The Economics Of Money Banking And Finance 3rd Edition Howells, Keith Bain - Solutions

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4 What has happened in relation to the Parmalat scandal since June 2004?
3 In a leading article on 23 December 2003, the Financial Times said that rating agencies in the Parmalat affair ‘carry responsibility for their sheer gullibility’. Do you think this is a fair criticism?(See the letter in reply on 24 December 2003 from the Executive Managing Director of
2 How has financial regulation been changed in the USA and Italy in response to the Enron, Worldcom and Parmalat scandals?
1 According to the Governor of the Banca d’Italia, ‘The Parmalat affair is the outcome of the repeated perpetration of criminal acts in the management of the company. The circumstances surrounding the case once again show that failure to observe the law and the lack of a firm ethical base for
4 What has been done in recent years to try to reduce the amount of financial exclusion?
3 To what extent is financial exclusion a social problem as well as a personal one?
2 Which features of recent developments in the financial services industry might have increased the amount of financial exclusion?
1 What are ‘doorstep lenders’ and ‘loan sharks’?How can one justify an APR of 80 per cent or 150 per cent?
4 What was the problem (in 2000), according to the Financial Times, in investing in a tracker fund based upon the FTSE-100 index.
3 Explain what is meant by a ‘tracker fund’. What are its supposed advantages from an investor’s point of view?
2 Why does concentrating upon relative valuation encourage ‘irrational’ valuation?
1 What does the article mean when it says that‘rational valuation took a holiday’?
2 How would you interpret the ‘dotcom’ phenomenon in the light of the ‘efficient market hypothesis’ discussed in Chapter 26?
1 Imagine that you are a fund manager and you observe share prices in one particular sector rising very rapidly, accompanied by much comment in the press that these companies are going to have a very profitable future. Using the valuation principles outlined in Chapter 11, you personally believe
8 Why might arbitrage fail to eliminate mispricing?
7 Explain what is meant by ‘investor sentiment’.
6 You suspect that directors’ purchases/sales of shares in their own firms are an indicator of future share price movements. How would you test whether such information could be profitably exploited?
5 How might you test for ‘weak’ and ‘semi-strong’efficiency?
4 How might an investment strategy appropriate for a market which is informationally efficient differ from one appropriate for a market which is inefficient?
3 Distinguish between the different forms of the efficient market hypothesis.
2 What forces tend to make financial markets informationally efficient?
1 Distinguish between the meanings which can be attached to ‘efficiency’ when applied to financial markets.
9 What aspects of the regulatory problem were highlighted by the collapse of Baring’s Bank in 1995?
8 Why is it thought that simple capital adequacy ratios are insufficient as a basis for supervising the activities of firms engaged in securities trading?
7 Explain the basis of the distinction between the types of capital in the Basel Concordat.
6 Why has globalization of the financial services industry made the problems faced by regulators more difficult?
5 Discuss the view that self-regulation cannot cope with the problem that what is good for the industry as a whole may not be good for individual practitioners.
4 Under what circumstances might regulation decrease rather than increase the stability of an industry?
3 How important is moral hazard as a determinant of people’s behaviour? Provide examples of moral hazard related both to everyday life and to the financial services industry.
2 How does asymmetric information produce a role for credit-rating agencies? What dangers might there be in the financial services industry becoming too dependent on credit-rating agencies?
1 Why might the existence of asymmetric information lead bankers to be conservative in their lending policies?
9 Why has retail liability management made control of the money supply more difficult?
8 Discuss the impacts, potential and actual, of liability management on the demand for money.
7 What is meant by ‘retail liability management’?Explain how it has been encouraged by deregulation.
6 What are the characteristics of a ‘passthrough’security? Why might these characteristics limit the attractiveness of this type of security for some types of investor?
5 Explain the basic principles underlying the creation of loan-backed securities.
4 Explain what is meant by ‘off-balance-sheet operations’ and give three examples.
3 Why has financial innovation been such a feature of the past 25 years?
2 Explain, using examples, how regulation, technological change and volatility can encourage financial innovation.
1 Why does financial innovation occur?
9 What reasons are there for a country or monetary union wanting to have a strong currency?
8 What has happened to the value of the euro since June 2004? Can this be explained by the factors discussed in the text or have other issues become important?
