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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Explain how the gold standard is an example of a fixed exchange rate system.
Why did the monetary policy become ineffective under the mechanism of the gold standard?
What are the principal components of the balance-of-payments account?
Explain the role envisaged for the International Monetary Fund under the Bretton Woods System.
What is pegging? What are the advantages of pegging? What are the disadvantages? Briefly discuss the controversy over China’s pegging the value of the yuan.
In 2012, the Swiss National Bank (SNB) was intervening in foreign exchange markets to keep a “floor” of 1.2 Swiss francs = 1 euro in the exchange rate between the franc and the euro. An article
Can a foreign exchange intervention by the Fed change the exchange rate if the Fed does not change its target for the federal funds rate? If the Fed wanted to carry out a foreign exchange
Briefly explain in what sense a country can run a balance of payments surplus or deficit.How would a country finance a balance of payments deficit in this sense? What important differences are there
Why has support for a system of fixed exchange rates tended to be higher in Europe than in the United States?
An article in the Economist magazine in late 2012 observed:The euro was meant to buttress the single market, reducing transaction costs and removing the risk of competitive devaluation.Could it now
In 2012, an article in the New York Times observed that: “The financial consequences of a Greek departure from the euro monetary union could be severe.”a. What does the article mean by “a Greek
In 2010, arguing that the Chinese yuan was overvalued versus the U.S. dollar, President Barack Obama said he wanted “to make sure our goods are not artificially inflated in price and their goods
In late 2012, an article in the Wall Street Journal, observed that: “The once-predictable Chinese yuan has become increasingly volatile, a development that . . . poses greater foreign-exchange
What is the misperception theory? What does it explain?
Use a money market graph to show the effect of an open market purchase of U.S. Treasury securities by the Federal Reserve. Use the results from your graph to explain why the aggregate demand curve
An article in the Economist magazine observed:“Creating more inflation is harder than it sounds. . . . It requires aggregate demand to return to, and exceed, potential output.” Use an AD–AS
In a blog on the Economist web site, correspondent Matt Yglesias makes the following statement: “[We] need to note that rising oil prices represent both demand shocks and supply shocks to the
In a column in the Wall Street Journal, Michael Bordo, an economist at Rutgers University, argues that the slow recovery from the 2007–2009 recession:can largely be attributed to the unprecedented
In a blog entry on the Barron’s Web site, the head of emerging markets research at the Japanese investment bank Nomura was quoted as saying the following about the Brazilian economy: “We think
In April 2010, Christina Romer, who was then serving as chair of the President’s Council of Economic Advisers, argued:The overwhelming weight of the evidence is that the current very high—and
Writing in the New York Times in August 2012, Christina Romer, former chair of the President’s Council of Economic Advisers, argued that: “The academic literature shows that monetary policy can
What are the shortcomings of the expectations theory?
How does a change in default risk affect the interest rate on a bond?
Suppose that you have $1,000 to invest in the bond market on January 1, 2014. You could buy a one-year bond with an interest rate of 4%, a two-year bond with an interest rate of 5%, a three-year bond
A student says: “The interest rate on the one-year Treasury bill is currently 0.29%, while the interest rate on the 30-year Treasury bond is currently 3.10%. Why are any investors buying the
What is the yield to maturity on a Treasury bill that matures one year from now, has a price of $1,010, and has a face value of $1,000? If the consumer price index is expected to decline during the
In the spring of 2012, yields on Treasury securities increased. An article in the Wall Street Journal observed: “The immediate cause for the lift was the Federal Reserve’s more optimistic
In 2012, an article in the Wall Street Journal had the headline “As Corporate-Bond Yields Sink, Risks for Investors Rise.” Is the biggest risk of holding long-term corporate bonds at low interest
In 2012, an article in the Wall Street Journal contained the following observation: “The fact that Spanish short-term yields are shooting higher than long-term yields is a particularly bad sign.”
What is the relationship between a corporation and a stockholder?
Distinguish between the profit distribution for common stockholders and for preferred stockholders.
A student makes the following observation: “The Dow Jones Industrial Average currently has a value of 13,500, while the S&P 500 has a value of 1,500. Therefore, the prices of the stocks in the DJIA
An article in the Wall Street Journal notes that “investors tend to view [preferred stock] more like bonds than like [common] stock.”a. In what sense is preferred stock more like bonds than like
Ulrike Malmendier of the University of California, Berkeley, and Stefan Nagel of Stanford have shown that investors’ willingness to participate in the stock market is affected by the returns they
What is the relationship between the price of a financial asset and the payments investors will receive from owning that asset?
