Questions Finance

Homework Question

Finance 350

Directions: Answer the following questions on a separate document. Explain how you reached the answer

or show your work if a mathematical calculation is needed, or both.

Submit your assignment using the

assignment link above. This homework assignment is worth 20 points.

Responses

should

be

at

least

75

words

for

each

question

.

1)

Would

you

characterize

the

U

.S.

dollar

as

a

freely

floating

or

dirty

float

system?

What

characteristics

support

your

answer

?

2)

What

is

direct

central

bank

intervention

in

the

currency

markets

and

provide

an

example

of

this

from

the

last

50

years

.

3)

Assume

that

Canada

suddenly

ex

periences

high

inflation.

How

might

this

affect

the

value

of

the

Canadian

dollar

according

to

the

purchasing

power

parity

(PPP)

theory

?

4)

Australia's

central

bank

decides

to

increase

the

value

of

the

Australian

dollar

against

the

Japanese

yen.

How

might

it

use

direct

intervention

to

do

this

?

5)

Assume

the

following

information

:

•

Mexican

one

-

year

interest

rate

=

15

%

•

U.S.

one

-

year

interest

rate

=

11

%

If

interest

rate

parity

exists,

what

would

be

the

forward

premium

or

discount

on

the

Mexican

peso’s

forw

ard

rate?

Would

covered

interest

arbitrage

be

more

profitable

to

U.S.

investors

than

investing

at

home?

Explain

.

6)

Create

a

balance

sheet

for

a

typical

bank,

showing

its

main

liabilities

(sources

of

funds)

and

assets

(uses

of

funds)

.

7)

The

Federal

Rese

rve

has

increasingly

favored

the

use

of

Repurchase

Agreements

as

part

of

its

open

market

operations.

Briefly

describe

these

and

why

the

Fed

or

banks

prefer

to

use

them

.

8)

Banks

engage

in

proprietary

trading

as

part

of

their

operations.

Briefly

speculat

e

on

why

they

now

must

adhere

to

much

more

stringent

trading

activity

as

a

result

of

the

2008

-

09

financial

crises

.

9)

Briefly

describe

two

off

-

balance

sheet

activities

and

why

banks

favor

the

use

of

these

.

10)

If

you

were

the

CEO

of

a

US

bank,

would

you

c

onsider

establishing

a

foreign

branch?

What

might

be

a

concern

related

to

doing

so

?

1

1)

Select

one

factor

that

affects

cash

flows

for

a

bank

valuation.

Why

is

this

factor

significant

for

banking

operations

?

1

2)

Select

one

factor

that

affects

the

required

rate

of

return

for

investors

in

commercial

banks.

Why

is

this

factor

significant

for

investors

?

1

3)

Differentiate

interest

income

from

noninterest

income.

Which,

if

any,

is

more

significant

for

long

-

term

he

alth

of

banks

(in

your

opinion)?

Why

?

1

4)

Refer

to

Exhibit

20.5

in

Chapter

20.

Briefly

explain

one

way

bank

managers

may

minimize

the

risk

of

loan

losses

given

economic

conditions

.

1

5)

Problem

1

-

assessing

bank

performance

(chapter

20,

page

576)

.

1

6)

Br

iefly

explain

why

a

bank's

capital

-

or

net

worth

-

is

important

when

it

comes

to

possible

losses,

such

as

during

the

2008

-

09

financial

crisis

.

1

7)

Briefly

explain

one

of

the

risks

banks

face.

Why

is

this

risk

significant

for

banks

?

1

8)

Select

and

briefly

explain

one

way

banks

may

manage

interest

rate

risk.

Why

might

it

be

impossible

to

eliminate

the

risk

completely

?

1

9)

Select

one

notable

bank

failure

during

the

2008

-

009

credit

crisis.

What

was

the

primary

reason

for

this

failure

?

2

0)

Briefly

explain

how

a

credit

union

differs

from

a

traditional

commercial

bank

.