7 Why might interest rates differ in different countries, even within a monetary union?
6 Compare and contrast the monetary policy system and practice of the Bank of England with those of the European Central Bank.
5 Does it matter if a country’s central bank is only weakly accountable to the country’s political institutions?
4 Why might it be undesirable for all the members of a monetary union for one member to default on its government debt?
3 Why might credit-rating agencies rate a country’s debt denominated in its own currency more highly than its debt denominated in a foreign currency?
2 Why was it thought that a monetary union with many members would be more inflationary than one with only a few members?
1 Explain the conflict between a low-inflation policy and a weak euro.
7 What are the advantages of having a weakening currency?
6 Consider the difficulties in coming to a conclusion on each of the UK Treasury’s five economic tests for membership of the single currency.
5 Why did Denmark, Sweden and the UK choose to stay outside the single currency when it was established? Were the reasons the same in each case?
4 Why was it important that Germany should be a member of the European single currency?
3 Consider the argument that monetary union was a necessary extension of the European single market.
2 What were the economic reasons for wanting monetary integration in Europe?
1 Explain the reasoning behind each of the Maastricht convergence conditions.
7 What is meant by systemic risk in connection with the banking industry?8 Why is consumer protection such an important issue in insurance?
6 Have you seen examples in your town or region of the development of a single European financial market?
5 List the arguments in favour of host-country regulation and discuss them. Why did the European Commission favour home-country regulation?
4 What was special about the financial services industry which led progress towards the harmonization of national laws to be so slow?
3 Why is the measurement of gains from the movement to a single market so difficult?
2 List as many technical barriers to trade as you can think of.
1 What disadvantages do you see in the movement to the SEM?
10 Why do you think so many types of derivatives have been developed over such a short period?
9 What factors are likely to influence the price that a swap bank will charge for participating in a currency swap?
8 Find as many examples as you can of exotic options and variations upon plain vanilla swaps.
7 Find more information about some of the examples of company problems mentioned in the text.
6 Find examples of companies having hedged through the use of derivatives products other than those mentioned in the text.
5 Consider Table 20.1 and answer the following questions:(a) Why do short sterling call options for March with strike prices at 95875 or above have premiums of 0?(b) Why do the premiums on put options increase as the strike price increases?(c) What do the premiums on Euribor options tell you about
4 Answer the following questions concerning interest rate swaps:(a) Why might a borrower wish to enter into such a swap?(b) Why might such a swap be possible?(c) What risk does the guaranteeing bank run?
3 Find out as much as you can about the activities and procedures of the international credit-rating agencies.
2 Explain the statement made by the Chairman of the Chicago Board of Trade (CBoT) in the following extract:‘The Chicago Board of Trade will launch an oats futures options contract on May 1. Options on oats will provide a variety of hedging possibilities.The American Oats Association in
1 Explain each of the following:(a) fixed rate currency swaps;(b) an ‘in-the-money’ option.
9 Why is so much attention given to the form of delivery of the underlying product on futures contracts when delivery hardly ever occurs?
8 You are given the following figures for the end of September:Spot dirty price of cheapest to deliver long gilt =£97.25 Price factor of cheapest to deliver long gilt =0.9815625 Sterling money market interest rate for three months = 4.29 per cent Coupon rate on the cheapest to deliver long gilt= 8
7 Assume that at the end of March 2005, threemonth Euribor futures offered by Eurex stood at:Jun 98.02 Sep 97.98 Dec 97.90 What term would you use to describe this relationship between futures contracts of different periods? What is the opposite situation? What might the above set of figures imply
6 In Section 19.4.2 above, we write:If the price of the futures contract were too high, yielding greater than the forward-forward rate, the arbitrage strategy above would produce a profit for the arbitrageur. On the other hand, if the yield on the futures contract were below the forward-forward
5 You are given the following information:Spot euro interest rates on three-month money:2.05 per cent Spot US interest rates on three-month money:1.17 per cent$/a exchange rate: $1.1825 = a1(a) Calculate the fair price for a euro futures contract with a delivery date three months ahead.(b) Why
4 Money market interest rates on the Danish krone on 23 April 2004 were:one month 2.1 three months 2.1 six months 2.15 one year 2.25 Calculate the forward-forward interest rates:(i) for two months, one month ahead;(ii) for three months, three months ahead;(iii) for six months, six months ahead;(iv)
