Term
| Interest rate swaps have an advantage over options and futures in that: |
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Definition
| they can be wrriten for a long time horizon |
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Term
| As a result of increased volatility in financial markets, instruments called ___________ were developed. |
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Definition
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Term
| Your company will pay 200M euros in one year. You want to hendge the foreign exchange rate w/ $12500 euro futures contract: |
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Definition
| go long, 1600 euros future contract 1 year. |
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Term
| If the bank you manage has a gap of $42 M, what would eliminate the bank's income risk from changes in the interest rate? |
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Definition
| conduct an interest rate swap on fixed rate for variable assets of $42 M. |
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Term
| Lack of liquidity in a market means: |
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Definition
| financial transactions may be advantageous |
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Term
| Interest forward contracts are used to: |
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Definition
| hedge against interest rate risk |
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Term
| why does greater volatility and/or a longer term to maturity lead to a higher premium on both call and put options? |
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Definition
- a longer maturity gives the option buyer more time for events to move in his/her favour
- more volatility creates a greater likelihood that events will be more in the option buyers favour before the option matures. |
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Term
| A fund manager who specializes in corporate bonds believes that credit spreads are going to tighten and that interest rates are going to continue to decline. To protect the fund, he could: |
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Definition
| buy a call on a credit option. |
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Term
| A type of derivative that offers a borrowers a hedge against credit risk, and gives investors a higher yield on the note for accepting exposure to a specified credit event is called a: |
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Definition
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Term
| Agreeing to deliver an asset at some future date is called taking a ____ position. Taking a ______ can offset the risk. |
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Definition
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Term
| Interest rate forward contracts are limited in that: |
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Definition
| a counterparty is difficult to find. |
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Term
| Future contracts differ from forward contracts in that: |
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Definition
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Term
| The ratio of money supply to the monetary base is called: |
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Definition
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Term
| Predict what will happen to the Money supply if there is a sharp rise in the currency ratio: |
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Definition
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Term
| Under 100% desired reserve banking, the money multiplier is: |
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Definition
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Term
True or False? - Explain.
"The money multiplier is necessarily greater than 1." |
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Definition
| True- because the desired reserve ratio is typically less than one. |
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Term
| What do you predict would happen to the money supply is expected inflation suddenly increased? |
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Definition
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Term
| The loans made by the BOC to commercial banks appear on its balance sheet as a part of its ______, and the deposits made by banks appear on its balance sheet as a part of its ______. |
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Definition
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Term
| If there is a rise in currency ratio, people begin to hold ______ deposits relative to currency and the level of multiple deposit expansion______. This causes the money multiplier to _____, which in turn causes the money supply to ______. |
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Definition
- fewer
- decreases
- fall
- decrease |
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Term
| The monetary base is comprised of: |
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Definition
| notes in circulation, reserves and coins in circulation |
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Term
| Two primary assets of BOC are: |
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Definition
| government securites and advances to banks |
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Term
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Definition
- deposits at the central bank, plus vault cash
- assets for commercial banks
- liabilities for central bank |
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Term
| The interest rate charged to banks who borrow funds from the central bank (BOC) is known as: |
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Definition
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Term
| By definition, when BOC conducts an open market purchase, it is: |
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Definition
- buying bonds
- increasing quantity of reserves |
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Term
| The purchase of government bonds from the nonbank public by the central bank causes: |
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Definition
- an increase in monetary base
- and may also increase the level of reserves |
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Term
The most commonly used means of changing the money supply is:
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Definition
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Term
| The monetary base is affected by: |
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Definition
- BOC through open market operations
- BOC through its extension of advances
- float and government deposits at BOC |
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Term
| Monetary base rises when there is an increase in: |
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Definition
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Term
| Open market sales shrink____, thereby decreasing______. |
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Definition
- monetary base
- money supply |
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Term
| A corporations bondholders are less likely to be concerned about moral hazard problems than its shareholders because: |
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Definition
- corporate bondholders have priority over stockholders in case of bankruptcy
- unlike shares, bonds include restrictive covenants on manager's behaviour |
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Term
| The ONR cannot be ______ higher than the bank rate because that is the rate BOC _____. The ONR cannot be _____ than the deposit rate because that is the rate BOC ______. |
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Definition
- higher
- charges to borrowers
- lower
- pays on reserve balances |
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Term
| The too-big-to-fail policy was implemented to protect big banks. This policy encourages big banks to take _____ risk which may make bank failures ____ likely. |
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Definition
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Term
| Whenever a policy is designed to reduce the problems caused by conflicts of interest, it may: |
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Definition
| diminish economies of scope and reduce the efficient production of information in financial markets. |
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Term
| An advantage of swap over futures and options is that: |
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Definition
| they can be written for longer periods |
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Term
| sales and repurchase agreements: |
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Definition
| relieve undesired downward pressure on the ONR. |
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Term
| According to the expectations theory of term structure: |
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Definition
| Interest rates on bonds of different maturities move together over time. |
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Term
| How can conflicts of interest make the fiancial sector less efficient? |
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Definition
| Conflicts of interest aggrevate principal agent problems. |
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Term
| The theory of Purchasing Power Parity suggests that, other things equal, if one country's price level falls relative to another, its currency should: |
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Definition
| Appreciate in the long run. |
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Term
| Other things equal, an increase in currency holdings will cause: |
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Definition
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Term
| A decrease in foreign interest rates causes the demand for domestic assets to shift to the ______ and the domestic currency to _____, everything else held constant. |
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Definition
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Term
| The governor of BOC announces that he will fight the high inflation rate with a new anti-inflation program. As a result of this announcement, people expect inflation will fall, which causes the demand for bonds to ______. However, supply of bonds will ______. The impact of these changes in bond demand and supply will cause equilibrium interest rate to _______. |
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Definition
- increase
-decrease
- decrease |
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Term
| When the currency ratio falls: |
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Definition
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Term
| When banks expect depositors to withdraw money: |
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Definition
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Term
| When interest rates increase: |
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Definition
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Term
Is this an exmaple of : Moral Hazard ? Adverse Selection? Conflict of Interest? Free rider? or Principal Agent problem?
An individual has several children, and has been diagnosed with cancer. He applies for life insurance but does not report his medical diagnosis.
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Definition
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Term
Is this an exmaple of : Moral Hazard ? Adverse Selection? Conflict of Interest? Free rider? or Principal Agent problem?
A pharmaceutical company offers money to a physician for prescribing a specific drug to his patients. |
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Definition
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Term
Is this an exmaple of : Moral Hazard ? Adverse Selection? Conflict of Interest? Free rider? or Principal Agent problem?
CEOS of big financial companies know that they will walk out with big bonuses even when the companies/banks fail. |
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Definition
-principal agent
- moral hazard |
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Term
Is this an exmaple of : Moral Hazard ? Adverse Selection? Conflict of Interest? Free rider? or Principal Agent problem?
If the Canadian Deposit Insurance Corp. raises the deposit insurance coverage banks will start giving more loans to uqualified borrowers.
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Definition
- Moral hazard
- principal agent problem |
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Term
Is this an exmaple of : Moral Hazard ? Adverse Selection? Conflict of Interest? Free rider? or Principal Agent problem?
A federally charted financial institution is exempt from laws requiring it to have federal deposit insurance, it decides to have deposit insurance after experiencing severe financial problems that may bankrupt the institution.
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Definition
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Term
Is this an exmaple of : Moral Hazard ? Adverse Selection? Conflict of Interest? Free rider? or Principal Agent problem?
A wall street company issues mortage backed securities backed by mostly bad-quality home loans it gave. However, it fails to report this fact to potential buyers of these securities.
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Definition
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