exercise_topic_10

exercise_topic_10 - granted bank nance (from informed...

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UNIVERSITY OF ESSEX DEPARTMENT OF ECONOMICS Session 2011–12 R. E. Bailey EC372 Economics of Bond and Derivatives Markets Exercise 10: Financial Intermediation, II 1. In the HT model with fixed investment: (a) Show that if A = A , then R f = B * / Δ p . [Hint: use p H R u = γI u and R f = R * - R u .] (b) Show that if A = A , then R f = b * / Δ p . Interpret these two results. 2. In the HT model with fixed investment, suppose that: p H = 5 / 6; I = 144; R * = 180; p L = 1 / 2; B * = 36; b * = 12; γ = 1; β = 3 / 2; c * = 18 (a) Calculate A , the level of a firm’s initial capital such that for any A A the firm will have access to the bond market (for uninformed investors’ capital). (b) For A = A obtain the payoff on the firm’s own (initial) capital. (c) Calculate A , the level of a firm’s initial capital such that for any A A the firm will be
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Unformatted text preview: granted bank nance (from informed intermediaries which monitor the rm). How much intermediary nance would the rm be offered? (d) For A = A obtain the payoff on the rms own (initial) capital. (e) Interpret the nancing decision of a rm (direct and indirect) for a rm with initial capital in the range A < A < A . 3. Using the market equilibrium conditions in the HT model, explain the implications of the following: (a) A collateral squeeze (i.e., a fall in the aggregate amount of rms initial capital). (b) A savings squeeze (i.e., a reduction in uninformed investors saving at each bond rate of interest). *****...
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