Question
1. All of the following are correct statements about the Fed Funds market, as compared to the repo market, except one. Which one is FALSE?
1. All of the following are correct statements about the Fed Funds market, as compared to the repo market, except one. Which one is FALSE?
Repo markets are accessible to a wider class of economic agents
Repo markets can function as a channel for inter-corporate borrowing and lending, but the Fed Funds market cannot
Both Fed Funds and repo provide mechanisms for flow of funds between banks
Repo dealers make markets in securities as well as markets for money
Dealers are more important than brokers because their balance sheets are monitored by the Fed
2. After the global financial crisis, the overnight repo rate was for a while persistently higher than the overnight Fed Funds rate, whereas previously it had been lower. Which of the following is NOT a possible explanation?
Before the crisis, the Fed was trying to encourage borrowing at the Fed Funds rate to expand short term credit
After the crisis, default risk was no longer priced positively
Before the crisis, the Fed was generally trying to impose discipline by keeping the better money at a premium
After the crisis, the Fed was generally trying to foster elasticity by keeping the better money at a discount
Eurodollars sold at a premium
3. Why would a bank seek financing on the Eurodollar market instead of the Fed Funds market?
Eurodollars are secured whereas Fed Funds are not
Eurodollar loans are available for terms longer than one day
Greater liquidity in Eurodollar markets due to greater presence of dealers
Interest rates are higher in Eurodollar markets
The Fed Funds market is not available to banks outside the US
4. Which of the following statements is correct regarding the expectations hypothesis of the term structure of interest rates?
Empirically, the forward rate tends to be greater than the expected (or realized) spot rate, which contradicts the expectations hypothesis
Arbitrage ensures that the hypothesis holds at all times, except during crisis
Foreign interest rates are always higher than domestic interest rates
The expected future spot rate should be greater than the forward rate in order to compensate for risk
The hypothesis provides a scientific explanation for the liquidity premium in the term structure
5. Which of these statements are FALSE regarding uncovered interest parity (UIP)?
Studies find that high yielding currencies tend to appreciate, which is just the opposite of UIP prediction
Forward exchange rates tend to be biased estimators of future spot exchange rates
It fails to hold empirically, while covered interest parity holds
Empirical studies find that high yielding currencies tend to depreciate relative to low yielding currencies
Arbitrage ensures covered interest parity holds, but not uncovered interest parity
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