1. It was said that the Bank of China (BOC) helped keep U.S. mortgage rates relatively low in 2003-2007. Explain in as much detail as possible each step in the process that starts with BOC intervention in the foreign exchange markets and ends with U.S. mortgage rates being lower than they would have been without the BOC actions.

2. Describe the process of securitization as it is employed in the mortgage market. Explain how this process contributed to the financial crisis of 2008-09. Explain why mortgage rates rise and fall in response to changes in Treasury yields.

3. As a financial whiz, you notice that you could borrow euros at 0.5% and invest in U.S. Treasury bills and earn 3%, potentially reaping an annualized profit of $25,000 per million. You propose that your company borrow 10 million euros, convert to dollars and invest the dollars for six months to earn as much as $125,000. Should your boss approve your plan? Why or why not?

4. What is a CMO and what risks are they designed to manage? What is a CDO? How did CDOs transform weak-credit subprime mortgages into high quality securities? Why was this process an essential step in the development of the financial crisis? How did credit default swaps amplify the crisis?

5. What is purchasing power parity? Why would a government want to keep its currency undervalued? What transactions does a central bank need to do to keep its currency undervalued?

6. If one is bullish on a stock, what option contract would you purchase? When is it in the money? When does it become profitable? If bearish, what option would you purchase? When is it in the money? What are the key variables that determine the value of an option?

7. Futures markets are used for hedging and for speculation. What is the difference between these activities? Why do speculators often use futures rather than cash markets? How would you use futures to profit from an expected rise in bond yields? From an expected rise in stock prices?

8. What are ARMs? What is the advantage of an ARM to a borrower? What are the disadvantages? What were teaser ARMs and how did they contribute to the financial crisis? What were liar loans? What were NINJA loans? Why did the credit rating agencies take so long to acknowledge the riskiness of those loans and to downgrade CDOs containing those loans?

9. What did Keynes mean when he said Markets can stay irrational longer than you can stay solvent? Explain how that process led to failures or near failures of such companies as Lehman Bros., Merrill Lynch, Wachovia, Bear Stearns and others.