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principles of finance
Questions and Answers of
Principles Of Finance
15 Which argument for fixed exchange rates do you think would be most compelling for Fiji? (Hint: Fiji’s major ‘‘export’’ is tourism, and most manufacturers and other consumer goods are
14 Why have central bankers frequently intervened in the foreign exchange market under a system of flexible exchange rates? If they have managed to smooth out fluctuations, have they made profits for
13 Do you think North America should adopt a common currency?
12 Do you think that coastal China and western China should have separate currencies?
11 Why do you think some European countries maintained pegged exchange rates after the collapse of the Bretton Woods system? Relate your answer to optimum currency areas?
10 How would you go about trying to estimate the seigniorage gains to the United States?(Hint: They depend on the quantity of US dollars held abroad, the competitive rate of interest that would be
9 Do you think that the collapse of the Bretton Woods system would have been less likely had surplus countries expanded their economies to ease the burden of adjustment on the countries with deficits?
8 Will revaluations or appreciations work for small, open economies? Why is there asymmetry in the effect of revaluation and devaluation?
7 Should Appalachia have its own currency? Under what conditions should the Hong Kong dollar be pegged to the Chinese yuan rather than the US dollar?
6 Why do we observe deficits or surpluses under ‘‘flexible’’ rates? Does this tell us something of the management of the rates?
5 Assume that you are going to poll the following groups:a. Central Bankersb. Business executivesc. Consumers How do you think each group would weigh the arguments for and against flexible rates?What
4 Why can speculators make profits with less risk under fixed rates? From whom do they make their profits?
3 In what ways did Bretton Woods require countries to sacrifice economic sovereignty for the public good?
2 Why might historical patterns of prices show parallel movements between deficit and surplus countries? Could gold discoveries and common movements in national incomes cause this?
1 How can government objectives such as the maintenance of full employment hinder the functioning of the gold standard? Would adjustment via income or via interest rates be inhibited in the same way?
14 What is the ‘‘Dutch disease?’’
13 What counterarguments can be made to the claim that flexible rates contribute to uncertainty and thereby inhibit trade?
12 What is an ‘‘optimum currency area?’’
11 What is the ‘‘peso problem?’’
10 What type of bank is the International Bank for Reconstruction and Development, or World Bank?
9 What type of bank is the Bank for International Settlements?
8 How has economic power shifted in recent years?
7 What factors contributed to the third-world debt crisis?
6 What is a ‘‘sovereign loan,’’ and what error did some bankers make when considering the risk of such loans?
5 What is meant by ‘‘seigniorage?’’
4 What are Special Drawing Rights?
3 How did the International Monetary Fund, IMF, help implement the Bretton Woods system?
2 What events helped shape the Bretton Woods system?
1 What role did commitment play in the successful functioning of the gold standard?
1 What is the essential feature of the gold standard concerning the exchange of paper money into gold?
10 How does the portfolio-balance approach differ in its predictions of the effect of a
14 What is the difference between a free-trade agreement and a customs union?
10 Does a crawling peg system lend itself to profitable speculation?
9 Why have central bankers frequently intervened in the foreign exchange market under a system of flexible exchange rates? If they have managed to smooth out fluctuations, have they made profits for
8 Do you think that the collapse of the Bretton Woods system would have been less likely had surplus countries expanded their economies to ease the burden of adjustment on the countries with deficits?
7 Why do we observe deficits or surpluses under ‘‘flexible’’ rates? Does this tell us something of the management of the rates?
6 Why can speculators make profits with less risk under fixed rates? From whom do they make their profits?
5 Use Figure 22.2 to show the effect of a fall in demand for British goods in terms of(a) the balance of payments measured in terms of pounds and (b) the balance of payments measured in terms of US
4 Why might historical patterns of prices show parallel movements between deficit and surplus countries? Could gold discoveries and common movements in national incomes cause this?
3 How can government objectives such as the maintenance of full employment hinder the functioning of the gold standard?
2 What assumptions have you made in Question 1?
1 Assume the following gold prices have been declared by the central banks:a Bank of England £300 b Federal Reserve System $475 c European Central Bank d500 d Reserve Bank of Australia A$700 e Bank
18 According to target zone research, does the establishment of a target zone for exchange rates increase or decrease the range within which exchange rates typically fluctuate?
17 What was the Louvre Accord?
16 What is a crawling peg?
15 What is a dirty float?
14 To what type of exchange-rate system did the Maastricht Agreement commit participating European Community member countries?
