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Questions and Answers of Money Banking Financial Markets

6.8.a. Suppose that you want to borrow a widget beginning in December 2004 and ending in March 2005. What payment will be required to make the transaction fair to both parties?b. Suppose that you
a. What are some possible explanations for the shape of this forward curve?b. What annualized rate of return do you earn on a cash-and-carry entered into in December 2004 and closed in March 2005? Is
Suppose the gold spot price is $300/oz., the 1-year forward price is 310.686, and the continuously compounded-risk-free rate is 5%.a. What is the lease rate?b. What is the return on a cash-and-carry
Suppose that pencils cost $0.20 today and the continuously compounded lease rate for pencils is 5%. The continuously compounded interest rate is 10%. The pencil price in 1 year is uncertain and
Given a continuously compounded risk-free rate of 3% annually, at what lease rate will forward prices equal the current commodity price? (Recall the pencil example in Section 6.4.) If the lease rate
The current price of oil is $32.00 per barrel. months are $31.37, $30.75, $30.14, and $29.54. Assuming a 2% continuously compounded annual risk-free rate, what is the annualized lease rate for each
Suppose the S&R index is 800, and that the dividend yield is 0. You are an arbitrageur with a continuously compounded borrowing rate of 5.5% and a con- tinuously compounded lending rate of 5%.a.
Verify that when there are transaction costs, the lower no-arbitrage bound is given by equation (5.11). LO.1
Suppose the S&P 500 index is currently 950 and the initial margin is 10%. You wish to enter into 10 S&P 500 futures contracts.a. What is the notional value of your position? What is the margin?b.
The S&R index spot price is 1100, the risk-free rate is 5%, and the continuous dividend yield on the index is 2%.a. Suppose you observe a 6-month forward price of 1120. would you undertake? What
Repeat the previous problem, assuming that the dividend yield is 1.5%. LO.1
Suppose that price and quantity are positively correlated as in this table: Price $2 Quantity 0.6m bu Revenue $1.2m $3 0.934m bu $2.8m There is a 50% chance of either price. The futures price is
Using the information in Table 4.9 about Scenario C:a. Compute total revenue positive. when correlation between price and quantity isb. What is the correlation between price and revenue? LO.1
Using the information in Table 4.11, verify that a regression of revenue on price gives a regression slope coefficient of about 100,000. LO.1
Consider the example in Table 4.6. Suppose that losses are fully tax-deductible. What is the expected after-tax profit in this case? LO.1
Compute estimated profit in 1 year if Telco buys paylater calls as follows (the net premium may not be exactly zero):a. Sell one 0.975-strike call and buy two 1.034-strike calls.b. Sell two
Compute estimated profit in 1 year if Telco sells a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. LO.1
Compute estimated profit in 1 year if Telco buys a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. LO.1
Compute estimated profit in 1 year if XYZ sells a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. LO.1
Compute estimated profit in 1 year if XYZ buys a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. LO.1
Suppose the 1-year copper forward price were $0.80 instead of $1. If XYZ were to sell forward its expected copper production, what is its estimated profit one year from now? Should XYZ produce
Verify that the butterfly spread in Figure 3.14 can be duplicated by following transactions (use the option prices in Table 3.4):a. Buy 35 call, sell two 40 calls, buy 45 call.b. Buy 35 put, sell two
Construct an asymmetric butterfly using the 950-, 1020-, and 1050-strike options. How many of each option do you hold? Draw a profit diagram for the position. LO.1
In the previous problem we saw that a ratio spread can have zero initial premium. Can a bull spread or bear spread have zero initial premium? A butterfly spread? Why or why not? LO.1
Suppose you invest in the S&R index for $1000, buy a 950-strike put, and sell a 1107-strike call. Draw a profit diagram for this position. How close is this to a zero-cost collar? LO.1
Suppose the premium on a 6-month S&R call is $109.20 and the premium on a put with the same strike price is $60.18. What is the strike price? LO.1
Verify that you earn the same profit and payoff by (a) shorting the S&R index for $1000 and (b) selling a 1050-strike S&R call, buying a 1050-strike put, and borrowing $1029.41. LO.1
Verify that you earn the same profit and payoff by (a) buying the S&R index for $1000 and (b) buying a 950-strike S&R call, selling a 950-strike S&R put, and lending $931.37. LO.1
For the following problems assume the effective 6-month interest rate is 2%, the S&R 6-month forward price is $1020, and use these premiums for S&R options with 6 months to expiration: Strike Call
Suppose that you short the S&R index for $1000 and sell a 1000-strike put. Con- struct a table mimicking Table 3.1 which summarizes the payoff and profit of this position. Verify that your table
