Questions and Answers of Financial Markets Institutions

Why are bank failures considered to have a greater impact upon the economy than other types of business failures? Do you agree with this conclusion?
In international lending, what is meant by the phrase “rescheduling of sovereign loans”? Why has rescheduling of loans become a problem to international lenders? What countries are involved?
Do you believe that the presence of foreign banks in the United States serves the public’s interest? In formulating your answer, consider the issues of bank safety and competition in banking
What risks must be evaluated in making international loans? Which of these are unique to international lending? How might these risks be reduced?
Consider a large syndicated loan to a firm with close ties to the government in a country with a large degree of political risk. As a large U.S. bank, explain why you might wish to have other
What is a syndicated loan? In what ways do large international loans differ from typical domestic loans? Define the term LIBOR.
What were the provisions of the International Banking Act? Are some of the provisions no longer relevant? If so, which ones? Explain.
Explain the motivation behind the International Banking Act of 1978.
What are the basic objectives of federal bank regulations as they apply to domestic banking? How are these basic regulatory objectives interpreted differently with respect to overseas banking? How do
What is an international banking facility? In what types of business activities can such entities engage? Why did the Federal Reserve Board create these new banking entities?
What is a shell branch? What functions do banking shell branches perform in U.S. overseas banking? Why are so many located in Caribbean island nations?
What are Edge Act corporations? What advantages do they afford American banks that wish to engage in international banking?
Why has the number of U.S. banks operating overseas declined in recent years?
How were the overseas expansions of U.S. non-financial corporations and banks related? Discuss the defensive follow-the-customer strategy in your response.
Why were U. S. banks slow to expand overseas? What changed to encourage overseas expansion?
How are fed funds loans and repurchase agreements similar? How do they differ? Which do you think should normally have a lower interest rate? Look up current fed funds rates and repurchase agreement
An American importer needs to pay £250,000 in 90 days and would like to use currency options to hedge the risk of appreciation of the pound. Should the importer buy a call or a put option on pound?
Which of the following bonds have the largest price risk and why? Note that the bonds are identical in all respects except for the size of the coupon.a. Zero-coupon bondb. Par bondc. Discount bondd.
Describe some of the recent trends affecting bank income statements. For example, has net interest income increased or decreased in recent years? What about other components of the income statement?
What are the major differences between large banks and small banks on the income statements? Why are there differences between the two groups of banks? For example, why is the net interest income
What is a contingent asset? What is a contingent liability? Provide an example of each.
What are the major benefits of getting assets off the balance sheet through either loan sales or securitization?
What do we mean by off-balance-sheet activities? If these things are not on the balance sheet, are they important? What are some off-balance-sheet activities?
What is the prime rate? Why do some banks make loans below the prime rate?
Define correspondent banking. Why do banks enter into correspondent relationships?
Explain why banks buy and sell federal funds. Also explain the role of the Federal Reserve System in the federal funds market. Show the T-accounts for a federal funds transaction.
Give the reasons banks hold Treasury securities and municipal bonds in their investment portfolios.
Distinguish between a line of credit and a letter of credit.
What are the advantages and disadvantages of using credit scoring to evaluate a loan application?
What are the important differences between investments and loans in a bank portfolio of assets?
What are the major uses of funds for a bank? What are the differences between large and small banks? Explain.
Define “bank capital”. What is the economic importance of capital to a firm?
Why are negotiable CDs and federal funds primarily sources of funds for very large banks?
What are borrowed funds? Give some specific examples. Have borrowed funds become more or less important as a source of funds for banks?
Why are deposits a more important source of funds for small banks than for large banks? Why are deposits considered a more stable source of funds for small banks than for large banks?
What is the primary goal of a commercial bank? Why may this goal be translated into maximizing the firm's stock share price?
You noticed the current spot exchange rate is $1.50/£ and the one-year forward exchange rate is $1.60/£. The one-year interest rate is 5.4% in dollars and 5.2% in pounds. Assuming you can borrow
An American exporter is expected to receive ¥10,000,000 in 180 days and would like to currency options to hedge the exchange rate risk. Should the importer buy a call or a put option on Japanese?
