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Problem Set 2 of EF 4331Instructor: Dr. Du Du

Select the best answers for questions 1-12 (2 points each)1. Assume that the balance-of-payments accounts for a country are recorded as follows. balance on the current account = BCA = $130 billionbalance on the capital account = BKA = -$86 billionThen, under the fixed exchange rate regime, the balance on the reserves account (BRA) should be (ignore statistical discrepancies) A) $44 billionB) $44 billionC) $216 billionD) none of the above

2. Consider the supply-demand framework for the British pound relative to the U.S. dollar shown in the following chart. The current demand and supply curve is D and S, hence equilibrium exchange rate is $1.90 = 1.00. Which of the following statements is correct? A) Demand for British pounds exceeds the supply of pounds at the exchange rate of $1.80 = 1.00. B) Supply for British pounds exceeds the demand of pounds at the exchange rate of $1.80 = 1.00C) Suppose the demand curve shifts from D to D. Under a floating exchange rate regime, the equilibrium pound exchange rate will depreciate from $1.90 = 1.00 to $1.80 = 1.00D) Both A) and C) are correct

3. The U.S. Trade DeficitA) is a capital account surplusB) is a current account deficitC) has to be financed by capital account surplusD) both B) and C)

4. From the 1944 to 1971, the international monetary system is under the so called Bretton Woods System, in which U.S. dollar is pegged to gold at $35/oz and all other currencies are pegged to dollar. As a result, gold and dollar are the two most important reserve assets for the central banks. Since gold has a natural scarcity, to satisfy the growing need for reserves, central banks from around the world have the incentive to accumulate dollars. The measures these foreign countries can take to attract dollars include stimulating _____ and _____ interest rates. A) imports from the US , raisingB) imports from the US, decreasingC) exports to the US, raisingD) exports to the US, decreasing

5. Resuming the above question, as the consequence that foreign countries tried to attract US dollar, the U.S. is likely to run BOP _____ . As a result, the dollar is expected to ____ against gold. A) surpluses, appreciate B) surpluses, depreciateC) deficits, appreciateD) deficits, depreciate

6. Under the currency board arrangment, HK has achievedi) full financial integrationii) exchange rate stabilityiii) monetary independenceA) i) and ii)B) i) and iii)C) ii) and iii)D) i), ii), and iii)

7. Before 2005, China imposed full control over capital flows across its border, and at the same time pegged its CNY to US dollar at CNY 8.28 for $1. China thus achieved: iv) full financial integrationv) exchange rate stabilityvi) monetary independenceA) i) and ii)B) i) and iii)C) ii) and iii)D) i), ii), and iii)

8. Which of the following statements related to the prediction of exchange rates is FALSE? A) The technical approach that history tends to repeat itself is at odds with the random walk hypothesisB) Technical analysis can become self-fulfilling used by enough tradersC) Exchange rates tend to adhere to international parity conditions in the short run rather than in the long runD) Monetary approach generally does not work any better than market-based forecasts, particularly in the short run.

9. Which of the following is correct about bid-ask spreads? i) ask price should always be higher than the bid priceii) bid-ask spread reflects the dealers expected profitsiii) higher degree of competition among dealers will tend to increase the bid-ask spreadA) i) onlyB) i) and ii)C) i), ii) and iii)D) ii) and iii)

10. Which of the following on provision for loan losses (PLL) is/are true? i) Only current loan losses are recorded by PLL.ii) Both impaired loans and non-performing loans are recorded by PLL. iii) PLL is set aside by a back to cover both current and anticipated loan losses in the future. A) i) onlyB) ii) onlyC) i) and ii) onlyD) ii) and iii) only

11. Which of the following on monetary base and money supply is/are true? i) US credit can raise the monetary base by crediting extra commercial banks with extra reserves. ii) Raising monetary base simultaneously raises money supply rises iii) Raising monetary base typically results in a much larger increase of money supply.iv) Relative to M0, M2 is more difficult to spend.

A) i) and ii) onlyB) i) and iii) onlyC) i), iii), and iv) onlyD) i), ii), iii) and iv)

12. Suppose a commercial bank operating in the USA, Citibank, has reserves with the Fed of USD 980 million. It wishes to run down its reserve to generate a vault cash of USD 400 million. What is the reserve balance of Citibank with the Fed after this transaction has been completed? A) 380 millionB) 480 millionC) 580 millionD) 880 million

13. Which of the following on certificates of indebtedness (CI) and money creation at HK is (are) true? i) When a note issuing bank (NIB) sells US$ to the Exchange Fund in return for the granted CI, the monetary base in Hong Kong increases. ii) When an NIB uses the granted CI to print out HK$ cash notes, the monetary base in Hong Kong increases.iii) When an NIB uses its vault cash to make a HK$ loan to Mr. X who withdraws the approved loan from an ATM machine, the money supply in HK rises.

