# Chapter 16 Questionsand Applications 1 and 6 Problems 1, 2

Chapter 16: Questionsand Applications 1 and 6; Problems 1, 2, and 41. Exchange Rate Systems Explain the exchange rate systemthat existed during the 1950s and 1960s. How did the Smithsonian Agreement in1971 revise it? How does today’s exchange rate system differ?6. Impact of Economic Conditions Assume that Switzerland hasa very strong economy, putting upward pressure on both inflation and interestrates. Explain how these conditions could put pressure on the value of theSwiss franc, and determine whether the franc’s value will rise or fall.1. Currency Futures Use the following information todetermine the probability distribution of per unit gains from selling Mexicanpeso futures.■  Spot rate of the peso is \$0.10.■  Price of peso futures is \$0.102 per unit. ■  Your expectation of the peso spot rate at maturity ofthe futures contract is:POSSIBLEOUTCOME FOR FUTURE  SPOT RATE  PROBABILITY\$0.09010%0.095700.11020  2. Currency Call Options Use the following information todetermine the probability distribution of net gains per unit from purchasing acall option on British pounds.■  Spot rate of the British pound is \$1.45.■  Premium on the British pound option is \$0.04 per unit. ■  Exercise price of a British pound option is \$1.46. ■  Your expectation of the British pound spot rate prior tothe expiration of the option is:POSSIBLEOUTCOME FOR FUTURE  SPOT RATE  PROBABILITY\$1.4830%1.49401.52304 .Covered InterestArbitrage Assume the following information:■ British pound spot rate =\$1.58 ■ British pound one-yearforward rate = \$1.58■ British one-year interestrate = 11 percent■ U.S. one-year interest rate =9 percentExplain how U.S. investors could use covered interestarbitrage to lock in a higher yield than 9 percent. What would be their yield?Explain how the spot and forward rates of the pound would change as coveredinterest arbitrage occurs.Chapter 17: Questionsand Applications 1, 2, 7, 11, and 131. Bank Balance Sheet Create a balance sheet for a typicalbank, showing its main liabilities (sources of funds) and assets (uses offunds).2. Bank Sources of Funds What are four major sources offunds for banks? What alternatives does a bank have if it needs temporaryfunds? What is the most common reason that banks issue bonds?7. Borrowing from the Federal Reserve Describe the processof “borrowing at the Federal Reserve.” What rate is charged, and who sets it?Why do banks commonly borrow in the federal funds market rather than throughthe Federal Reserve?11. Bank Capital Explain the dilemma faced by banks whendetermining the optimal amount of capital to hold. A bank’s capital is lessthan 10 percent of its assets. How do you think this percentage would com- pareto that of manufacturing corporations? How would you explain this difference?13. Credit Crisis Explain how some mortgage operations bysome commercial banks (along with other financial institutions) played a majorrole in instigating the credit crisis.

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