An American exporter is expected to receive ¥10,000,000 in 180 days and would like to sign a forward contract to hedge the exchange rate risk. Should the importer buy or sell yen through a forward
An American importer needs to pay £100,000 in 30 days and would like to sign a forward contract to hedge the exchange rate risk. Should the importer buy or sell pounds through a forward contract?
Suppose the spot exchange rate today is $1.5/£. The inflation rate is expected to be 3% in the United States and 5% in the United Kingdom each year over the next two years. What is the expected
Suppose the spot exchange rate today is $1.5/£. The inflation rate is expected to be 3% in the United States and 5% in the United Kingdom over the next year. What is the expected exchange rate in
Suppose the nominal interest rates are 5% in the United States and 2% in the United Kingdom this year. The inflation rate is 1.5% in the U.S. and 2% in the U.K. next year. Calculate the real interest
Suppose the spot exchange rate today is $1.5/£. The annual inflation rate is expected to be 3% in the United States and 5% in the United Kingdom over the next three years. The annual real interest
Suppose the spot exchange rate today is $1.5/£. The inflation rate is expected to be 3% in the United States and 5% in the United Kingdom over the next year. The annual real interest rate will be
Describe several of the factors which have promoted the internationalization of financial markets during the previous 15 years. Are any of these factors reversible?
How does inflation affect a country's spot and forward exchange rates? Why? Is it absolute inflation or inflation relative to other countries that is important?
How can central bank intervention affect the exchange value of a currency? Will the currency generally rise or fall if a central bank sells its home currency?
Will the domestic capital account be helped or hurt if foreign investment flows into the country increase?
Why do domestic governments often try to limit domestic flows of funds abroad for investment in foreign countries? How did such limitations in the United States contribute to the development of the
Explain the role that letters of credit and banker’s acceptances play in international transactions. Is a banker's acceptance a sight draft?Why or why not?
The newly industrializing countries (NIC) of the Far East such as Korea, Taiwan, and Hong Kong have dramatically increased their merchandise exports during the 1980s. Based on what you know about the
Assume that the United States and Canada are both initially in an economic recession and that the United States begins to recover before Canada. What would you expect to happen to the U.S. dollar
If the Japanese yen were to change from ¥100/$ to ¥90/$, would the U.S. balance of payments improve (become more positive) or not? Consider what effect the exchange rate change would have on both
If purchasing power parity applied to Big Macs, and a Big Mac cost $2.50 in the United States while the British pound cost $1.50 and €0.90 euros could be obtained for $1.00, how much would the Big
Why are international banks able to earn large fees from providing letters of credit and forward currency transactions?
If the United States runs a deficit in its current account of $100 billion and receives a net inflow of $60 billion on long-term investments in a year, by how much will its short-term capital flows
Assume that the spot and one-year forward rates for the British pound are $1.60 and $1.55, respectively and are $0.90 and $0.92 per euro, respectively. If interest rates are 4 percent in the United
If a dollar can buy 98 Japanese yen and a British pound costs $1.50, how many yen would it take to buy £1? If a pound of copper costs £1 in Britain, ¥160 in Tokyo, and $1.45 in the United States,
If a bushel of corn costs ₤3.00, and a British pound is worth $1.50, how many dollars would a person receive for 100,000 bushels of corn sold in Britain in the spot market? If the delivery were to
Do you think swap contracts will have more or less counter party default risk after the rules in the Dodd-Frank Wall Street Reform Protection Act are implemented? Why?
A bank has entered into an interest rate swap. The swap has a notional principal amount of $100 million and calls for the bank to make annual fixed interest rate payments of 5 percent and to receive
Refer to Exhibit 11.6. What is the time value and what is the intrinsic value of a call option on Wells Fargo with a strike price of $23.00 and October expiration? What is the time value and what is
If your bank held 1 percent of the units issued by a unit trust and the mortgages in the trust repaid $10,500,000 in interest and $1,500,000 in principal in its first year, how much principal and
The observed yields on 1-year and 3-year securities are 8 percent and 11 percent, respectively. What is the expected yield on a 2-year security 1 year from now?
