://www.hku.hk/plagiarism/.

Cheating or plagiarism of any kind would result in an automatic F grade for the course plus
strict enforcement of all Faculty and/or University regulations regarding such behavior.
Incident(s) of academic dishonesty will NOT be tolerated.

For this take-home exam, I declare that

 I have not received or given any assistance to another student of this course.
 I have not solicited input from any AI such as ChatGPT.
 I have not plagiarized someone else’s work and turn it in as my own.
 I understand that acts of academic dishonesty may lead to serious academic
disciplinary consequence including but not limited to receiving a failing grade for this
course.

Name:____wang xinrui_______________________________

Student Number:_____3036128298___________________