Investment Markets and Principles

Lecturer Khuc The Anh

Student’s name Dinh Thi Mai Phuong
CMU 20293325
Class 9B

Hanoi, 2025

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I, Dinh Thi Mai Phuong, declare that I am the sole author of this assignment, and the work
is a result of my own investigations, except where otherwise stated. All references have
been duly cited.
 Table of Contents
I. Question 1...............................................................................................................................1
II. Question 2...............................................................................................................................2
1. Portfolio diversification and safe-haven assets: mitigating stock market risk through
negative correlation.....................................................................................................................2
1.2. Safe-haven assets:........................................................................................................3
2. Bitcoin as a safe-haven asset: evaluating affirmative and negative perspectives................7
2.1. Summary of research on bitcoin as a safe-haven asset................................................7
2.2. Personal perspective on safe-haven assets...................................................................8
III. Reference..............................................................................................................................11
 I. Question 1.
Interest rates play a crucial role in financial decision-making, influencing both borrowing and
saving strategies. Different banks offer varying interest rates with different compounding
periods, affecting the effective annual rate (EAR). In my essay, I will analyze interest rate quotes
from four banks, determine the best choices for borrowing and saving, and explore potential
arbitrage strategies.
Compounded interest grows an initial amount by applying interest periodically rather than just
annually. The formula to calculate EAR is
n
r
EAR = (1+ ) – 1
n
In which: r is the nominal annual interest rate; n is the number of compounding periods per year.
1
15 %
Bank A: EAR = (1+ ) – 1 = 15%
1
12
14.8 %
Bank B: EAR = (1+ ) – 1 = 15.85%
12
52
14.6 %
Bank C: EAR = (1+ ) – 1 = 15.7%
52
3 65
14.4 %
Bank D: EAR = (1+ ) – 1 = 15.49%
3 65
The optimal choice for borrowing is Bank A, as it offers the lowest EAR (15%). This minimizes
the total interest paid overtime.
The best choice for saving is Bank B, as it offers the highest EAR (15.85%), maximizing returns
on deposits.
Borrowing money from Bank A and depositing it in Bank B can generate profits when there is an
interest rate differential between the two banks. If the effective annual rate (EAR) at Bank A is
15.00% and at Bank B is 15.85%, an individual can borrow from Bank A at a lower interest rate
and deposit it in Bank B to take advantage of the higher rate. For example, borrowing $100,000
from Bank A and depositing the entire amount in Bank B could yield a profit of $850 per year.
However, this opportunity cannot last indefinitely. The financial market constantly adjusts to
minimize inefficiencies. Banks may adjust interest rates to narrow the gap between borrowing
and saving rates, limiting the potential for arbitrage. When banks notice customers exploiting

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interest rate differences, Bank A may increase its lending rates, while Bank B may reduce its
deposit rates
to make such transactions less attractive. These adjustments help stabilize the market and
mitigate risks for financial institutions.
Nevertheless, profiting from interest rate differentials continues to occur in many international
markets. In different countries, interest rates on various currencies can vary significantly. Some
investors may borrow USD in one market at a low-interest rate and deposit it in another market
where rates are higher, profiting from the differential. This is a widely applied financial strategy,
particularly in foreign exchange transactions and international finance.
In conclusion, leveraging interest rate differentials between banks can generate short-term
profits. However, banks typically adjust their rates to minimize such opportunities, making them
unsustainable in the long run. Despite this, on a global scale, the opportunity to profit from
interest rate differentials across markets persists and remains an essential part of international
financial activities.

