Question & Answer

Posted: August 27th, 2021

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1. What Is the Character/Trader You Find Most Interesting and Why?

The most interesting character in the film is Michael Burry, played by Christian Bale. Burry is the hedge fund manager. The guy is interested in the way his storyline is exhibited. As a fund manager, Burry recognizes that the housing market for the U.S is merely an asset bubble. In this case, he creates a credit default swap to ensure he shorts the housing market. This infuriates his clients (Mckay). Their argument is actually out of ignorance with wrong confidence that the housing market is stable. Regardless, being aware of the realities in the market, Burry does not give in but sustains the implementation of his managerial policy. He continues playing shorts. However, things continue going tough with his customers demanding their money back. On this, Burry places a moratorium on any withdrawals. Besides, Burry is also an influence. This is because his management skills are admired by other managers; Jarred Vennet playing as Ryan Gosling and Mark Baum playing as Steve Carrel (Mckay). They both join Burry by putting their investments into credit default swaps when they realize that his goals. Thus, Burry is the most interesting character because he is creative and visionary as he becomes the ultimate game-changer.

• How Is the European INSTEX Competing Platform Could Challenge the Dominating Position of The SWIFT System? What Impact the Use of INSTEX Is Expected to Have On the Dollar?

The European INSTEX platform has the capability of challenging the dominant position of the SWIFT system. It will provide an alternative form of transaction with other nations. The mechanism also allows international trade to affect typical payments. Thus, the establishment of the system will enable interested companies to execute their business activities with sanctioned countries such as Iran and Partners while avoiding engaging in sanctionable behavior (Mckay). Although the technical and legal details of the functioning of INSTEX is still undefined, affected economies will be compelled to overcome political restrictions to develop their version of INSTEX. Currently, the EU is in the process of unavailing the system. However, is delayed for fear of facing the U.S wrath from hosting such an instrument. Regardless, the system will be established and gradually introduced to small and medium sized businesses that are not directly engaged with the U.S. in sectors such as pharmaceuticals and food (Mckay). Gradually, it will be rolled out by large multinational companies before taking shape to outdo the SWIFT system. Equally, the continued interdependence between U.S. – E.U. to the detriment of E.U. freedom of economic policies could encourage embracing of INSTEX as Europe’s preferred payment platform. Thus, the impact of the introduction of the INSTEX system is that dollar dependent on payments.

•  What Can You Say About the Relationship Between the Price of a Bond and Prevailing Discount Rate?

From the film, it is evident that a bond whose price has been discounted has a market price face value. This face value creates capital appreciation as it matures. The reason is that when a bond matures, it collects high pay on face value (Mckay). Thus, a discount for a bond is the difference between the bond’s face value and its market value. Hence, the prevailing discount rate and price of a bond affect its performance on the market. More so, interest rates have an inverse relationship with bond prices (Hunter). This implies that an increase in bond prices leads is associated with a decrease in interest rates. Therefore, when a new bond is issued with higher interest rates than those on the market, prices of existing bonds will decline. This is because this reduces their demand (Mckay). Similarly, the reverse is true when new bonds are issued with relatively low-interest rates. Hence, the prevailing discount rate serves to balance the difference between the newly issued bonds against the existing ones by eliminating the effect of interest rates. The discount rate helps establish the appropriate price of the bond relative to the market price.

• Analyze The Relationship Between Interest Rates and The High Yield Debt Issue

The high yield debt issue performs better in the bond market than the high-quality debt issue with a rise in interest rates. The high yield debt issue is also referred to as junk bond and some offer the best investment options (Hunter). However, the relationship between high debts issue and interest rate is conflicting. Whereas some economists argue that high yields for bonds occur with an increase in borrowing (Mckay). In this case, investors seeking compensation of government defaults on bonds tend to demand high yields (Hunter). Whereas, other economists aver that this is a misleading argument. As such, they explain that in circumstances where there are low inflation and surplus savings, there will be no rising yields with higher debts (Mckay). Equally, fear of default and inflation can contribute to high bond yields with high debt levels (Hunter). Thus, bond yield represents an effective interest rate that lenders receive as payment for ownership of government bonds. Hence, market forces of demand affect the behavior of the yield. An increase in the demand for government bonds respectively increases bond prices; thus reducing yields and the reverse is true with lower demand for government bonds.

Works Cited

Hunter, Michael. “Charts That Matter: US Bonds and Fiscal Challenges After QE Era.” Financial Times, 24 Jan. 2018, www.ft.com/video/980e34b8-1d54-4760-a354-081450a949b3.

Mckay, Adam. “The Big Short (2015).” Rotten Tomatoes, 7 July 2017, www.rottentomatoes.com/m/the_big_short.