What is the Gordon Growth model? What does it help to measure?
A column in the Wall Street Journal observes that “while many people buy stocks in the hope of scoring profits down the road, dividends deliver cash right now.” If stockholders desire dividends,
An article in the Wall Street Journal in 2012 described investors’ behavior since 2000 as a “flight to safety” that has led to “a high equity risk premium.”a. What does “flight to
Suppose that you buy an Apple iPad, you like it, and you think it will be a big seller. You expect that Apple’s profits will increase tremendously as a result of booming iPad sales. Should you buy
In 2012, the wireless company T-Mobile sold some of its cell towers to the Crown Castle company.When the agreement was announced, the stock price of Crown Castle declined. An article in the Wall
In 2010, Toyota recalled millions of automobiles to fix a potentially hazardous problem known as “sudden acceleration.” Writing in the Wall Street Journal, James Stewart gave investors the
An article in the Wall Street Journal contained the following: “Burberry Group issued a surprise profit warning on Tuesday. . . . The announcement sent Burberry’s stock down 21%.”a. What is the
Suppose that Apple’s profits are expected to grow twice as fast as Microsoft’s. Which firm’s stock should be the better investment for you? Briefly explain.
Henry Blodget worked for Merrill Lynch during the dot-com boom. The New York attorney general accused Blodget of having praised Internet stocks in public and criticized the same stocks in private. In
An article in the Wall Street Journal noted that of the thousands of mutual funds investing in stocks or stocks and bonds, only 31 had managed to earn a higher rate of return than the S&P 500 in
Distinguish between the small firm effect and the January Effect.
What is inside information? How is it relevant to the efficient market hypothesis?
What do you understand by the term “insider trading”? Explain the legal provisions in this regard with examples.
According to an article in the Wall Street Journal, “Cyclical sectors such as tech typically lead in the second year of a bull market, which is on track for the beginning of March.”a. What is a
An article in the Wall Street Journal notes that since 1926, stock prices have gone up more in July than in any other month. Is this “July effect”a pricing anomaly? Will you be able to earn a
What is the “greater fool theory”?
Some mutual funds have started behavioral finance funds that attempt to use insights from behavioral finance in choosing stocks. According to an article in the New York Times:Emotions cause investors
Writing in New York magazine, Sheelah Kolhatkar asks an intriguing question:[The] investment-management company Vanguard released data showing that men were more likely than women to sell stocks at
When Facebook first began selling shares of stock to the public, the price for its initial public offering (IPO) was $38 per share. After a few days of trading, the price fell to $20 per share. An
Charles Dow was the original editor of the Wall Street Journal. He was the originator of “Dow Theory,” which holds that the prices of transportation stocks, such as Heartland Express, can predict
What is a margin requirement in the futures market?
What are the three main benefits of futures contracts over forwards contracts?
Is a firm likely to have a long position in both the spot market and the futures market? Briefly explain.
An article in the Wall Street Journal on the market for coffee futures noted that on that day, “traders began to close out bets that prices would rise, or liquidate their long positions.”a. What
An article in the Wall Street Journal noted that All Nippon Airways had “reduced its oil hedging to around 40% this fiscal year from 60% in the last fiscal year in a bid to capture the lower spot
An article in the Wall Street Journal states, “Gasoline futures are falling, which could point to a drop in prices at the pump down the line.”a. What does it means to say that “futures are
An article in the Wall Street Journal discussing the nickel market contained the following:The sharp rise in nickel prices demonstrates how even a slight shift in demand and supply can roil tiny
An article in the Wall Street Journal discussed the fear that some farmers had that regulation of derivatives would make it harder for them to hedge risk. The article described the situation of a
Consider the listing below for 10-year Treasury note futures on the Chicago Board of Trade. One futures contract for Treasury notes = $100,000 face value of 10-year 6% notes.a. If today you bought
An article in Wall Street Journal in the fall of 2012 quoted an options broker as saying: “The market is relatively strong with a good couple of months this summer, so put options are expensive as
An article on the stock market observes: “To protect profits, investors can buy put options, which act as insurance, while investors who want to add exposure to the market can buy call
An article in the Wall Street Journal discussed put options on Facebook’s stock. One put option had a strike price of $25. The article observed:“Puts are contracts that give the buyer the right
Use the following information on call and put options for Facebook to answer the questions.a. What is the intrinsic value of the call option that expires in April and has a $17 strike price?b. What
An article in the Wall Street Journal noted that, “Options traders appeared to be taking a bullish approach to Target” because during the previous day they purchased 68,000 calls on the
Suppose that the Dow Jones Industrial Average is above the 13,000 level. If the Dow were to fall to 10,000, who would gain the most: investors who had bought call options, investors who had sold call
An article in the Wall Street Journal noted:“The cost of credit default swaps on Italian and Spanish government and corporate debt surged last week.” What does an increase in the price of credit
An article in the Wall Street Journal on proposals to change the regulations governing the trading of financial derivatives contained the following:The SEC and the Commodity Futures Trading
Go to wsj.com and click on “Markets” and “Market Data Center.” Under “U.S. Stocks” in the pull-down menu, click on “Listed Options Quotes.” Find the data on call and put options for
If the value of the Canadian dollar falls with respect to the euro, what will be the likely impact on European exports to Canada? Will the effect be the same on Canadian exports to Europe?
