3 - Banking Homework: Unit 3 :Conceptual Problems As the...

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Banking Homework: Unit 3 Conceptual Problems : As the end of the month approaches, you realize that you probably will not be able to pay the next month’s rent. Describe both an informal and a formal financial instrument that you might use to solve your dilemma . Informal—borrow from family or friends . Formal—obtain a loan from a bank . The Chicago Mercantile Exchange has announced the introduction of a financial instrument that is based on rainfall in the state of Illinois. The standard agreement states that for each inch of rain over and above the average rainfall for a particular month, the seller will pay the buyer $1,000. Who could benefit from buying such a contract? Who could benefit from selling it ? Someone who benefits from above average rainfall could sell the contract, and someone who is harmed by above average rainfall should buy the contract. Crops can benefit from additional rainfall during certain times of the year, but may be harmed by too much rain at other times; so, depending on the season, farmers could be buying or selling derivatives. Hydroelectric companies could also sell the contracts, while people who benefit from dry weather – like golf course operators – would buy them . Consider an annuity that makes monthly payments for as long as someone lives. Describe what happens to the purchase price of the annuity as (1) the age of the purchaser goes up, (2) the size of the monthly payment rises, and (3) the health of the purchaser improves . a . The number of expected monthly payments declines so the price of the annuity falls . b . The price of the annuity rises . c . The purchaser is expected to live longer; the number of expected monthly payments rises so the price of the annuity rises . Consider the investment returns to holding stock. Which of the following would be more valuable to you: Stocks that rise in value when your income rises or stocks that rise in value when your income falls? Why ? Stocks that rise in value when your income falls are more valuable because they pay
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This note was uploaded on 02/12/2012 for the course ECON 101 taught by Professor Abrams during the Spring '11 term at Adams State University.

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3 - Banking Homework: Unit 3 :Conceptual Problems As the...

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