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principles of finance

Questions and Answers of Principles Of Finance

The unrestricted regression will be the one given by equation(4.30) above. To derive the restricted regression, first impose the restriction:(4.31)Replacing β2 and β3 by their values under the null
Suppose that a researcher wants to test whether the returns on a company stock (y) show unit sensitivity to two factors (factor x2 and factor x3) among three considered. The regression is carried out
Dropping the time subscripts for simplicity, suppose that the general regression is(4.21)and that the restriction β3 + β4 = 1 is under test (there exists some hypothesis from theory which suggests
The following model with three regressors (including the constant, so k = 3) is estimated over fifteen observations (4.13)and the following data have been calculated from the original xs Calculate
Construct and interpret quantile regression models
Derive the OLS parameter and standard error estimators using matrix algebra
Form a restricted regression
Determine how well a model fits the data
Test multiple hypotheses using an F-test
Construct models with more than one explanatory variable
1 What are the essential components of the monetary theory of exchange rates?
12 Why does the interest rate return to its initial level in the Dornbusch overshooting theory after an increase in the stock of money to a new level?
11 Is the long-run equilibrium of Dornbusch’s overshooting theory consistent with the monetary theory of exchange rates?
10 How does the portfolio-balance approach differ in its predictions of the effect of a money supply expansion via open-market operations and a money supply expansion via a reduction in reserve
9 Why does the foreign exchange equilibrium line FF move downwards in Figure 21.3 when there is an increase in the US price level?
8 What is the crucial assumption required for exchange-rate overshooting in the Dornbusch model? Do you think this assumption is valid?
7 What are the principal differences and similarities between the monetary and portfoliobalance approaches to exchange rates?
6 How can the asset approach explain deviations from PPP based on current price indexes?
5 What does the asset approach imply about the ability to make money by speculating in foreign exchange?
4 Assume that all data in Question 2 are unchanged except the US GDP, QUS, which increases from $7,000 billion to $7,700 billion? What happens to the exchange rate, and how does this compare in
3 Assume in the previous question that all magnitudes are unchanged except the Canadian money supply which increases from C$50 billion to C$55 billion. What happens to the implied exchange rate, and
2 Suppose that MUS ¼ $500 billion MCan ¼ C$50 billion QUS ¼ $7; 000 billion QCan ¼ C$600 billion a ¼ 1 b ¼ 0 and that PPP holds. What exchange rate is implied by the monetary theory of exchange
1 Why does the monetary approach imply that higher expected inflation causes a currency to depreciate?
8 What happens in the Dornbusch overshooting theory to interest rates after exchange rates have overshot their eventual equilibrium?
7 What does the Dornbusch overshooting theory assume about the speed of adjustment of different prices?
6 What is meant by exchange-rate overshooting?
5 What does the portfolio-balance approach to exchange rates assume about the substitutability of different countries’ monies and bonds?
4 Does the asset approach to exchange rates consider expectations about future exchange rates?
3 What does the monetary theory of exchange rates imply for a Relatively rapid growth in a country’s money supply?b Relatively rapid growth in a country’s national income?c An increase in a
2 What does the monetary theory of exchange rates assume about the substitutability of different countries’ monies and bonds?
12 Under what conditions might the emergence of a limited number of free-trade blocs lower standards of living?
11 How can a customs union or common market such as the EU hurt a US exporter?
10 Why is counterpurchase so much more common than barter in countertrade?
9 What form of trade financing is an exporter likely to seek first, and how would the choice depend on the export deal?
8 Is forfaiting a form of factoring?
7 What is the similarity between an aval and an acceptance?
6 Why do you think promissory notes used in forfaiting deals are avalled by the importer’s bank?
5 Why is export credit insurance typically offered by government agencies?
4 Are cash terms likely when an importer can arrange a letter of credit?
3 Why are banks willing to accept time drafts, making them bills of exchange, and why do importers and exporters arrange for banks to accept drafts?
2 Why does the exporter provide the importer with the check for payment that the importer signs, rather than just allow the importer to send a check?
1 Why are letters of credit less often used in domestic trade?
14 What is the difference between a free-trade agreement and a customs union?
13 How does the WTO differ from its predecessor, the GATT?
12 Why does countertrade occur?
11 What forms does countertrade take?
10 What is forfeited with forfaiting?