II. Question 2.
1. Portfolio diversification and safe-haven assets: mitigating stock market risk through negative
correlation.
1.1. Asset classification based on cross-asset correlation.
Asset classification based on cross-asset correlation is a crucial framework in portfolio
management, helping investors optimize returns while managing risk exposure. Broadly, assets
can be categorized into three main groups: diversifiers, hedges, and safe havens.
Diversifiers are assets that have a positive but low correlation with stock markets, meaning they
do not move in perfect tandem with equities. This helps smooth out returns and reduce overall
portfolio risk. Examples include corporate bonds, which offer fixed interest payments and
moderate correlation with stocks; real estate investment trusts (REITs), which follow their own
property market cycles rather than stock market trends; and commodities like oil and industrial
metals, whose prices are influenced by supply-demand dynamics and external factors such as
geopolitical risks.
Hedges, on the other hand, have a low or negative correlation with stock markets, meaning they
tend to move in the opposite direction or remain stable during downturns. These assets serve as a
buffer against market losses. Common hedging instruments include gold, which historically

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appreciates during financial instability; inflation-protected bonds (TIPS), designed to preserve
purchasing power against rising prices; and defensive stocks in sectors like utilities and
consumer staples, which remain resilient in economic downturns.
Lastly, safe havens are assets with a strong negative correlation with stock markets, making them
particularly valuable during financial crises or extreme market turbulence. Safe haven assets tend
to appreciate in value when riskier investments decline, offering capital protection in uncertain
times. Examples include sovereign bonds from stable economies like German Bunds, known for
their security and reliability; cryptocurrencies like Bitcoin, which some investors view as digital
gold due to its decentralized nature; cash and bank deposits, which provide liquidity and capital
preservation in volatile periods; and precious metals such as gold, silver, and platinum, which
serve as alternative stores of value. Some investors also view Bitcoin as a potential digital safe -
haven due to its decentralized nature, although its volatility makes its role in crisis protection
debated. Understanding these classifications allows investors to construct well-balanced
portfolios that can withstand different market conditions and economic cycles.

1.2. Safe-haven assets:

During periods of financial crises or extreme market volatility, investors seek safe-haven assets
to preserve capital and mitigate risks. These assets typically exhibit low or negative correlation
with stock markets, meaning their value remains stable or even appreciates when equities
experience sharp declines. Key characteristics of safe-haven assets include stability, resilience to
economic downturns, and high liquidity, making them crucial components of a well-diversified
investment portfolio.
Among the wide range of safe-haven assets, four stand out due to their historical performance
and investor preference: precious metals (gold, silver, platinum), sovereign bonds, safe-haven
currencies, and Bitcoin. While traditional safe-haven assets like gold and government bonds have
long been recognized for their reliability, currencies from stable economies offer additional
protection through liquidity and global acceptance. Meanwhile, Bitcoin has emerged as a digital
alternative, attracting attention for its decentralized nature and limited supply. Each of these
assets plays a unique role in protecting wealth and reducing risk exposure in uncertain economic
environments.

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 1.2.1. Precious metals – The traditional safe haven.

Gold, silver, and platinum have long been recognized as reliable safe-haven assets, offering
protection against economic instability, inflation, and currency depreciation. Among them, gold
stands out as the ultimate store of value, historically used as a hedge during financial crises. Its
scarcity, durability, and independence from government policies make it a preferred choice for
investors seeking stability. For instance, following the 2008 financial crisis, gold entered a strong
uptrend as investors sought a safe-haven amid economic uncertainty. Initially fluctuating during
the crisis, gold surged in the following years, reaching approximately $1,920 per ounce in
September 2011. This peak was driven by prolonged economic instability, fears of inflation, and
concerns over sovereign debt crises, particularly in the Eurozone. Similarly, in 2020, amid the
COVID-19 pandemic, gold reached an all-time high of $2,070 per ounce as global markets faced
severe disruptions and central banks implemented aggressive monetary easing policies. As of
March 30, 2025, gold prices have continued their upward trajectory, reaching new record highs.
On the international market, gold is trading at approximately $3,085.3 per ounce. In Vietnam,
domestic gold prices have also surged, with SJC gold being bought at 98.4 million VND per tael
and sold at 100.7 million VND per tael. This sustained increase reflects ongoing economic
uncertainties, geopolitical tensions, and persistent inflationary pressures influencing global
markets.
While silver shares many of gold’s safe-haven qualities, it has a stronger industrial demand,
particularly in electronics, solar panels, and medical applications. This dual nature makes silver
more volatile, but it still serves as a store of value during economic downturns. In 2020, silver
prices surged over 50%, peaking at $30 per ounce as investors sought alternatives to gold.
Meanwhile, platinum, though rarer than both gold and silver, is highly valued for its industrial
applications, especially in automobile manufacturing and chemical processing. While platinum
prices can fluctuate due to shifts in industrial demand, they tend to rise sharply during supply
shortages or geopolitical instability.
Despite some challenges such as storage costs, price volatility, and lack of passive income, gold,
silver, and platinum remain essential assets in portfolio diversification. Their ability to retain
value during financial turbulence makes them indispensable for investors looking to safeguard
wealth in uncertain economic times.

