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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

“The independence of the Bank of Canada leaves it completely unaccountable for its actions.” Is this statement true, false, or uncertain? Explain your answer.
Why might eliminating the Bank’s independence lead to a more pronounced political business cycle?
“The theory of bureaucratic behaviour indicates that the Bank of Canada never operates in the public interest.” Is this statement true, false, or uncertain? Explain your answer.
How is the responsibility for monetary policy shared in the Eurosystem?
How can the government directly infl uence the Bank of Canada?
The Bank of Canada is the most independent of all Canadian government agencies. What is the main diff erence between it and other government agencies that explains its greater independence?
“The strongest argument for an independent Bank of Canada rests on the view that subjecting the Bank of Canada to more political pressures would impart an infl ationary bias to monetary policy.”
Over time, which entities have gained power in the conduct of monetary policy in Canada and which have lost power? Why do you think this has happened?
How did the “Coyne Aff air” motivate the current system of joint responsibility for monetary policy?
Do you think that the seven-year renewable term for the governor of the Bank of Canada eff ectively insulates the Bank from political pressure?
Who is responsible for monetary policy in Canada?
In what ways can the government infl uence the conduct of monetary policy?
What political realities might explain the creation of the Bank of Canada in 1934?
What is Rocky’s net interest for the year after the agreement?
A swap agreement calls for Rocky Industries to pay interest annually based on a rate of 2% over the one-year T-bill rate, currently 3%. In return, Rocky Industries receives interest at a rate of 4%
Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1.4 Canadian dollars. If you want to hedge the foreign exchange risk in this
If your company has to make a 10 million euro payment to a German company three months from now, how would you hedge the foreign exchange risk in this payment with a 125 000 euro futures contract?
If your company has a payment of 200 million euros due one year from now, how would you hedge the foreign exchange risk in this payment with a 125 000 euro futures contract?
If the bank you manage has a gap of –$42 million, describe an interest-rate swap that would eliminate the bank’s income risk from changes in interest rates.
If the fi nance company you manage has a gap of 1$5 million (rate-sensitive assets greater than rate-sensitive liabilities by $5 million), describe an interest-rate swap that would eliminate the
Suppose that you buy a call option on a $100 000 Canada bond futures contract with an exercise price of 110 for a premium of $1500. If on expiration the futures contract has a price of 111, what is
If you buy a put option on a $100 000 Canada bond futures contract with an exercise price of 95 and the price of the Canada bond is 120 at expiration, is the contract in the money, out of the money,
How would you use the options market to accomplish the same thing as in Problem 9? What are the advantages and disadvantages of using an options contract rather than a futures contract?
Suppose that the pension you are managing is expecting an infl ow of funds of $100 million next year and you want to make sure that you will earn the current interest rate of 8% when you invest the
If you buy a $100 000 June Canada bond contract for 108 and the price of the deliverable Canada bond at the expiration date is 102, what is your profi t or loss on the contract?
If, on the expiration date, the deliverable Canada bond is selling for 101 but the Canada bond futures contract is selling for 102, what will happen to the futures price?Explain your answer.
If the portfolio you manage is holding $25 million of 8s of 2030 Canada bonds with a price of 110, what forward contract would you enter into to hedge the interest-rate risk on these bonds over the
If the pension fund you manage expects to have an infl ow of $120 million six months from now, what forward contract would you seek to enter into to lock in current interest rates?
Why does a lower strike price imply that a call option will have a higher premium and a put option a lower premium?
Explain why greater volatility or a longer term to maturity leads to a higher premium on both call and put options.
Suppose you are the manager of a bank that has $15 million of fi xed-rate assets, $30 million of rate-sensitive assets, $25 million of fi xed-rate liabilities, and $20 million of rate-sensitive
Suppose you are the manager of a bank whose $100 billion of assets have an average duration of four years and whose $90 billion of liabilities have an average duration of six years. Conduct a
X-Bank reported an ROE of 15% and an ROA of 1%.How well capitalized is this bank?
NewBank decides to invest $45 million in 30-day T-bills. The T-bills are currently trading at $4986.70(including commissions) for a $5000 face value instrument.How many T-bills does NewBank
NewBank started its fi rst day of operations with$6 million in capital. A total of $100 million in chequable deposits is received. The bank makes a$25 million commercial loan and lends another$25
What happens to reserves at the First National Bank if one person withdraws $1000 of cash and another person deposits $500 of cash? Use T-accounts to explain your answer.
Using the T-accounts of the First National Bank and the Second National Bank given in this chapter, describe what happens when Jane Brown writes a $50 cheque on her account at the First National Bank
Why has noninterest income been growing as a source of bank operating income?
“Bank managers should always seek the highest return possible on their assets.” Is this statement true, false, or uncertain? Explain your answer.
If you are a banker and expect interest rates to rise in the future, would you prefer to make short-term loans or long-term loans?