2

1)

Briefly

differentiate

between

a

commercial

bank

and

a

consumer

finance

company.

What

is

the

most

significant

difference

between

these

two

?

2

2)

Identify

one

of

the

significant

risks

finance

companies

face.

Why

is

this

risk

important

to

monitor

?

2

3)

Select

one

factor

that

affects

cash

flows

for

a

finance

company

valuation.

Why

is

this

factor

significant

for

its

operations

?

2

4)

Select

one

factor

that

affects

the

required

rate

of

return

for

i

nvestors

in

finance

companies.

Why

is

this

factor

significant

for

investors

?

2

5)

Speculate

on

why

you

think

a

finance

company

is

in

a

better

position

to

offer

credit

cards

than

a

commercial

bank

.

Homework Question Finance 350

Directions: Answer the following questions on a separate document. Explain how you reached the answer

or show your work if a mathematical calculation is needed, or both. Submit your assignment using the

assignment link above. This homework assignment is worth 20 points. Responses should be at least 75

words for each question.

1) Would you characterize the U.S. dollar as a freely floating or dirty float system? What characteristics

support your answer?

2) What is direct central bank intervention in the currency markets and provide an example of this from

the last 50 years.

3) Assume that Canada suddenly experiences high inflation. How might this affect the value of the

Canadian dollar according to the purchasing power parity (PPP) theory?

4) Australia's central bank decides to increase the value of the Australian dollar against the Japanese

yen. How might it use direct intervention to do this?

5) Assume the following information: • Mexican one-year interest rate = 15% • U.S. one-year

interest rate = 11% If interest rate parity exists, what would be the forward premium or discount

on the Mexican peso’s forward rate? Would covered interest arbitrage be more profitable to U.S.

investors than investing at home? Explain.

6) Create a balance sheet for a typical bank, showing its main liabilities (sources of funds) and assets

(uses of funds).

7) The Federal Reserve has increasingly favored the use of Repurchase Agreements as part of its open

market operations. Briefly describe these and why the Fed or banks prefer to use them.

8) Banks engage in proprietary trading as part of their operations. Briefly speculate on why they now

must adhere to much more stringent trading activity as a result of the 2008-09 financial crises.

9) Briefly describe two off-balance sheet activities and why banks favor the use of these.

10) If you were the CEO of a US bank, would you consider establishing a foreign branch? What might be

a concern related to doing so?

11) Select one factor that affects cash flows for a bank valuation. Why is this factor significant for

banking operations?

12) Select one factor that affects the required rate of return for investors in commercial banks. Why is

this factor significant for investors?

13) Differentiate interest income from noninterest income. Which, if any, is more significant for long-term

health of banks (in your opinion)? Why?

14) Refer to Exhibit 20.5 in Chapter 20. Briefly explain one way bank managers may minimize the risk of

loan losses given economic conditions.

15) Problem 1 - assessing bank performance (chapter 20, page 576).

16) Briefly explain why a bank's capital - or net worth - is important when it comes to possible losses,

such as during the 2008-09 financial crisis.

17) Briefly explain one of the risks banks face. Why is this risk significant for banks?

18) Select and briefly explain one way banks may manage interest rate risk. Why might it be impossible

to eliminate the risk completely?

19) Select one notable bank failure during the 2008-009 credit crisis. What was the primary reason for

this failure?

20) Briefly explain how a credit union differs from a traditional commercial bank.

21) Briefly differentiate between a commercial bank and a consumer finance company. What is the

most significant difference between these two?

22) Identify one of the significant risks finance companies face. Why is this risk important to monitor?

23) Select one factor that affects cash flows for a finance company valuation. Why is this factor

significant for its operations?

24) Select one factor that affects the required rate of return for investors in finance companies. Why is

this factor significant for investors?

25) Speculate on why you think a finance company is in a better position to offer credit cards than a

commercial bank.