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 1.2.2. Sovereign bonds – stability in times of crisis.

Sovereign bonds, particularly those issued by economically stable governments, are among the
most secure safe-haven assets due to their low default risk and government backing. During
periods of financial uncertainty, investors often shift capital into these bonds, driving up their
prices and reducing their yields. This pattern has been observed in past economic crises, where
investors sought safety in government securities as stock markets declined. Additionally, central
banks frequently implement monetary easing policies, such as large-scale bond purchases, to
stabilize financial markets, further increasing demand for these assets.
One of the most prominent examples is German government bonds, which are widely considered
a benchmark for stability in Europe. Germany’s strong economy and high credit rating make
Bunds a preferred choice for investors looking to protect their capital. During financial crises,
demand for German Bunds rises significantly. For instance, during the European debt crisis
(2010–2012), investors flocked to Bunds, causing yields to drop to historic lows. Similarly, in
2020, as the COVID-19 pandemic disrupted global markets, German Bund yields turned
negative, reflecting extreme demand for these safe-haven assets.
Beyond providing capital preservation, sovereign bonds also offer a steady income stream
through fixed interest payments. Their high liquidity and widespread global acceptance make
them an attractive option for conservative investors. However, these bonds are not without
limitations. Their returns tend to be lower than riskier assets like stocks, and they are sensitive to
interest rate fluctuations—when rates rise, bond prices fall. Additionally, inflation can erode the
real value of fixed bond yields over time. Despite these challenges, sovereign bonds, particularly
German Bunds, remain a fundamental component of a well-balanced portfolio, offering stability
and security during market turbulence.

1.2.3. Safe-haven cash and bank deposits – A secure store of value.

Certain fiat currencies are considered safe-haven assets due to the economic and political
stability of their issuing countries. These currencies tend to appreciate during financial crises, as
investors seek security and liquidity. Safe-haven currencies are typically backed by strong
financial systems, low inflation, and prudent monetary policies, making them less prone to rapid
depreciation compared to other fiat currencies.

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A notable example is the Singapore dollar (SGD). Singapore has a highly stable economy, a
robust banking sector, and a strong credit rating, making its currency a reliable safe-haven.
Unlike many central banks that focus on interest rates, the Monetary Authority of Singapore
(MAS) manages the currency against a basket of other currencies, ensuring stability even during
global economic turmoil. This resilience was evident during the 2008 financial crisis, when
many currencies depreciated sharply, but SGD remained relatively stable. Investors often turn to
Singapore’s banking system and currency during market downturns, reinforcing its position as a
trusted store of value. Despite the advantages, safe-haven currencies are not without risks, as
exchange rate fluctuations, central bank interventions, and inflation can impact their value over
time. Nonetheless, holding safe-haven cash provides investors with liquidity, stability, and
protection against market volatility, making it an essential component of a diversified portfolio.