Assume the initial margin on a Eurodollar futures contract is $878 and the maintenance margin is $650 (the contract size is $1mln). If the contract price declines by 25 basis points, by how much do
Assume that in March a farmer and a baker enter into a forward contract on 1,000 bushels of wheat at a price of $3.00 per bushel for delivery in September. In September the spot price of wheat is
Futures contracts on stock indices are very popular. Why do you think that is so? How do you think they might be used?
Explain the difference in the gain and loss potential of a call option and a long futures position. Under what circumstances do you think someone would prefer the option to the futures or vice versa?
Why do you think exchanges are more concerned with writers of naked options than with writers of covered options?
Explain the difference between a put and a call. Draw a diagram showing the payoffs of puts and calls at expiration. Draw it from the prospective of both the option buyer and the option seller.
Why do you think some futures contracts are more widely traded than others?
How can a thrift institution guarantee its costs of funds for a period of time by using the futures market?
What role does the exchange play in futures transactions?
What is the difference between the forward and the futures markets? What are the pros and cons associated with using each one?
You have decided to create stock market indexes using three representative stocks. At the end of day one, stock X has a price of $20 per share and 20 million shares outstanding, stock Y has a price
Explain the difference between systematic and unsystematic risk. Explain how beta captures systematic risk.
The market's required return on Paul Bunyan Oil Company stock is currently 13.8 percent. If the expected return on the market portfolio is 12.6 percent and the risk-free rate is 3.5 percent, what is
Farrell Motors stock has a beta of 1.3. If the market has an expected return of 9 percent and the risk-free rate is 1 percent, what is the expected return of the stock according to the security
You purchase 100 shares of Adams Trading Company stock today for $22.50 per share. At the end of one year, you collect a dividend of $2.75 and then sell the stock at $24.50 per share. What is your
Patty’s Gardening Supplies is a young start-up company. It plans to pay no dividends over the next five years because it must reinvest all earnings in the firm to finance planned growth. The firm
Dolezilek Power Company promises to maintain dividends of $5.00 per share on its preferred stock, indefinitely. The stock currently sells at $37.50 per share. What is the required return on the stock?
Winters Hi-Hook Inc., a golf club manufacturer, is currently paying dividends of $.50 per share. These dividends are expected to grow at a 20 percent rate for the next two years and at a 3 percent
Val believes the price of ABC is too high at $35/share. She shorts 100 shares. A week later, the price is $32/share when she covers a short position. How much money did Val make?
Rachel and Mary have both decided to buy 100 shares of WWW.COM, a hot Internet stock. The market price is $240 per share when Rachel places a market order and Mary places a limit order at $230 per
Explain how an American Depository Receipt (ADR) works.
Briefly describe the role of the NYSE specialists. How does this role differ from that of a dealer?
Explain why investors look at a stock’s P/E ratio rather than its price to determine if the stock is cheap or expensive.
Arbuckle Corporation is selling two million shares of common stock in its initial public offering (IPO). The company’s investment banker, Jones Securities, will offer the stock to the public at
Weber Corporation has 10 million shares of a preferred stock issue outstanding that pays a cumulative $6 annual dividend on a quarterly basis. As a result of poor profitability, however, the company
Valerie Apparel Lines (VAL) has 100 million shares of common stock outstanding and the company is electing seven directors by means of cumulative voting. If a group of minority shareholders controls
Why are convertible securities more attractive to investors than simply holding a firm's preferred stock or corporate bonds?
If mortgage bankers originate more mortgages than other types of financial institutions, why don't they also hold more mortgages in their asset accounts?
Why have CMOs and REMICs made it easier for the mortgage markets to compete for funds with corporate bonds? What problems do their residuals pose?
If you expect prices and incomes to rise, would you rather have a conventional mortgage, FRM or ARM? What if you expected prices to fall? Explain your answer. Also explain how your answer would
What is the difference between conventional mortgages and FHA and VA mortgages?
How has the government encouraged the development of secondary mortgage markets?
Why have mortgage market interest rates become more uniform across the country in recent years?
Explain how mortgage-related securities have become more similar to capital market instruments over time.
How has the development of secondary mortgage markets allowed mortgage issuers to attract additional funds from the capital markets?

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