13 What is the European Currency Unit?
12 What exchange-rate system evolved from the snake?
11 What is a central-bank swap?
10 Why might speculation be profitable in a gold-standard system?
9 If a country increases its official price of gold, ceteris paribus, does that constitute a devaluation or revaluation of its currency?
8 What is the difference between the dollar standard and the gold-exchange standard?
7 What is meant by support points in the Bretton Woods system?
6 What is sterilization or neutralization policy in the context of the functioning of the gold standard?
5 How are the money supply and prices linked according to the price-specie adjustment mechanism?
4 What does the price-specie adjustment mechanism assume about the connection between the trade balance and a country’s money supply?
3 What does the price-specie automatic-adjustment mechanism assume about the connection between the gold reserves of a country and that country’s trade balance?
2 What are the ‘‘gold points?’’
12 What type of option would speculators write if they thought the Swiss franc would increase more than the market believed?
11 What type of option(s) would speculators buy if they thought the euro would increase more than the market believed?
10 What is the payoffprofile frombuying andwritinga calloption?Ignore the transaction costs.
9 Suppose a bank sells a call option to a company making a takeover offer where the option is contingent on the offer being accepted. Suppose the bank reinsures the option on an options exchange by
8 How does a currency option differ from a forward contract? How does an option differ from a currency future?
7 Does the need to hold a margin make forward and futures deals less desirable than if there were no margin requirements? Does your answer depend on the interest paid on margins?
6 How could arbitrage take place between forward exchange contracts and currency futures? Would this arbitrage be unprofitable only if the futures and forward rates were exactly the same?
5 Do you think that a limit on daily price movements for currency futures would make these contracts more or less risky or liquid? Would a limitation on price movement make the futures contracts
4 Why is a futures contract similar to a string of bets on the exchange rate, settled every day?
3 How does the payoff profile of a futures sale of a currency compare to the profile of a purchase of the same currency?
2 To what extent do margin requirements on futures represent an opportunity cost?
1 Why do you think that futures markets were developed when banks already offered forward contracts? What might currency futures offer which forward contracts do not?
18 What goes on the axes of a payoff profile for a currency option?
17 What is an ‘‘over-the-counter option?’’
16 What factors influence options prices?
15 What is the ‘‘time value’’ on an option?
14 What is an ‘‘option premium?’’
13 What does it mean to be ‘‘out of the money?’’
12 What does it mean to be ‘‘in the money?’’
11 What is an options ‘‘writer?’’
10 What is a ‘‘call option’’ on a currency?
9 What is a ‘‘put option’’ on a currency?
8 How do American options differ from European options?
7 What is meant by the ‘‘strike’’ or ‘‘exercise’’ price of an option?
6 What causes marking-to-market risk?
5 What is ‘‘marking-to-market?’’
4 What is a meant by a margin’s ‘‘maintenance level?’’
3 What is the meaning of ‘‘margin’’ on a futures contract?
2 How are futures contracts ‘‘cleared?’’
1 What is a currency futures contract?
A researcher wishes to examine the link between the returns on two assets A and B in situations where the price of B is falling rapidly. To do this, he orders the data according to changes in the
What are quantile regressions and why are they useful?
What are the units of R 2?
A researcher estimates the following two econometric models(4.59)(4.60)where ut and vt are iid disturbances and x3t is an irrelevant variable which does not enter into the data generating process for
A researcher estimates the following econometric models including a lagged dependent variable(4.57)(4.58)where ut and vt are iid disturbances.Will these models have the same value of (a) The residual
You estimate a regression of the form given by equation (4.55)below in order to evaluate the effect of various firm-specific factors on the returns of a sample of firms. You run a crosssectional
You decide to investigate the relationship given in the null hypothesis of Question 2, part (c). What would constitute the restricted regression? The regressions are carried out on a sample of 96
Which would you expect to be bigger – the unrestricted residual sum of squares or the restricted residual sum of squares, and why?
Which of the above null hypotheses constitutes ‘THE’ regression F-statistic in the context of equation (4.54)? Why is this null hypothesis always of interest whatever the regression relationship
Which of the following hypotheses about the coefficients can be tested using a t-test? Which of them can be tested using an F-test?In each case, state the number of restrictions.(a) H0: β3 = 2(b)
By using examples from the relevant statistical tables, explain the relationship between the t- and the F-distributions.For questions 2–5, assume that the econometric model is of the form
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