A student makes the following observation: It currently takes 80 yen to buy 1 U.S. dollar, which shows that the United States must be a much wealthier country than Japan. But it takes more than 1
If $2 buys £1 and €2.2 buys £1, how many euros are required to buy $1?
If the exchange rate between the yen and the dollar changes from ¥75 = $1 to ¥90 = $1, is this good news for Sony? Is it good news for U.S. consumers?Is it good news for U.S. firms that export to
An article observes that the high value of the yen “is dealing crippling blows to the country’s once all-important export machine.” The article also observes, though, that “a high yen
An editorial in the Wall Street Journal contains this statement: “The exchange rate is India’s most important price.”a. In what sense is the exchange rate a price?b. Why might the exchange rate
Suppose that an Apple iPhone costs $200 in the United States, £65 in the United Kingdom, and ¥35,000 in Japan. If the exchange rates are $1.50 = £1 and ¥100 = $1, what are the real exchange rates
According to an article in the Wall Street Journal: “Fund managers tend to bid up options when they expect more erratic currency movements, and sell them when the outlook is calm.”a. What does it
Suppose that Daimler AG, which manufacturers Mercedes-Benz automobiles, sells €5 million worth of automobiles to U.S. importers.Assuming that the current exchange rate is $1.22 = €1 and Daimler
What is counterparty risk? How is it different for forwards and for futures?
In a column in the New York Times, Uwe Reinhardt, an economist at Princeton, compared health care spending in Germany and the United States: “Total national health spending in Germany. . . amounted
The Economist magazine tracks the prices of the McDonald’s Big Mac hamburger in countries around the world. The following table shows the price of Big Macs in the United States and in five other
Look again at Figure 8.3 and answer the following questions.a. Why is the demand curve for foreign exchange downward sloping?b. Why is the supply curve for foreign exchange upward sloping?c. Who
According to an article in the New York Times in early 2012, “Bond yields have risen for countries like Brazil, Turkey and India, with investors preferring the safety of the dollar or yen.”
An article in the Wall Street Journal in 2012 noted that interest rates in Australia were higher than in the United States on comparable bonds. The article quoted a specialist on foreign exchange at
Borrowing at a low interest rate in one currency to lend at a higher interest rate in another currency is sometimes called a “carry trade.” An article in the New York Times describes an
An article in the Wall Street Journal in 2012 noted: “Turkey’s relatively strong economy and its attractive yields have kept emerging-market investors in the country.”a. What is an “emerging
Go to the Web site of the Federal Reserve Bank of St. Louis Federal Reserve (FRED) (http://research.stlouisfed.org/fred2/) and download monthly data on the tradeweighted exchange rate for the U.S.
What advantages do financial intermediaries have relative to small savers in dealing with the transactions costs involved in making loans? If we lived in a world in which everyone was perfectly
How has the growth of the Internet affected the problem of transactions costs and information costs in the financial system?
What are restrictive covenants? Why do investors introduce restrictive covenants into bond contracts?
Explain how incentive contracts help to reduce the problem of moral hazard.
At a used car lot, a nearly new car with only 2,000 miles on the odometer is selling for half the car’s original price. The salesperson tells you that the car was “driven by a little old lady
An article in the Economist magazine observes:“Insurance companies often suspect the only people who buy insurance are the ones most likely to collect.”a. What do economists call the problem
An article in the Economist magazine on crowd-funding argued: “Start-ups are especially needy now, since many banks are loth to lend even to well-established companies.”a. Why might banks be
Brett Arends, a columnist for the Wall Street Journal, argues: “Today you should probably view [financial firms selling investments] the way you view someone selling a used car.” How should you
Yves Smith runs the popular financial blog nakedcapitalism.com. In one of his postings, he noted: “Amex [American Express] is offering very hefty balance reductions (20%) to business accounts who

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