1.2.4. Bitcoin – The digital safe haven.

Bitcoin has emerged as a potential safe-haven asset, often referred to as "digital gold" due to its
limited supply of 21 million BTC and its independence from traditional financial systems. Unlike
fiat currencies or government-backed assets, Bitcoin operates on a decentralized network,
allowing for seamless global transactions without reliance on banks or central authorities. This
makes it particularly attractive during periods of economic uncertainty, as investors seek
alternatives to traditional assets.
However, Bitcoin’s status as a safe-haven remains controversial due to its high volatility. While
it has shown resilience in financial crises, it has also experienced dramatic price swings. For
instance, in 2020, following large-scale liquidity injections into the economy, Bitcoin surged
from $5,000 to over $60,000 by 2021. Yet, in 2022, as interest rates rose and markets corrected,
Bitcoin plunged below $20,000, underscoring its instability compared to traditional safe-haven
assets like gold or sovereign bonds.
Despite its risks, Bitcoin continues to gain institutional adoption, with companies and financial
institutions recognizing its potential as a hedge against inflation and currency devaluation. Its
decentralized nature, ease of transfer, and long-term scarcity contribute to its appeal. However,
challenges such as regulatory uncertainty, cybersecurity threats, and extreme price fluctuations
remain key concerns. While Bitcoin may not yet be a fully reliable safe-haven asset, its growing

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role in the financial ecosystem suggests that it could play an increasingly significant role in
portfolio diversification in the future.
2. Bitcoin as a safe-haven asset: evaluating affirmative and negative perspectives.

2.1. Summary of research on bitcoin as a safe-haven asset.

Bitcoin has become a widely debated topic as economists and financial experts analyze whether
it can serve as a safe-haven asset like gold or government bonds. Numerous studies have
examined Bitcoin’s correlation with the stock market, particularly during financial crises. The
findings indicate both affirmative and negative perspectives on Bitcoin’s role as a safe-haven.
 Affirmative perspective: Bitcoin as a safe-haven asset.
Some studies argue that Bitcoin exhibits characteristics of a safe-haven asset, especially in the
context of expansionary monetary policies and inflation concerns. The key arguments supporting
this perspective include:
- Low correlation with the stock market: Bouri et al. (2017) found that Bitcoin exhibits a
low or even negative correlation with traditional financial markets during periods of
market turbulence. This means that when traditional financial markets experience
extreme volatility, Bitcoin may act as a store of value, like gold. For example, during the
2008 financial crisis, gold demonstrated its safe-haven role by increasing in value amid
economic uncertainty. Some studies indicate that Bitcoin could function similarly during
market downturns due to its decentralized nature and independence from traditional
financial systems (Bouri, Jain, Roubaud, Kristoufek, & Lucey, 2017).
- Limited supply: Unlike fiat currencies, which can be devalued through excessive
printing, Bitcoin has a fixed supply of 21 million coins. This scarcity makes Bitcoin
resistant to inflation and an attractive asset for those looking to hedge against currency
devaluation. This argument is particularly relevant when central banks worldwide adopt
expansionary monetary policies to stimulate economies, leading to depreciation of fiat
currencies. According to Ammous (2018), Bitcoin’s fixed supply makes it a more
predictable and potentially stable store of value in the long run, comparable to gold.
- Strong performance during crises: Studies highlight that during the COVID-19 pandemic
in 2020, as central banks implemented monetary easing policies, Bitcoin surged from

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 $5,000 to over $60,000 in 2021, suggesting its role as a hedge against economic
instability (Cheah, Mishra, Parhi, & Zhang, 2022).
 Negative perspective: bitcoin is not a safe-haven asset.
However, many researchers refute the idea that Bitcoin is a true safe-haven asset, citing the
following reasons:
- Extreme price volatility: One of Bitcoin’s most notable characteristics is its high
volatility. In 2021, Bitcoin peaked above $60,000, only to drop below $20,000 in 2022 as
financial markets weakened. Such fluctuations are inconsistent with traditional safe-
haven assets like gold or bonds, which typically maintain stability during crises. Klein,
Thu, and Walther (2018) argue that Bitcoin’s extreme volatility undermines its function
as a safe-haven asset, making it riskier compared to traditional alternatives like gold.
- Increasing correlation with stocks during crises: Some studies suggest that while Bitcoin
may have a low correlation with stocks under normal conditions, during major market
downturns, it tends to decline alongside equities rather than appreciating like gold. This
was evident during the 2022 market downturn when the U.S. Federal Reserve tightened
monetary policy to combat inflation. As stock markets plummeted, Bitcoin also
experienced significant declines, contradicting the notion that it serves as a safe-haven
(Conlon & McGee, 2020).
- Speculative nature: Many Bitcoin investors are not seeking a safe-haven but rather
engaging in speculation, leading to price swings driven by market sentiment rather than
fundamental economic factors. According to Smales (2019), Bitcoin’s price rallies are
often fueled by market enthusiasm, while sharp declines occur due to negative news or
the withdrawal of large investors (whales). This volatility makes Bitcoin more of a high-
risk asset rather than a reliable safe-haven during financial crises.