Construct a spreadsheet that permits you to compute payoff and profit for a short and long stock, a short and long forward, and purchased and written puts and calls. The spreadsheet should let you
For each entry in Table 2.4, explain the circumstances in which the maximum gain or loss occurs. LO.1
For Figure 2.9, verify the following:a. The S&R index price at which the put option diagram intersects the x-axis is $924.32.b. The S&R index price at which the put option and forward contract have
For Figure 2.7, verify the following:a. The S&R index price at which the call option diagram intersects the x-axis is $1095.68.b. The S&R index price at which the call option and forward contract
A default-free zero-coupon bond costs $91 and will pay $100 at maturity in 1 year. What is the effective annual interest rate? What is the payoff diagram for the bond? The profit diagram? LO.1
2.5.a. Suppose you enter into a long 6-month forward position at a forward. price of $50. What is the payoff in 6 months for prices of $40, $45, $50, $55, and $60?b. Suppose you buy a 6-month call
What position is the opposite of a purchased call? The opposite of a purchased put? LO.1
Using the same information as the previous question, draw payoff and profit diagrams for a short position in the stock. Verify that profit is 0 at a price in one year of $55. LO.1
Suppose XYZ stock has a price of $50 and pays no dividends. The effective annual interest rate is 10%. Draw payoff and profit diagrams for a long position in the stock. Verify that profit is 0 at a
Suppose that you go to a bank and borrow $100. You promise to repay the loan in 90 days for $102. Explain this transaction using the terminology of short-sales. LO.1
Repeat the previous problem supposing that the brokerage fee is quoted as 0.3% of the bid or ask price. LO.1
Suppose the businesses in the previous problem use futures contracts to hedge their temperature-related risk. Who do you think might accept the opposite risk? LO.1
What is the main rationale behind paying negative interest rates to banks for keeping their deposits at central banks in Sweden, Switzerland, and Japan? What could happen to these economies if banks
Consider an economy described by the following:C̅= $3.25 trillionI̅= $1.3 trillionG̅= $3.5 trillionT̅= $3.0 trillionN̅X̅= -$1.0 trillionf̅= 1mpc= 0.75d= 0.3x= 0.1λ= 1r̅= 1 a. Derive
Consider an economy described by the following:C̅= $4 trillionI̅= $1.5 trillionG̅= $3.0 trillionT̅= $3.0 trillionN̅X̅= $1.0 trillionf̅= 0mpc= 0.8d= 0.35x= 0.15λ= 0.5r̅= 2a. Derive
For each of the following situations, describe how (if at all) the IS, MP, and AD curves are affected.a. A decrease in financial frictionsb. An increase in taxes and an autonomous easing of monetary
Consider an economy described by the following data:C̅= $3.25 trillionI̅= $1.3 trillionG̅= $3.5 trillionT̅= $3.0 trillionN̅X̅= -$1.0 trillionf̅= 1mpc= 0.75d= 0.3x= 0.1a. Derive an expression
Go to the St. Louis Federal Reserve FRED database and find data on the 30-year fixed rate average mortgage rate (MORTGAGE30US) and the 5/1-year adjustable-rate mortgage (MORTGAGE5US).a. What are the
AssetsLiabilitiesRequired Reserves$ 8 millionCheckable Deposits$100 millionExcess Reserves Loans$26 million$75 millionBank Capital$ 9 million
Over time, as the financial system expands and develops additional sources of financing for small to medium-sized firms, such as asset-backed securities, would the bank lending channel become more or
Classify each of the following as either a policy instrument or an intermediary target. Explain your answer.a. Long-term interest ratesb. Central bank interest ratesc. M2d. Reserve requirements
What are the main criteria for choosing a policy instrument?Why? Explain.
You are considering buying a bottle of wine. Suppose that the euro appreciates by 15% with respect to the U.S. dollar. Are you more or less likely to buy a bottle of Californian wine or French wine?
A German sports car is selling for €65,000. What is the dollar price in the United States for the German car if the exchange rate is 0.80 euro per dollar?
If the Canadian dollar to U.S. dollar exchange rate is 1.24 and the British pound to U.S. dollar exchange rate is 0.68, what must be the Canadian dollar to British pound exchange rate?
The New Zealand dollar to U.S. dollar exchange rate is 1.38, and the British pound to U.S. dollar exchange rate is 0.65. If you find that the British pound to New Zealand dollar is trading at 0.5,
The Mexican peso is trading at 11 pesos per dollar.If the expected U.S. inflation rate is 1% while the expected Mexican inflation rate is 15% over the next year, given PPP, what is the expected
If the price level recently increased by 19% in England while falling by 6% in the Canada, by how much must the exchange rate change if PPP holds? Assume that the current exchange rate is 0.58 pound
Go to the website that contains the most recent calculations of the Economist’s Big Mac Index, http://www.economist.com/content/big-mac-index.a. Plot the relationship between the local price of a
What is the exchange rate between dollars and Swiss francs if one dollar is convertible into 1/40 ounce of gold and one Swiss franc is convertible into 1/25 ounce of gold?
