exercise_topic_10

exercise_topic_10 - granted bank ﬁnance(from informed...

This preview shows page 1. Sign up to view the full content.

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
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: granted bank ﬁnance (from informed intermediaries which monitor the ﬁrm). How much intermediary ﬁnance would the ﬁrm be offered? (d) For A = A obtain the payoff on the ﬁrm’s own (initial) capital. (e) Interpret the ﬁnancing decision of a ﬁrm (direct and indirect) for a ﬁrm 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 ﬁrms’ initial capital). (b) A savings squeeze (i.e., a reduction in uninformed investors’ saving at each bond rate of interest). *****...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online