Bus 313 Midterm

Front 1

Measures of national income level

Back 1

GDP and GNP

Front 2

Measures of economic level of development

Back 2

GDP per capita

Front 3

Measures of income equality

Back 3

Gini Index, Intergenerational income mobility (0-1, lower the more equal)

Front 4

Balance of Payments

Back 4

Financial (financial assets) = Current (goods) + Capital (non market)

Front 5

Top trading partners in U.S.

Back 5

Canada, China, Mexico, Japan, Germany

Front 6

private saving = ?

Back 6

Sp = I + CA + (G – T)

Private saving = investment + foreign wealth + governmentdebt (deficit)

Front 7

private saving is important because?

Back 7

cushions economic downturn

increases countries investment (S=I)

Front 8

Evaluating Assets

Back 8

Expected Rate of Return (simple RoR, Average RoR)

Risk (Standard Dev (difference between variables), Volatility(time series))

Sharp Ratio (expected return of portfolio)

Front 9

Forward Rate? helps you understand? useful?

Back 9

exchange rate quoted for future, what the bank thinks will happen in future, can take now (lock in future return)

Front 10

Forward Exchange Swap

Back 10

Aspot sale of a currency combined with a forward repurchase of the currency

Front 11

Futures Contract

Back 11

Apromise that a specific amount of foreign currency will delivered on a specificdate with a specific price (1 transaction)

Front 12

Options (put and call)

Back 12

The right to buy or sell a specified amount offoreign currency at a specified price at any time up to the expiration date

Front 13

4 major actors in foreign exchange market

Back 13

Commercial banks, corporations non-bank financial organizations, central banks

Front 14

Foreign exchange equilibrium

Back 14

same expected rate of return for all currencies

Front 15

Interest parity

Back 15

same rate of return for 2 currencies (essentially all currencies)

Front 16

Rate of Return?

Back 16

Front 17

World Major Currencies

Back 17

British Pound (£), Japanese Yen (¥), ChineseRenminbi(Yuan) (¥), Euro (€), and US Dollar ($)

Front 18

Banks hold major currencies in reserve because?

Back 18

trust level and demand is high, willing to exchange any currency for the majorcurrencies. The major world currencies exhibit greater economic stability andare essentially reliable.

Front 19

Vehicle currency and majors?

Back 19

The currency used to buy anotherforeign currency

Euro(39%), USD (37%) , Yen (19%)

Front 20

Arbitrage =? helps?

Back 20

purchase and sale to profit from difference inprice. It helps bring the market exchange rate to equilibrium (buying lowselling high)

Front 21

Why almost no difference between NY and London exchange?

Back 21

high frequency of trading due to computers inthe stock market. buying low and selling high – the act of arbitrage. As thedemand increases, the market will simultaneously increase as well whilearbitragers are selling.

Front 22

Golden Rule?

Back 22

higher the better

Front 23

Why portfolio diversification?

Back 23

Hedge risk, uncertainty of future return

Front 24

Correlation of asset returns

Back 24

For example 2 differentkiwi producers, negative correlation of -1 so they have opposite outcomes. Badseason risk cancels out and they should swap 50% shares/ownership with eachother, together they always produce.

Front 25

Types of international assets

Back 25

Debt (Fixed income) bank deposits (cash), bonds

Equity (volatile income) stock, corporate bond, real estate, business acquisition

Front 26

3 differences between commercial and investment banks

Back 26

Commercial banks take deposits, IB does not Commercial banks underwrite bonds, IBunderwrite bonds and IPOs (initial public offering = buying shares pre-stockmarket) *risky

Commercial banks are not allowed to bet onequity market, IB can do that

*Glass-Steagall Act of1993 and its repeal in 1999

Front 27

Bank Run

Why?

Fragile because?

Back 27

large and sudden loss of deposits

cannot meet liabilities

run out of capital

maturity missmatch

Front 28

Prevent Bank Run (6 safeguards on financial stability)

Back 28

Deposit insurance (insures depositors)

Reserve requirement (holding liquid assets)

Capital requirements and asset restrictions (min cap requirement and regulates risky assets like stock)

Bank examination (audit and force sell assets)

Lender of last resort facilities (borrow from central bank)

Government-organized restructuring and bailouts (central bank buys failed bank)

Front 29

3 types of offshore banking and regulations

Back 29

1. Agency office – arranges loans and transferfunds but does not accept deposits

2. Subsidiary bank –controlled by foreign bank headquarter, but subject to same regulation as localbanks

3. Foreign branch – an officeof home bank in another country, subject to both local and home bankingregulations

Front 30

Eurodollars

Back 30

dollars deposited outside U.S.

also:

Eurocurrencies – offshorecurrency deposits

Eurobanks – banks that acceptdeposits denominated in Eurocurrencies

Front 31

Shadow Banking

Back 31

Alternative to borrowing, non-bankfinancial institutions providing payment and credit services

Front 32

Major shadow bankers

Back 32

hedge fund, insurance companies, mutual andpension funds.

Front 33

Moral hazard =?

Back 33

less care to prevent an accident if you areinsured

Front 34

moral hazard prevention?

Back 34

Prevention focus (end of year deduction) loss vs no loss

Promotion (base salary end ofyear bonus) gain vs no gain

Front 35

Regulatory Arbitrage

Back 35

shifting risky business fromhome regulators to places where few questions are asked

Ex: IPO's, set up subsidiary bank

Front 36

Credit Ratings

Back 36

Investment grade > BBB-> high risk, non investment grade

Front 37

Rent seeking =?

Back 37

increase one’s share of existingwealth without creating new wealth (ex: licensing, your not generatinganything, or land lord)