3 What are the characteristics of futures and futures exchanges which serve to increase the tradability of futures?
2 Outline the relative advantages and disadvantages of each of the following as instruments for providing protection against foreign exchange risk:(a) forward foreign exchange markets;(b) futures contracts in foreign exchange.
1 Explain each of the following:(a) the role of a clearing house in a futures market;(b) the potential advantages and risks of trading on margin in futures markets;(c) contango;(d) normal backwardation.
11 Explain the following:(a) the relationship between spot and forward rates of exchange;(b) purchasing power parity;(c) the difference between a rational and a speculative bubble in the foreign exchange market.
10 How might one use the spot markets to obtain protection against foreign exchange risk?What advantages do the forward markets have for this purpose?
9 Explain and defend the argument that speculation in markets is desirable.
8 You are given the following information:Spot exchange rate a1 = ¥111.9 Expected euro area inflation rate for next year = 2.2%Expected Japanese inflation rate for next year = 0.2%Three-month money market interest rate for the euro = 2.08%Three-month money market interest rate for Japan = 0.05%On
7 Explain the relationship postulated by the efficient markets hypothesis between forward rates of exchange and future spot rates of exchange.
6 Examine the ‘Currency Rates’ table from any copy of the Financial Times and answer the following questions:(a) What information is being given by the columns headed: ‘Closing mid’ and ‘Day’s change’?(b) To what do the rows labelled ‘Three month’ refer?(c) Why are the euro and
5 (a) Describe the arbitrage operation that would produce a profit if the following set of spot exchange rates prevailed in a foreign exchange market, explaining how you arrived at your answer:$US1 = NKr6.8076$US1 = a0.8397 a1 = NKr8.0025(b) What impacts would such an arbitrage operation have on
4 In the ‘Market Rates’ column of the Financial Times of 8/9 May 2004, the three-month interest rate on sterling was quoted as 4.45 per cent; the three-month rate on US dollars was given as 1.19 per cent. On the same day, the spot rate of exchange for the pound against the dollar was: $1 =
3 Examine the ‘Effective Index Rates’ table from the Financial Times and answer the following questions:(a) What information do the numbers in the table provide?(b) What is meant by the words ‘index rebased’?(c) List the currencies that have, on average, strengthened since 1990.
2 Explain the following terms in the context of the foreign exchange market:(a) Covered interest arbitrage(b) Long positions in a foreign currency(c) Hedging(d) Three-point foreign exchange arbitrage
1 List as many items as you can of ‘news’ which would be likely to cause the value of your domestic currency to fall. Explain why in each case.
10 Explain what is meant by a ‘quote-driven continuous market’ for securities. What advantages does it have over other types of trading arrangement?
9 After careful consideration, Wilton Wayfarers plc decides to drop African adventure holidays from its range of package tours since political uncertainties have made earnings from these tours extremely variable. It decides to put more effort into marketing European weekend breaks, for which there
8 In Box 17.5, Scottish and Newcastle (a longestablished UK brewer) has a P/E ratio of 13.5, while SABMiller (a South African brewer) has a P/E ratio of 18.5. Does this mean that SABMiller is overpriced? Explain your answer.
7 Explain what is meant by a P/E ratio and discuss how it may be used to value the shares of a firm.
6 Explain why an increase in the retention ratio may have no effect on the value of a firm’s shares. Specify carefully the assumptions that you need to make for this to be true and work a numerical example to illustrate it.
5 Explain what is meant by the retention ratio.
4 Why is this rate of return also the firm’s cost of capital?

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The Economics Of Money Banking And Finance 3rd Edition Howells, Keith Bain - Solutions

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