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1、Solutions to Integrative Cases 1.Based on monthly data,from January 1960 to December 1999:Calculate the inflation rate as t 1200 (Pt+1/Pt 1)and graph the series.The average t for each decade is(approximately):2.5,6.5,5.5,and 3.0.The standard deviations are(approximately):1.5,2.7,3.5,and 1.1.The wors
2、t decade was the 1970s and the best the 1990s.2.Based on annual data,calculate the real growth rate as:gt 100 (GDPt+1/GDPt 1).Graph the real growth rate.The average real GDP growth rate for each decade is(approximately):4.4,3.2,3.0,and 3.0.The standard deviations are(approximately):2.1,2.8,2.6,and 1
3、.5.The 1980s and 1990s had the lowest real growth.The 1960s had the highest.The 1990s had the most stable growth.3.Based on monthly data on M1,from January 1960 to December 1999:Calculate the money growth rate as t 1200 (Mt+1/Mt 1)and graph the series.The 1990s had the slowest money growth.The 1980s
4、 had the highest.The 1970s had the lowest money growth volatility.The 1990s had the highest.Yes.1.Using monthly data,from January 1955 to February 2002,on the federal funds rate,the one-year Treasury bill rate,a 10-year interest rate,and interest rates on AAA and BAA corporate bonds,plot the series.
5、The series move together over time:The statistics are(with the series in the same order as in the graph on page ix):Mean Std Dev Minimum Maximum FF 6.08194 3.29450 0.63000 19.10000 1-Year 6.14885 2.85532 1.23000 16.72000 10-Year 6.85830 2.66268 2.61000 15.32000 AAA 7.57369 2.72090 2.93000 15.49000 B
6、AA 8.52769 3.05805 3.45000 17.18000 xvi Mishkin/Eakins Financial Markets and Institutions,Sixth Edition 2.The correlation matrix is:FF 1-Year 10-Year AAA BAA FF 1 1-Year 0.97 1 10-Year 0.87 0.93 1 AAA 0.84 0.89 0.98 1 BAA 0.83 0.88 0.98 0.99 1 The strongest correlation is between the interest rates
7、on AAA and BAA bonds.The weakest is between the fed funds rate and the interest rate on BAA bonds.Yes,the correlation patterns identified here manifest in the graphical representation of the series.The correlation matrix for the 1960s is:FF 1-Year 10-Year AAA BAA FF 1 1-Year 0.95 1 10-Year 0.92 0.97
8、 1 AAA 0.89 0.94 0.98 1 BAA 0.86 0.90 0.96 0.98 1 For the 1970s is:FF 1-Year 10-Year AAA BAA FF 1 1-Year 0.91 1 10-Year 0.63 0.86 1 AAA 0.58 0.78 0.94 1 BAA 0.37 0.57 0.82 0.93 1 For the 1980s is:FF 1-Year 10-Year AAA BAA FF 1 1-Year 0.95 1 10-Year 0.80 0.92 1 AAA 0.77 0.89 0.99 1 BAA 0.76 0.87 0.97
9、 0.98 1 For the 1990s is:FF 1-Year 10-Year AAA BAA FF 1 1-Year 0.94 1 10-Year 0.52 0.67 1 AAA 0.47 0.59 0.98 1 Solutions to Integrative Cases xvii BAA 0.48 0.57 0.95 0.98 1 3.Time series plots of the spread between the interest rates on each of AAA and BAA corporate bonds and the Treasury bill rate:
10、-4-3-2-1012345671316191121151181211241271301331361391421451481511541AAA-1YearBAA-1Year These series appear to be slightly upward trending.The statistics are:Mean Std Dev Minimum Maximum AAA Spread 1.42484 1.28214 2.86000 4.79000 BAA Spread 2.37883 1.41491 1.37000 5.83000 4.To investigate the cyclica
11、l properties of interest rates and interest rate spreads,you need to calculate correlation coefficients between the cyclical component of each of these series and the cyclical component of the relevant cyclical variable(GDP).The question is how to calculate these cyclical components!Risk premiums on
12、 corporate bonds are usually countercyclical;they decrease during business cycle expansions and increase during recessions.This is so because during business cycle booms fewer corporations go bankrupt and there is less default risk on corporate bonds,which lowers their risk premium.During recessions
13、,default risk on corporate bonds increases and their risk premium increases.1.The European Central Banks Executive Board and Governing Council govern the Eurosystem.The Executive Board consists of the European Central Banks president,vice president,and four other members.2.The primary objective of t
14、he European Central Bank is price stability,defined as inflation of less than 2 percent in the euro area as a whole.xviii Mishkin/Eakins Financial Markets and Institutions,Sixth Edition 3.The Executive Board of the European Central Bank is responsible for the current business of the European Central
15、 Bank and for the implementation of monetary policy in accordance with the guidelines set by the Governing Council.4.The gains are reduced transaction costs and exchange rate risk.5.Based on Table 2 of the Federal Reserve Bank of St.Louis Review article,the share of the U.S.economy in world GDP is 2
16、1.9%and that of the euro-area is 15.8%.6.The U.S.economy accounts for 15.3%of world exports whereas the euro-area accounts for 19.4%.7.The internationalization ratio of the dollar has been declining and that of the euro increasing.8.Based on Table 6 of the Federal Reserve Bank of St.Louis Review art
17、icle,the dollars dominance has declined and the euros has increased.9.In 2000,24 IMF member countries had their currencies pegged to the euro and 23 to the U.S.dollar.10.Estonia(1992),Bulgaria(1997),and Bosnia(1998).In addition,several countries in Eastern Europe and the former Soviet Union are cons
18、idering adopting a currency board with the euro.1.A soft peg is an exchange rate arrangement with pegged(fixed)but adjustable rates.A hard peg is an arrangement of pegged rates supported by a highly credible institutional commitment,such as a currency board or even the abandonment of a national curr
19、ency.2.Pegs are variants of a fixed exchange rate arrangement.3.Dollarization is an exchange rate arrangement where one country uses another countrys money(which may not be the U.S.dollar).It is a hard peg,with an even stronger commitment device than a currency board.In particular,dollarization avoi
