Final Exam - Financial Institution

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Financial Insitutions Closed book, Closed Notes 1.

Final Examination

Fall 2011 Roger Staiger III

What is the difference between the spot market and the futures market In the spot market, trades are executed immediately, i.e. real time. In the futures markets, which is a derivatives market, trades are agreed upon today but settled lat later dates in the future.

2.

What is the main difference between the money markets and capital markets? Money markets are for short-term security exchanges, i.e. less than 270 days. The capital markets are for long-term security exchanges, i.e. greater than one year.

3.

What are four requirements to transfer capital within an efficient market? a. b. c. d. e. f. Stable Government Low Inflation Savings (personal, corporate, fiscal) Competition Disclosure (transparency) Fair market rules (legal system)

4.

Draw the difference between direct and indirect capital formation process.

Business

Securities Dollars

Savers

Business
5.

Financial Intermed.

Savers

Describe the purpose of an investment banking house. a. Design Sellable Securities b. Buy securities from corporations c. Resell to ‘savers’ (broker transactions)

6.

Name two sources of funds for Financial Intermediaries. a. Deposits (lenders, credit unions, pension funds) b. Premiums (life insurance) c. Share issuance (mutual funds) Name four main roles for depository institutions. a. Offer deposit accounts

7.

All problems equally weighted

Page 1 of 7

Financial Insitutions Closed book, Closed Notes b. c. d. e. 8.

Final Examination

Fall 2011 Roger Staiger III

Repackage (warehouse) deposit accounts Underwrite risk on loans “Expertise” in quantifying creditworthiness Provide diversification for placed loans

What are the unique characteristics for a credit union separating it from other depository institutions? a. b. c. d. Not for profit All business restricted to members All members share a common bond (geography, employer) Small (relatively) depository institution

9.

Name two of the securities found in the Money Markets. a. Treasuries b. Commercial Paper

10.

Name two of the securities found in the Capital Markets. a. b. c. d. Fixed income securities Mortgages Securitized products Equity

11.

Define “Derivative”. An asset for which the value is derived from an underlying asset.

12.

A wife purchases insurance on her husband (the marriage is loving). What type of “trader” is the wife? A “hedger” as the wife is not purchasing the instrument to profit from the loss of her husband but to provide financial security should the husband expire. The strategy is loss-minimization and therefore a hedge.

13.

Name two large risks when investing abroad. a. Country Risk b. Foreign Exchange Risk c. Interest Rate Risk Note: B&C could be considered parallel due to interest rate parity.

All problems equally weighted

Page 2 of 7

Financial Insitutions Closed book, Closed Notes 14.

Final Examination

Fall 2011 Roger Staiger III

What is considered the leading Federal District Bank? New York Federal Reserve

15.

Name three operations performed by Federal District Banks. a. b. c. d. e. Clear Checks Replace old currency Provide loans through discount window) Collect economic data Research

16.

How many district banks are there in the Federal Reserve system? 12

17.

Name five sources of data used by the FOMC. a. b. c. d. e. f. g. h. i. j. k. l. m. Wages Consumer prices Unemployment GDP Business inventories Foreign Exchange Rates Interest Rates Financial Market Conditions Production Levels Business Investment Residential Construction International Trade International Economic Growth

18.

Why does the Federal Reserve perform Open Market Operations? a. Increase/decrease level of funds in market b. Offset impact of other conditions that affect level of funds, e.g. holiday traffic

19.

Why is the reserve requirement ratio important?...
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