2.2. Personal perspective on safe-haven assets.

In the face of increasing global economic uncertainty, from rising inflation to financial crises, the
demand for a safe-haven asset has become more crucial than ever. Traditionally, gold has been
considered the most reliable store of value. However, with the development of blockchain
technology and decentralized finance, Bitcoin has emerged as a strong contender for this role. I
firmly believe that Bitcoin is indeed a safe-haven asset due to its scarcity, decentralization,

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ability to preserve value during crises, high liquidity, and growing acceptance by major financial
institutions. This essay will provide detailed analysis and supporting evidence for this viewpoint.
One of the most important factors that make Bitcoin a safe-haven asset is its scarcity. Unlike fiat
currencies, which can be printed indefinitely by central banks, Bitcoin has a fixed supply of 21
million coins. This creates a natural anti-inflation mechanism, helping Bitcoin maintain its value
over time. Historical examples demonstrate this principle in action. For instance, during the
COVID-19 pandemic, governments worldwide printed massive amounts of money to stimulate
their economies. This led to significant inflation in many countries, devaluing national
currencies. Bitcoin, on the other hand, remained unaffected by such policies, reinforcing its role
as a hedge against inflation.
Moreover, Bitcoin operates on a decentralized network, free from government or financial
institution control. This decentralization allows it to avoid risks associated with unpredictable
monetary policies or banking system failures. For example, in 2013, the Cypriot financial crisis
saw banks impose withdrawal limits on citizens, restricting their access to personal savings. In
response, Bitcoin’s price surged as people sought a financial asset beyond government control.
This event demonstrated how Bitcoin could act as a safeguard against government-imposed
financial restrictions.
Bitcoin has repeatedly demonstrated its ability to retain value during economic crises. For
instance, in 2020, when the COVID-19 pandemic triggered a global financial crisis, traditional
markets, including stocks and commodities, suffered massive downturns. However, Bitcoin
rebounded strongly, with its price surging from around $5,000 in March 2020 to over $60,000 by
April 2021. This performance highlights Bitcoin’s potential as a store of value in times of
financial instability.
Similarly, during periods of hyperinflation, Bitcoin has provided a lifeline for citizens in
economically unstable countries. A notable example is Venezuela, where hyperinflation has
rendered the national currency, the bolívar, practically worthless. Many Venezuelans have turned
to Bitcoin as an alternative means of preserving their wealth, bypassing government-controlled
financial systems. This real-world case underscores Bitcoin’s role as a hedge against economic
turmoil.
Another advantage Bitcoin holds over traditional safe-haven assets like gold is its high liquidity
and ease of transfer. Bitcoin can be quickly traded across the globe with just a smartphone or

