T-bill and foreign exchange markets adjust to situation

Assignment Help Corporate Finance
Reference no: EM13546072 , Length: 2277 Words

Word Limit: 2000 Words

Question 1. Suppose that the current (simple annual) yields on 3-month U.S. (RA) and U.K. T-bills (Rb) are 16 percent and 8 percent, respectively, and that the dollar value of the pound is expected to rise 1 percent during the next three months.

(a)

How might the British and American T-bill and foreign exchange markets adjust to this situation?

Present and discuss equilibrium consistent with the concept of interest rate parity (IRP) and discuss the processes by which this equilibrium might be achieved.

Should you buy U.S. or U.K. bills?

At what U.S. T-bill yield would you be indifferent between U.K. and U.S. Tbillsgiven the expected changes in the exchange rate?

(b) Governments frequently buy and sell foreign exchange for the purpose of smoothing fluctuations in exchange rates. Discuss the purposes for these interventions since 1971 and describe how these actions might interfere with the efficient allocation of resources by causing forward exchange rates to be biased predictors of spot rates.

Question 2. As a financial institutions and markets analyst for MoreGaine Securities, Inc., a highly reputable financial institutions' securities underwriter, you must prepare an analysis of the financial condition of a broad range of financial institutions of various sizes, localities, and product lines. Using the "probability of insolvency" model discussed in class where E(ROA) is the expected value of after-tax earnings on assets, σ2 is the variance of ROA, and K/A is the firm's equity capital plus contingency and loan loss reserves to total assets, discuss, based upon your economic assumptions,what financial ratios you might use to assess the level and expected future course, over the next few years, of each of these indicators of financial soundness. As a preliminary to this discussion, clearly state your assumptions about general economic growth and cyclical movements, interest rates (level and term structure), and potential developments inindividual industries and regional economies (e.g., agriculture, energy, Asian Markets).

Primarily, discuss how the federal regulatory agencies' capital adequacy policy, in the form of risk-based capital adequacy standards and Prompt Corrective Action, might affect financial institution soundness, costs of moral hazard and portfolio choices.

NOTE: the maximum probability of insolvency = σ2/[E(ROA) + K/A]2(15)

Question 3. Public policy toward financial institutions, and depositories in particular, has attempted to promote competition within a framework of regulation intended to ensure the financial integrity of the institutions.

a. Detail the fundamental reasons for financial regulation as discussed in class and in the text. As part of this discussion, provide an analysis of the potential conflicts between a policy of promoting competition and a policy of reducing the chance of financial institution failure. In this context what are the dangers of the too-big-to-let-fail policy in promoting financial intermediary efficiency, productivity and competition as more large FIs are formed through mergers and consolidation. Consider whether the problem of moral hazard facing regulators and the federal deposit insurance funds is more or less of a problem under this policy.

b. Give an example of a recent regulatory reform or change in federal or state laws that are intended to promote competition among financial intermediaries and how they are to do so. Within your discussion, provide an analysis of how market forces, such as rising interest rates, inflation, and financial innovation, have stimulated the development of new financial instruments and new institutional arrangements and intensified competition among financial institutions.

Verified Expert

Reference no: EM13546072

What would be cost to van doren of the discounts taken

What would be the cost to Van Doren of the discounts taken, what would be the incremental bad debt losses if the change were made and what would be the incremental cost of car

What are the possible values of the combined company

What arc the possible values of end -of -period debt values and stock values ever merger and show the bond holders are better off and the stockholders are worse off in the c

Capital budgeting - how is the basic wacc calculated

Weighted average cost of capital (WACC) is an important consideration in capital budgeting and valuing options. What is WACC, and how is the basic WACC calculated?

Describe the needs-based sales advisory process

Prepare for George and Grace Cash Flow Statement and net Worth Statement - Advise George about the situations that the SRS can be withdrawn without penalty, commenting also o

Will ethical considerations determine what you do

Are there social goals that are so important that they would lead you to change your answer - What will you say when you explain your decision to your partner - Will ethical c

Construct an investment strategy

Construct an investment strategy in which an investor purchases 20 percent of Alpha's equity. and replicates both thecost and dollar return of purchasing 20 percent pf Beta'

How would you propose obtaining the funds

How would you propose obtaining the funds needed to keep the company alive and thriving for the next two years until you are able to see a return on the product development,

Explain black-scholes-merton model

The Black-Scholes-Merton model to calculate the maximum bid that the company would be willing to make at the auction - What is the value of the option to expand over the next

Reviews

Write a Review

 
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd