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Financial Markets and Institutions 6th edition Anthony Saunders, Marcia Cornett - Solutions

How are foreign exchange markets open 24 hours per day?
What is the spot market for FX? What is the forward market for FX? What is the position of being net long in a currency?
What motivates FIs to hedge foreign currency exposures? What are the limitations to hedging foreign currency exposures?
What are the two primary methods of hedging FX risk for an FI? What two conditions are necessary to achieve a perfect hedge through on-balance-sheet hedging? What are the advantages and disadvantages of off-balance-sheet hedging in comparison to on- balance-sheet hedging?
What are the major foreign exchange trading activities per-formed by financial institutions?
What is the implication for cross-border trades if it can be shown that interest rate parity is maintained consistently across different markets and different currencies?
What is the purchasing power parity theorem?
Explain the concept of interest rate parity. What does this concept imply about the long-run profit opportunities from investing in international markets? What market conditions must prevail for the concept to be valid?
Why has the United States held a trade deficit for most of the 1990s and 2000s? Make sure you distinguish between the imports versus exports of goods and services.
Why must the current account balance equal the value of the capital account balance (in opposite sign)?
A U.S. insurance company invests $ 1,000,000 in a private placement of British bonds. Each bond pays £ 300 in interest per year for 20 years. If the current exchange rate is £ 1.564/$, what is the nature of the insurance company’s exchange rate risk? Specifically, what type of exchange rate
If international capital markets are well integrated and operate efficiently, will FIs be exposed to foreign exchange risk? What are the sources of foreign exchange risk for FIs?
Refer to Table.a. What was the spot exchange rate of Australian dollars for U.S. dollars on July 31, 2013? b. What was the six-month forward exchange rate of Australian dollars for U.S. dollars on July 31, 2013? c. What was the three-month forward exchange rate of U.S. dollars for Japanese yen
Refer to Table.a. On June 30, 2013, you purchased a British pound–denominated CD by converting $ 1 million to pounds at a rate of 0.6598 pounds for U.S. dollars. It is now July 31, 2013. Has the U.S. dollar appreciated or depreciated in value relative to the British pound b. Using the information
X-IM Bank has ¥14 million in assets and ¥23 million in liabilities and has sold ¥8 million in foreign currency trading. What is the net exposure for X-IM? For what type of exchange rate movement does this exposure put the bank at risk?
If the interest rate in the United Kingdom is 8 percent, the interest rate in the United States is 10 percent, the spot exchange rate is $ 1.75/£ 1, and interest rate parity holds, what must be the one- year forward exchange rate?
Suppose all of the conditions in Problem 18 hold except that the forward rate of exchange is also $ 1.75/£1. How could an investor take advantage of this situation?
If a bundle of goods in Japan costs ¥ 4,000,000 while the same goods and services cost $ 40,000 in the United States, what is the current exchange rate of U.S. dollars for yen? If, over the next year, inflation is 6 percent in Japan and 10 percent in the United States, what will the goods cost
The following table lists balance of payment current accounts for Country A.a. What is Country A€™s total current accounts? b. What is Country A€™s balance on goods? c. What is Country A€™s balance on services? d. What is Country A€™s balance on
On July 31, 2013, you convert 500,000 U.S. dollars to Japanese yen in the spot foreign exchange market and purchase a six-month forward contract to convert yen into dollars. How much will you receive in U.S. dollars at the end of six months?
Bank USA recently purchased $ 10 million worth of euro-denominated one- year CDs that pay 10 percent interest annually. The current spot rate of U.S. dollars for euros is $ 1.30/€ 1. a. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro? b. What will be the
Bankone issued $ 200 million worth of one-year CD liabilities in Brazilian reals at a rate of 6.50 percent. The exchange rate of U.S. dollars for Brazilian reals at the time of the transaction was $ 1.00/Br 1.a. Is Bankone exposed to an appreciation or depreciation of the U.S. dollar relative to
Sun Bank USA has purchased a 16 million one- year Australian dollar loan that pays 12 percent interest annually. The spot rate of U.S. dollars for Australian dollars is $ 0.625/A$1. It has funded this loan by accepting a British pound (BP) – denominated deposit for the equivalent amount and
East Bank has purchased a 5 million one-year Swiss franc (Sf) loan that pays 6 percent interest annually. The spot rate of U.S. dollars for Swiss francs is 0.9691. It has funded this loan by accepting a Canadian dollar (C$) – denominated deposit for the equivalent amount and maturity at an annual
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $ 2 million CD at 6 percent and is planning to fund a loan in British pounds at 8 percent for a 2 percent expected spread. The spot rate of
Jones Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $ 5 million CD at 4 percent and is planning to fund a loan in yen at 6 percent for a 2 percent expected spread. The spot rate of U.S. dollars
Suppose that a U.S. FI has the following assets and liabilities:Assets Liabilities $ 300
Suppose that, instead of funding the $ 200 million investment in 10 percent German loans with U.S. CDs, the FI manager in Problem 10 funds the German loans with $ 200 million equivalent one-year euro CDs at a rate of 7 percent. Now the balance sheet of the FI would be as follows:a. Calculate the
Citibank holds $ 23 million in foreign exchange assets and $ 18 million in foreign exchange liabilities. Citibank also conducted foreign currency trading activity in which it bought $ 5 million in foreign exchange contracts and sold $ 12 million in foreign exchange contracts. a. What is
P.J. Chase Stanley Bank holds $ 75 million in foreign exchange assets and $ 68 million in foreign exchange liabilities. P.J. Chase Stanley also conducted foreign currency trading activity in which it bought $ 165 million in foreign exchange contracts and sold $ 128 million in foreign exchange
The following are the foreign currency positions of an FI, expressed in the foreign currency.The exchange rate of dollars per Sf is 0.9301, of dollars per British pound is 1.6400, and of dollars per yen is 0.010600.The following are the foreign currency positions converted to dollars.a. What is
Suppose that the current spot exchange rate of U.S. dollars for Australian dollars, S US$/A$, is 1.0277 (i. e., $ 1.0277 can be received for 1 Australian dollar). The price of Australian-produced goods increases by 5 percent (i. e., inflation in Australia, IPA, is 5 percent), and the U.S. price
Assume that annual interest rates are 8 percent in the United States and 4 percent in Switzerland. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $ 0.60/ Sf. a. If the forward rate is $ 0.64/Sf, how could the bank arbitrage using a sum of $ 1 million?
Assume that annual interest rates are 5 percent in the United States and 4 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $ 0.6624/Turkish lira (TL).a. If the forward rate is $ 0.6735/TL, how could the bank arbitrage using a sum of
What is a derivative security?
What is an option? How does an option differ from a forward or futures contract?
Which party is the swap buyer and which is the swap seller in an interest rate swap transaction?
An American firm has British pound–denominated accounts payable on its balance sheet. Managers believe the exchange rate of British pounds to U.S. dollars will depreciate before the accounts will be paid. What type of currency swap should the firm enter?
What are the differences between a spot contract, a forward contract, and a futures contract?
What are the functions of floor brokers and professional traders on the futures exchanges?
What is the purpose of requiring a margin on a futures or option transaction? What is the difference between an initial margin and a maintenance margin?
Refer to Table. a. If you think 15-year Treasury note prices will fall between August 7, 2013, and March 2014, what type of futures position would you take? b. If you think inflation in Japan will increase by more than that in the United States between August 2013 and December 2013, what type of
What is the difference between a call option and a put option?
What must happen to the price of the underlying T-bond futures contract for the purchaser of a call option on T-bond futures to make money? How does the writer of the call option make money?
What must happen to the price of the underlying stock for the purchaser of a put option on the stock to make money? How does the writer of the put option make money?
What are the three ways an option holder can liquidate his or her position?
What factors affect the value of an option?
What are the differences between a cap, a floor, and a collar? When would a firm enter any of these derivative security positions?
Refer to Table. a. What was the settlement price on the December 2014 Eurodollar futures contract on August 7, 2013? b. How many 5-year Treasury note futures contracts traded on August 6, 2013? c. What is the face value on a Swiss franc currency futures contract on August 7, 2013? d. What was the
Suppose you purchase a Treasury bond futures contract at a price of 95 percent of the face value, $ 100,000. a. What is your obligation when you purchase this futures contract? b. Assume that the Treasury bond futures price falls to 94 percent. What is your loss or gain? c. Assume that the Treasury
Tree Row Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 95-040. Tree Row thinks interest rates will go up over the period of investment. a. Should the bank go long or short on the futures contracts? b. Calculate the net profit to Tree Row Bank if
Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 105-100. Dudley Savings thinks interest rates will go down over the period of investment. a. Should the bank go long or short on the futures contracts? b. Calculate the net profit to
Suppose an investor has a $ 1 million long position in T-bond futures. The investor’s broker requires a maintenance margin of 4 percent, which is the amount currently in the investor’s account. a. Suppose also that the value of the futures contract drops by $ 50,000 to $ 950,000. How much will
You have taken a long position in a call option on IBM common stock. The option has an exercise price of $ 176 and IBM’s stock currently trades at $ 180. The option premium is $ 5 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net
You have written a call option on Walmart common stock. The option has an exercise price of $ 74, and Walmart’s stock currently trades at $ 72. The option premium is $ 1.25 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if
You have written a put option on Diebold Inc. common stock. The option has an exercise price of $ 28 and Diebold’s stock currently trades at $ 30.50. The option premium is $ 0.75 per contract. a. What is your net profit if Diebold’s stock price increases to $ 32 and stays there until the option
Refer to Table. a. How many ExxonMobil October 2013 $ 92.50 put options were outstanding at the open of trading on August 7, 2013? b. What was the closing price of a 10-year Treasury bond December 12550 futures call option on August 7, 2013? c. What was the closing and dollar price of a December
You have purchased a call option contract on Johnson & Johnson common stock. The option has an exercise price of $ 89.00 and J & J’s stock currently trades at $ 90.43. The option premium is quoted at $ 2.17 per contract. a. Calculate your net profit on the option contract if J & J’s
You have purchased a put option on Kimberly Clark common stock. The option has an exercise price of $ 95.00 and Kimberly Clark’s stock currently trades at $ 96.18. The option premium is $ 1.25 per contract. a. Calculate your net profit on the option if Kimberly Clark’s stock price falls to $
An FI has purchased a $ 200 million cap of 9 percent at a premium of 0.65 percent of face value. A $ 200 million floor of 4 percent is also available at a premium of 0.69 percent of face value. a. If interest rates rise to 10 percent, what is the amount received by the FI? What are the net savings
An insurance company owns $ 50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed with $ 50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has $ 50 million of auto loans with a fixed rate of 14 percent. The
A commercial bank has $ 200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with $ 200 million of fixed-rate deposits costing 9 percent. A savings bank has $ 200 million of mortgages with a fixed rate of 13 percent. They are financed with $ 200
Consider the following two financial institutions:Money Center Bank:Managers of the money center bank are concerned that interest rates may fall over the next four years, while managers of the savings bank are concerned that interest rates may rise over the next four years.On the balance sheet,
Consider the following two financial institutions:Managers of the bank are concerned that interest rates may fall over the next four years, while managers of the savings association are concerned that interest rates may rise over the next four years.On the balance sheet, the bank could attract an
You have purchased a put option on Pfizer common stock. The option has an exercise price of $ 27 and Pfizer’s stock currently trades at $ 29. The option premium is $ 0.50 per contract. a. What is your net profit on the option if Pfizer’s stock price does not change over the life of the
What are the major sources of funds for commercial banks in the United States? What are the major uses of funds for commercial banks in the United States? For each of your answers, specify where the item appears on the balance sheet of a typical commercial bank.