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computer connected to the internet. Unlike gold, which requires significant storage and
transportation costs, Bitcoin can be securely stored in digital wallets without the need for
physical facilities.
Furthermore, Bitcoin’s borderless nature makes it an attractive option for individuals in countries
with strict capital controls. For example, in China, where the government has imposed tight
restrictions on capital outflows, many citizens have used Bitcoin to move funds across borders.
This ability to bypass financial restrictions further enhances Bitcoin’s appeal as a reliable safe-
haven asset.
While Bitcoin was once regarded primarily as a speculative investment, it has now gained
recognition as a valuable asset by major financial institutions. Companies such as Tesla,
MicroStrategy, and large investment funds have incorporated Bitcoin into their portfolios as a
hedge against inflation.
Additionally, the rise of Bitcoin exchange-traded funds (ETFs) has made it easier for institutional
investors to access this asset. In 2021, the U.S. Securities and Exchange Commission (SEC)
approved the first Bitcoin futures ETF, marking a significant milestone in Bitcoin’s mainstream
adoption. The increasing acceptance of Bitcoin by the financial industry has strengthened
confidence in its role as a reliable store of value.
Critics often argue that Bitcoin’s high volatility undermines its status as a safe-haven asset.
While it is true that Bitcoin experiences price fluctuations, it is essential to consider its long-term
trajectory. Despite short-term volatility, Bitcoin has consistently appreciated in value over the
past decade, outperforming traditional assets like gold and stocks. This long-term growth
suggests that Bitcoin can serve as a reliable store of value over time.
Another common criticism is the regulatory uncertainty surrounding Bitcoin. Governments
worldwide have implemented varying degrees of regulation, which can impact Bitcoin’s
adoption. However, as more countries recognize the legitimacy of cryptocurrencies, regulatory
clarity is improving. For instance, El Salvador became the first country to adopt Bitcoin as legal
tender in 2021, setting a precedent for broader acceptance.
Although Bitcoin remains highly volatile, its characteristics such as scarcity, decentralization,
value preservation during crises, high liquidity, and growing institutional adoption-make it a
viable safe-haven asset. Historical examples, including the Cypriot financial crisis, Venezuelan
hyperinflation, and the COVID-19 pandemic, illustrate Bitcoin’s role in protecting wealth during

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economic instability. As the global economy continues to face mounting risks, Bitcoin has the
potential to become a digital alternative to gold in the modern financial era.

III. Reference.

- Ammous, S. (2018). The Bitcoin Standard: The Decentralized Alternative to Central

Banking. Wiley.
- Bouri, E., Jain, A., Roubaud, D., Kristoufek, L., & Lucey, B. (2017). Bitcoin’s
decoupling from traditional financial markets during crises: Evidence from dynamic
correlations. Finance Research Letters, 27, 208-214.
- Cheah, E. T., Mishra, T., Parhi, M., & Zhang, Z. (2022). The role of Bitcoin during
financial crises: Safe haven or speculative asset?. Journal of International Financial
Markets, Institutions and Money, 76, 101404.
- Conlon, T., & McGee, R. (2020). Safe haven or risky hazard? Bitcoin during the COVID-
19 bear market. Finance Research Letters, 35, 101607.
- Investopedia. (n.d.). Interest Rate Arbitrage Strategy: How It Works. Retrieved March
31, 2025, from [Link]
[Link]
- Klein, T., Thu, H. P., & Walther, T. (2018). Bitcoin is not the new gold – A comparison
of volatility, correlation, and portfolio performance. International Review of Financial
Analysis, 59, 105-116.
- Lao Động. (n.d.). Giá vàng hôm nay 30/3: Tăng tới 4 triệu đồng sau một tuần [Gold price
today 30/3: Increased by 4 million VND in a week]. Retrieved from
[Link]
[Link]
- SD Bullion. (n.d.). 2011 Gold Price Record High over $1,900 oz USD on September 5,
2011. Retrieved from [Link]
- Smales, L. A. (2019). Bitcoin as a safe haven: Is it even worth considering?. Finance
Research Letters, 30, 385-393.
- USA Gold. (n.d.). Daily Gold Prices since 1993. Retrieved from
[Link]

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- Wikipedia. (n.d.). Covered interest arbitrage. Retrieved March 31, 2025, from
[Link]
- Wikipedia. (n.d.). Interest rate parity. Retrieved March 31, 2025, from
[Link]

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