20、ds the possibility of a speculative attack on the domestic currency.Recently,Ecuador adopted full dollarization and El Salvador announced its determination to do the same.4.According to Chart 1 of the Finance&Development article by Stanley Fischer,the proportion of IMF members with hard pegs increas
21、ed,that with soft pegs declined,and that with flexible exchange rates increased.5.According to Chart 2,the proportion of developed and emerging market countries with hard pegs increased,that with soft pegs declined,and that with flexible exchange rates increased.6.Countries with softly pegged exchan
22、ge rates were the ones that mostly experienced financial crises.7.With the reduction of the number of currencies in the world,foreign exchange broking will perhaps be less profitable.Money-and capital-market brokers will not be affected.Solutions to Integrative Cases xix 1.The degree of financial gl
23、obalization increases with domestic and global financial sector reform.For example,removing restrictions on mergers and acquisitions and easing restrictions on corporate structures and foreign ownership,advances the globalization of national economies.Capital mobility and the emergence of global pla
24、yers in financial markets led to the globalization of the financial services industry.The introduction of common currencies has brought benefits to national economies and has driven the globalization of finance.The formation of economic communities and trading blocs had similar effects as the introd
25、uction of common currencies.2.The Internet has enabled the introduction of new products,new product providers,and new delivery mechanisms.For example,phenomenal declines in the price of microprocessors over the past twenty years,together with advances in fiber optics and communications technologies,
26、have enhanced the power of computers and enabled financial institutions to serve their customers better.The recent adoption of inflation targets by many countries has produced lower inflation rates,and as a result,lower returns on bank deposits.This has led investors to shift away from insured produ
27、cts and into market-based instruments and mutual funds.In doing so,they are also looking beyond their national borders,thereby increasing the degree of competition in domestic and global financial markets.Regulators are becoming increasingly aware of how the Internet and the recent technological adv
28、ances in telecommunications are shaping financial markets.They have responded by forcing new standards in domestic and global financial services marketplaces.3.Financial reform can act as a force on its own.A good recent example is the reform efforts of Japan.In the last two years,Japan has allowed
29、foreign banks the same freedoms as Japanese banks,abolished restrictions on foreign management of pension funds,and eliminated the separation between different financial service sectors.Developments in financial markets are also driving country-specific as well as international reform efforts.For ex
30、ample,regulators respond to economic and financial crises by introducing new risk management systems.They also respond to the emergence of global players that are too big to be successfully supervised by any single national regulator.1.Download the monthly yen per dollar exchange rate series.The fun
31、damental determinants of exchange rates are purchasing power parity and interest rate parity.A foreign exchange rate can be quoted as the domestic currency value of one unit of domestic currency($/euro)or as the foreign currency value of one unit of domestic currency(euro/$).In the textbook,the latt
32、er exchange rate quotation convention is used.Spot exchange rates pertain to transactions in the foreign exchange market that take two business days to complete.Forward exchange rates pertain to transactions that will occur at a designated date in the future.Plot the 1997 observations of the Yen/$an
33、d$/Yen exchange rates.In 1997,the yen depreciated by over 9%.xx Mishkin/Eakins Financial Markets and Institutions,Sixth Edition 2.You are short 10 million Japanese yen.The foreign exchange risk is that the yen will appreciate in which case you would need more dollars to come up with the 10 million y
34、en one year from now.If you use forwards or futures to eliminate the foreign exchange risk,you will have to buy 1-year forward Japanese yen,thereby locking in an exchange rate and eliminating the risk that the yen will appreciate.If you use options,a call option will protect against a rise in the va
35、lue of the yen.If you use a currency swap,you would have to swap yen for dollars.In all cases,of course,you forego the opportunity to benefit from a depreciation of the yen.In a currency swap there is an exchange of both interest payments and principal.In an interest rate swap only interest payments
36、 are exchanged.3.In general,there are two types of foreign exchange options:options on the foreign exchange and options on foreign exchange futures contracts.When you buy a call the maximum loss is the call premium whereas when you write a put the maximum gain is the put premium.Over long periods of
37、 time,a lot can happen to even a very low volatility asset.Because of this,the premiums will be higher for the option with the longer time to maturity.Because deep-in-the-money options are not worthless when they expire;it would make no sense for such options to expire unexercised.4.It should be a p
38、olicy of the bank that all transactions should be confirmed,thereby removing errors from the trading system and preventing fraud.Rusnak bypassed the banks control procedures by convincing those officials responsible for confirmations not to confirm his transactions.This allowed his bogus trades to escape greater scrutiny.