What are the principal types of financial assets for commercial banks? How has the relative importance of these assets changed over the past six decades? What are some of the forces that have caused these changes? What are the primary types of risk associated with these types of assets?
Why do commercial banks hold investment securities?
What type of transaction accounts do commercial banks issue? Which types of accounts have dominated the transaction accounts of banks?
What are the three major segments of deposit funding? How are these segments changing over time? Why? What strategic impact do these changes have on the profitable operation of a bank?
What is meant by an off-balance-sheet activity? What are some of the forces responsible for them?
What types of activities are normally classified as off-balance-sheet (OBS) activities?a. How does an OBS activity move onto the balance sheet as an asset or liability? b. What are the benefits of OBS activities to a bank? c. What are the risks of OBS activities to a bank?
The following balance sheet accounts (in millions of dollars) have been taken from the annual report for a U.S. bank. Arrange the accounts in balance sheet order and determine the value of total assets. Based on the balance sheet structure, would you classify this bank as a community bank,
What challenges have been made to the commercial banking industry by nonbanks?
What is a money center bank and a regional bank?
What are the differences between community banks, regional banks, and money center banks? Contrast the business activities, locations, and markets of each of these bank groups.
How do small bank activities differ from large bank activities?
Compare and contrast the profitability ratios (ROE and ROA) of banks with assets below and above $ 100 million in figure from 1990 through 2013. What conclusions can you derive from those numbers?
How has the performance of the commercial banking industry changed in the last twenty years?
Who are the major regulators of commercial banks? Which banks does each agency regulate?
What are the major functions performed by the FDIC?
For each of the following banking organizations, identify which regulatory agencies (OCC, FRB, FDIC, or state banking commission) may have some regulatory supervision responsibility. a. State-chartered, nonmember, non–holding company bank b. State-chartered, nonmember, holding company bank c.
What are the advantages and disadvantages of international expansion?
What are the principal liabilities for commercial banks? What does this liability structure tell us about the maturity of the liabilities of banks? What types of risks does this liability structure entail for commercial banks?
How does one distinguish between an off-balance-sheet asset and an off-balance-sheet liability?
What are the main off-balance-sheet activities undertaken by commercial banks?
What has been the recent trend in the number of commercial banks in the United States? What factors account for this trend?
How does a bank’s report of condition differ from its report of income?
What does it mean when a bank has a CAMELS rating of 2? Of 4?
Match these three types of cash balances with the functions that they serve: a. Vault cash b. Deposits at the Federal Reserve c. Deposits at other FIs (1) Used to meet legal reserve requirements (2) Used to purchase services (3) Used to meet customer withdrawals
What are the major categories of off-balance-sheet activities?
How does the asset utilization ratio for a bank compare to that of a retail company? How do the equity multipliers compare?
What sort of problems or opportunities might ratio analysis fail to identify?
Classify the following accounts into one of the following categories: a. Assets b. Liabilities c. Equity d. Revenue e. Expense f. Off-balance-sheet activities (1) Service fees charged on deposit accounts (2) Retail CDs (3) Surplus and paid- in capital (4) Loan commitments (5) Consumer loans (6)
Repurchase agreements are listed as both assets and liabilities in Table. How can an account be both an asset and a liability?
How do core deposits differ from purchased funds?
How might the use of an end-of-the-year balance sheet bias the calculation of certain ratios?
What is the likely relationship between the interest income ratio and the noninterest income ratio?
A security analyst calculates the following ratios for two banks. How should the analyst evaluate the financial health of the twobanks?
A bank has an ROE of 10 percent. The industry average ROE is 15 percent. How can ratio analysis help the firm’s managers identify the reasons for this difference?

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