9 List the market failures that support government export credit insurance.
8 Are letters of credit and export credit insurance perfect substitutes?
7 Why might a company have a letter of credit confirmed?
6 What purpose is served by a bill of lading or air waybill?
5 What is a ‘‘clean draft’’?
4 What is a banker’s acceptance?
3 How does a time draft differ from a sight draft?
2 What purpose is served by a bill of exchange?
1 What purpose is served by a letter of credit?
10 Empirical evidence suggests that banks tend to locate near importers rather than exporters. What do you think is responsible for this?
9 In what way does Table 19.2 suggest little discrimination against foreign financial firms?Can you find any apparent examples of discrimination?
8 If the object of US banks moving overseas had been purely to help customers, could they have used only correspondent relationships and representative offices? Why then do you believe they have
7 What is the difference between a foreign branch, a foreign subsidiary, a foreign affiliate, and a foreign agency? Which type(s) of foreign banking will make banks multinational?
6 Does it make any difference to the individual bank that makes a loan whether the loaned funds will leak to the United States? In other words, does the individual bank lose the funds no matter who
5 Give a reason (or reasons) why each of the following might open a Eurodollar account a The government of Iran b A US private citizen c A Canadian university professor d A European-based corporation
4 a What is the Eurodollar creation from a deposit of $2 million when the offshore banks maintain a 5 percent reserve? Assume that the $2 million is deposited in a London office of Barclays Bank,
3 Given the relatively extensive use of dollars in denominating sales contracts in international trade, are Eurodollar multipliers likely to be larger than multipliers for other offshore currencies?
2 Why do you think Eurodollars are the major offshore currency? Does it have to do with the amount of business transacted in US dollars?
1 Since a person can open an offshore sterling account with dollars – by converting the dollars into pounds – or open a dollar account with sterling, what yield differences can exist between
14 In what ways has information contributed to the multinationalization of the banking industry?
13 What is an IBF?
12 Why have some banks set up Edge Act corporations?
11 How does a foreign bank agency differ from a branch?
10 Why do banks have correspondent relationships with other banks?
9 How do leakages of dollars back to the United States affect the size of the Eurodollar multiplier?
8 What is the Eurodollar multiplier?
7 Why do banks trade Eurodollar futures?
6 What is meant by ‘‘LIBOR?’’
5 Did US trade deficits contribute to the growth of Eurodollars?
4 What contributed to the demand for Eurodollar loans?
3 How did the US Federal Reserve contribute to the supply of Eurodollar deposits?
2 What is an offshore currency?
1 What is a Eurodollar?
10 What determines whether you would issue a Eurosterling bond or a sterling bond(i.e. a foreign bond) in Britain?
9 Why does having an income in foreign currency reduce required borrowing risk premiums? What type of risk – translation/transaction risk or operating risk – is reduced?
8 Ifr$¼12.50 percent, r£¼14.00 percent, and S($/£)¼2.25, what must the actual exchange rate after 10 years, S10($/£), be in order to make borrowing in pounds a good idea?
7 With r$¼12.50 percent, r£¼14.00 percent, S($/£)¼2.25, and S10($/£)¼1.50, in which currency would you borrow? What is the expected gain on each $1 million borrowed from making the correct
6 How is the tax shield on debt mitigated by a high tax rate on interest earnings, thereby making debt/equity ratios in different countries depend on individual income versus corporate tax rates?
5 When lenders are more optimistic about the future value of a currency than borrowers, what do you think this implies about the likelihood of debt denomination in that currency?
4 Why do Canadian firms borrow so heavily in US dollars?
3 Is a US dollar bond sold by a British firm in the United States a foreign bond or a Eurobond? How about a pound bond sold by a British firm in the United States?
2 How can the availability of savings and the opportunities for investment influence the cost of capital in different countries?
1 Why might a firm want to issue shares simultaneously in a number of financial centers?
14 How might the extent of equity ownership by banks in different countries affect financial structure differences between countries?
13 How does liability for debt affect parent versus subsidiary borrowing?
12 How does country risk affect parent versus subsidiary borrowing?
11 What is a credit swap?
10 What is a parallel loan?
9 What is the advantage of a multicurrency bond to lenders?
8 Why are strong-currency bonds preferred by lenders facing lower tax rates on capital gains than on interest income?
7 Why might some borrowers pay more to borrow foreign rather than domestic currency?
6 Under what condition will a risk-neutral borrower borrow pounds?
5 What is a Eurobond?

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