“Because diversifi cation is a desirable strategy for avoiding risk, it never makes sense for a bank to specialize in making specifi c types of loans.” Is this statement true, false, or
If the CEO of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outfl ow, would you be willing to buy stock in
A bank almost always insists that the fi rms it lends to keep compensating balances at the bank. Why?
Why is being nosy a desirable trait for a banker?
What are the benefi ts and costs for a bank when it decides to increase the amount of its bank capital?
If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?
Why do equity holders care more about ROE than about ROA?
If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?
If a bank fi nds that its ROE is too low because it has too much bank capital, what can it do to raise its ROE?
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don’t have any excess reserves to
Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?
If a deposit outfl ow of $50 million occurs, which balance sheet would a bank rather have initially, the balance sheet in Question 3 or the following balance sheet? Why? Assets Reserves $100 million
The bank you own has the following balance sheet:If the bank suff ers a deposit outfl ow of $50 million with a desired reserve ratio on deposits of 10%, what actions should you take? Assets Reserves
Rank the following bank assets from most to least liquid:a. Commercial loansb. Securitiesc. Reservesd. Physical capital
Why might a bank be willing to borrow funds from other banks at a higher rate than the rate at which it can borrow from the Bank of Canada?
“The invention of the computer is the major factor behind the decline of the banking industry.” Is this statement true, false, or uncertain? Explain your answer.
Why have banks been losing income advantages on their assets in recent years?
“If infl ation had not risen in the 1960s and 1970s, the banking industry might be healthier today.” Is this statement true, false, or uncertain? Explain your answer.
Why have banks been losing cost advantages in acquiring funds in recent years?
What are the essential diff erences between chartered banks, trust and loan companies, and credit unions and caisses populaires ?
If the bank at which you keep your chequing account is owned by foreigners, should you worry that your deposits are less safe than if the bank were owned by Canadians?
Explain how securitization can be used to change illiquid assets into liquid assets.
What incentives do Canadian regulatory agencies have to encourage the establishment of foreign banks in Canada?
Explain how the early development of chartered banks in Canada diff ered from the development of commercial banks in the United States.
Explain how sovereign loans in the 1970s and early 1980s caused problems for the Big Six banks.
Describe and contrast the activities of a Schedule I bank, a Schedule II bank, a trust company, and a credit union.
How did new technology cause banks’ traditional lending activities to decline in balance-sheet importance?
“The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the
Which regulatory agency has the primary responsibility for supervising the following categories of fi nancial institutions?a. chartered banksb. trust and loan companiesc. credit unions and caisses
Describe how the 2001 Bank Act reform attempted to introduce more competition in Canada’s fi nancial services marketplace.
Why might more competition in fi nancial markets be bad? Would restrictions on competition be a better idea? Why or why not?
Suppose Universal Bank holds $100 million in assets, which are composed of the following:a. Do you think it is a good idea for Universal Bank to hold stocks, corporate bonds, and commodities as
How do disclosure requirements help limit excessive risk taking by banks?
Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?
How does bank chartering reduce adverse selection problems? Does it always work?
What are some of the limitations to the Basel and Basel 2 Accords? How does the Basel 3 Accord attempt to address these limitations?
What special problem do off -balance-sheet activities present to bank regulators, and what have they done about it?
At the height of the global fi nancial crisis in October 2008, the U.S. Treasury forced nine of the largest U.S.banks to accept capital injections in exchange for nonvoting ownership stock, even
Why does imposing bank capital requirements on banks help limit risk taking?
What types of bank regulations are designed to reduce moral hazard problems? Will they completely eliminate moral hazard problems?
What are the costs and benefi ts of a too-big-to-fail policy?
How could higher deposit insurance premiums for banks with riskier assets benefi t the economy?
Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer.
If casualty insurance companies provided fi re insurance without any restrictions, what kind of adverse selection and moral hazard problems might result?
Why are deposit insurance and other types of government safety nets important to the health of the economy?
What was the Canadian experience during the 2007–2009 financial crisis?
Why were consumer protection provisions included in the financial reform legislation in the aftermath of the global financial crisis?
What are the three approaches to limiting the too-bigto-fail problem? Briefly describe the advantages and disadvantages of each of the approaches.
How does the process of financial innovation impact the effectiveness of macroprudential regulation?
Why is it a good idea for macroprudential policies to require countercyclical capital requirements?
How did the global financial crisis promote a sovereign debt crisis in Europe?
Why would haircuts on collateral increase sharply during a financial crisis? How would this lead to fire sales on assets?
What role did the shadow banking system play in the 2007–2009 financial crisis?
How did a decline in housing prices help trigger the subprime financial crisis in the United States that began in 2007?
“Financial engineering always leads to a more efficient financial system.” Is this statement true, false, or uncertain?
Why is the originate-to-distribute business model subject to the principal–agent problem?
What technological innovations led to the development of the subprime mortgage market?
What do you think prevented the financial crisis of 2007–2009 from becoming a depression?
Describe two similarities and two differences between the United States’ experiences during the Great Depression and the financial crisis of 2007–2009.
What role does weak financial regulation and supervision play in causing financial crises?

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