A. i) only B. i) and ii) only C. i) and iii) onlyD. ii) and iii) only

Questions 14-15 are quantitative problems: you need to show both the final results and the procedure with which you obtain the final results.14. Given the following information, what are the NZD/SGD and SGD/NZD currency against currency bid-ask quotations? (3 points for bid and 3 points for ask)American TermsEuropean TermsBank QuotationsBidAskBidAskNew Zealand dollar .7265 .72721.37511.3765Singapore dollar .6135 .61401.62871.6300

15. Currently, the spot bid-ask exchange rates between USD and AUD are USD0.6733/AUD USD0.6737/AUD, and the one-year forward exchange rate between USD and AUD is traded at the bid-ask prices of USD0.6624/AUD- USD 0.6635/AUD. In the international money markets, you get the (annualized) interest rates of 0% and 4% by depositing USD and AUD, respectively, and you are charged the (annualized) interest rates of 1% and 5% by borrowing USD and AUD, respectively.

a) (5 points) Consider a covered interest arbitrage strategy started by borrowing USD1,000 from the U.S. money market. Calculate the profit/loss in USD one year later.

b) (5 points) Consider a covered interest arbitrage strategy started by borrowing AUD1, 000 from the Australian money market. Calculate the profit/loss in AUD one year later. In both a) and b), please list the detailed steps and intermediate results.

Questions 16-18 are based on the Bankscope data. Please use instructions provided in lecture nodes to retrieve the required data from Bankscope under Global summary. Since at most two users can use Bankscope at the same time, I suggest you retrieve all the required data first and then log off immediately so that the other groups may use Bankscope as well. Note only data of part of the listed banks will be required to answer Q1618.

The following table lists the name of banks as well as their index numbers at Bankscope for which you need to retrieve the data to answer the following questions.RegionBanks Accounting StandardsIndex Number

North AmericaUnited StatesCiti. Group, JP Morgan Chase & Co.Wells FargoBank of AmericaLocal GAAP

48492445113401935019

Europe

UK BarclaysIFRS24151

France Societe Generale IFRS11150

Greek National Bank of GreeceIFRS43085

Italy UniCredit IFRS47295

German Deutsche Bank Spain Banco Santander S.A.IFRS1321647560

Mainland ChinaICBC China Construction bankBank of ChinaAgricultural Bank of ChinaIFRS33576482063011833572

Asia(ex-Mainland China)Hong KongHang Seng Bank BOC Hong KongBank of East AsiaStandard Chartered Bank (Hong Kong)IFRS30092185903009440750

JapanMizuho BankJapan Post BankBank of TokyoSumitomo Mitsui Banking Co.Local GAAP19603271824413149454

IndiaState Bank of IndiaICICI Bank LimitedPunjab National BankBank of BarodaLocal GAAP31485422943148931473

OceaniaAustraliaWestpac Banking CorporationNational Australia Bank Commonwealth Bank of AustraliaAustralia and New Zealand BankIFRS30186301913137630962

Latin AmericaBrazilItau Unibanco HoldingsBanco Do Brasil S.A.Banco Bradesco SALocal GAAP166644109032034

16. Report the average ROA (return on total assets) ending in 2010 for banks in Europe and in Australia, where the average is taken with respect to all banks listed in the above table for the given region. Which of the two regions has the higher ROA? Scoring: please report ROA for each of the aforementioned bank (0.5pt each). Then report the average and make the comparison (1pt).

17. Report the average ROE (return on equity) ending in 2011 for banks in Europe and in Hong Kong, where the average is taken with respect to all banks listed in the above table for the given region. Which of the two regions has the higher ROE? Scoring: please report ROE for each of the aforementioned bank (0.5pt each). Then report the average and makes the comparison(1pt).

18. Report the average reserve for impaired loans/NPLs as the ratio of gross loans ending in 2011 for banks in Europe and in Hong Kong, where the average is taken with respect to all banks listed in the above table for the given region. Which of the two regions has the lower impaired/NPLs as the ratio of the gross loan? Scoring: please report impaired loans/NPLs as the ratio of gross loans for each of the aforementioned bank (0.5pt each), then report the average and make the comparison (1pt).