Tuesday, August 6, 2013

Marketing Money, Banking, and Financial Market


1. Find a recent (July 2013-present) money and banking related article in the media (the Economist, Globe and Mail, National Post, New York Times, etc.,), and attempt to explain parts or all of it using the tools we learned in class. Highlight the sentences that you analyze, and hand in the article along with your work. Use written and graphical explanations. (approximately 3 double spaced pages)
2. What role did weak financial regulation and supervision play in causing the 2007-2009 financial crisis?(approximately 2 double spaced pages)

First Bank
Assets Liabilities
Rate-Sensitive assets $20 million Rate Sensitive Liabilities $50 mill
Variable and Variable-rate CDs
Short term loans
Short term securities
Fixed-rate liabilities $50 mill
Fixed Rate Assets $80 million Chequable deposits
Reserves Savings deposits
Long-term loans Long-term CDs
Long-term securities Equity Capital
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(a) Above are First Banks’ assets and liabilities. Also assume that the average duration of its assets is 2 years, that interest rates are initially at 10%, and that the bank’s equity capital is $10 million.If the First Bank sells $10 million of its fixed rate assets and replaces them with rate-sensitive assets, what is the income gap for the bank? What will happen to profits next year if interest rates fall by 3 percentage points? (4 marks)
(b) If the First bank decides to convert $5million of its fixed rate assets into rate sensitive assets, what will happen to its interest rate risk? Explain using gap analysis. (do not use the results from (a) in doing this question). (4 marks)
(c) What happens to the market value of the banks assets if the interest rate increases by 2 percentage points? (do not use the results from (a) or (b) in doing this question).
4. Explain using an example the statement that “at the expiration date of a futures contract, the price of the contract is the same as the price of the underlying asset to be delivered.” (approximately 1.5 double spaced pages)
5. a) Explain why the bank rate is an upper limit for the overnight rate.
b) Explain why the bank rate minus 50 basis points (ib-50) is the lower limit for the overnight rate. (approximately1.5 double spaced pages in total for both questions.)
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