Calculate the overvaluation of the Thai baht (THB) if you can get 34.6 THB per USD at the exchange counter, but a lunch menu that costs 25 USD in Boston sells for 948.25 THB in Bangkok.
The New York Fed executes foreign exchange interventions for the Federal Reserve system. Go to https://www.newyorkfed.org/markets/quar_reports.html to see quarterly summaries of the Fed’s foreign
Suppose your bank has the following balance sheet:If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million? Assets
Suppose your bank has the following balance sheet:What would happen to bank profits if the interest rates in the economy go down? What actions could you take to reduce the bank’s interest-rate
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 check for $90 on her account at the First National
What happens to reserves at the First National Bank if one person withdraws \($1\),100 of cash and another person deposits \($200\) of cash? Use T-accounts to explain your answer.
NewBank started its first day of operations with \($155\) million in capital. A total of \($92\) million in checkable deposits is received. The bank makes a \($28\) million commercial loan and lends
Suppose NewBank decides to invest \($273\) million in 30-day T-bills. The T-bills are currently trading at \($4\),981 (including commissions) for a \($4\),940 face value instrument. How many T-bills
Axle Bank reported an ROE of 16% and an ROA of 1.32%. What is the equity multiplier? How well capitalized is this bank?
Suppose you are manager of a bank whose \($200\) million of assets have an average duration of five years and whose \($160\) million liabilities have an average duration of seven years. Conduct a
Why can government safety nets create both an adverse selection problem and a moral hazard problem?
In some countries, governments and bank authorities adopt policies that impose restrictions on asset holdings.Why do they do this?
Banking crises have occurred throughout the world, like the Finnish banking crisis of 1990s, the 2002 Uruguay banking crisis, and the 2003 Myanmar banking crisis. In this context, what similarity do
Consider a failing bank. How much is a deposit of \($290\),000 worth to the depositor. if the FDIC uses the payoff method? The purchase-and-assumption method?Which method is more costly to taxpayers?
Consider a bank with the following balance sheet:The bank makes a loan commitment for $15 million to a commercial customer. Calculate the bank’s capital ratio before and after the agreement.
Oldhat Financial starts its first day of operations with \($11\) million in capital. A total of \($120\) million in checkable deposits are received. The bank makes a \($30\) million commercial loan
Early the next day, the bank invests \($35\) million of its excess reserves in commercial loans. Later that day, terrible news hits the mortgage markets, and mortgage rates jump to 13%, implying a
To avoid insolvency, regulators decide to provide the bank with \($27\) million in bank capital. Assume that bad news about mortgages is featured in the local newspaper, causing a bank run. As a
Securitization changes the systemic (system-wide) risks in the regulated and unregulated “shadow” banking system.What is securitization? Does it pose a problem for effective banking systems?
According to Reuters, the People’s Bank of China has been using targeted increases in banks’ reserve requirement ratios (RRR) in recent months. Explain why central banks impose reserve
Why are the number of traditional banking systems in industrialized and developed countries declining?
Implementing a structural separation of commercial banking and investment banking activities is a way to reduce systemic risks when a potential bank failure threatens an entire economic system. Do
Identify two similarities and two differences between the Great Depression and the global financial crisis of 2007–2009.
Why is international regulatory cooperation important? What forms has it taken in the aftermath of the 2007–2009 financial crisis?
What role can self-regulation play in the future to avert financial crises?
The Financial Crisis Inquiry Commission was set up in the aftermath of the Great Recession as an independent group tasked with investigating the causes of the financial crisis of 2007–2009. Go to
What are the two basic causes of financial crises in emerging market economies?
Why might financial liberalization and globalization lead to financial crises in emerging market economies?
Why might severe fiscal imbalances lead to financial crises in emerging market economies?
What other factors can initiate financial crises in emerging market economies?
What events can ignite a currency crisis?
Why do currency crises make financial crises in emerging market economies even more severe?
How did the financial crises in South Korea and Argentina affect aggregate demand, short-run aggregate supply, and output and inflation in these countries?
What can emerging market countries do to strengthen prudential regulation and supervision of their banking systems? How might these steps help avoid future financial crises?
How can emerging market economies avoid the problems of currency mismatch?
Why might emerging market economies want to implement financial liberalization and globalization gradually rather than all at once?
Go to the World Bank’s databank website at http://databank.worldbank.org/data/reports. aspx?source=2&country=. Find the following annual data for South Korea (the Republic of Korea) and Thailand,
Go to the World Bank’s databank website at http://databank.worldbank.org/data/reports. aspx?source=2&country=. Find the following annual data for Argentina, for the past 25 years: (i) GDP at
What are the main difficulties encountered by the newly established central banks in transition economies?
A central bank decides by how much an interest rate should be changed in order to restore equilibrium.What are the tools it uses to take such decisions?

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