Econ423_final_F2010

Econ423_final_F2010 - Economics 423 Financial Markets Fall...

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Economics 423: Financial Markets Fall 2010 Instructor: Josef Perktold Midterm Examination Name:. ................................ Student ID:. ........................................... Instructions (Read Carefully): You have 3 hours to complete this exam. There are 13 questions totaling 160 points; the point value of each question is given next to that question. Do not forget to label the axes and curves when you draw a graph. For each question, support your answer with arguments. This is a closed book/notes exam. Only simple calculators are allowed. Good Luck! (14 pages including cover) 1
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1) (8 points) rate in future years starting a year from now is expected to be lower. Consider the Euro/Dollar the long run b) What is the e±ect on the exchange rate in the short run 2
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2) (12 points) Explain the problems that a bank faces for each type of risk, and the main activity banks use to reduce the risk. Illustrate with T-accounts, a) liquidity risk b) interest rate risk 3
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Y104 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is = Y104/$1. The current interest rate is 4% in the US and 2% in Japan. many Dollars does it need today? Y104 million in one year at an exchange rate of = Y100/$1, how many dollars does it need today to invest the necessary funds at the US interest rate? in one year? d) which method(s) described in a)-c) provide(s) a hedge against exchange rate risk? Which 4
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Econ423_final_F2010 - Economics 423 Financial Markets Fall...

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