Capital Markets: Problem Set2

Ted Takeda May 10, 2013

Hardcopy answers are due at the beginning of the class on May 17 (Friday). It is open book and you can work with your friends, but do not copy your friends solutions. When youre asked to discuss, do not write a long essay. Be brief and to the point. This assignment has 7.5% wait toward your nal grade. Each question carries 5 points and there are 75 points in total.

Derivatives
1. Suppose a potential issuer has AAA rating and a potential investor has BBB rating. From the counterparty credit exposures perspective, which is more cost eective, structured notes or asset swaps? 2. In asset swaps, who receives the cashows from the underlying (original) assets, the swap house or the investor? 3. Why is the portfolio insurance considered as a cause for 1987 market crash?

Money Markets
1. Discuss the common characteristics for the issuers of CP. 2. Why do governments need to issue T-bills or Financing bills? 3. What are the required reserves and the excess reserves?

Exchange Markets
1. Assume youre a contrarian equity index trader. I.e., you sell the index when the price goes up and buy when the price goes down. Will your P/L at the and of one month resemble that from a long option position or a short option position? (This is dicult) 2. What is the denition of market liquidity in CFTC/SEC report on the event of May 6, 2010? Is trading volume a good measure for liquidity? Discuss. 3. How does electronic trading platforms such as TradeWeb impact the sales people at investment banks?

Credit Markets
1. Assume you are the CFO of Nippon Steel and your company has a large amount of account receivables against Hyundai. Discuss how you would manage your credit exposure. 2. Why do you see signicant dierence in credit spreads for the same borrower depending on the products, i.e., loans, bonds, and CDS? 3. Discuss the asymmetric nature of credit products investment returns.

Securitization
1. Discuss the reasons for issuers to use securitization. 2. What is the most imminent risk associated with investing in MBS? 3. Would the investors for the ABS equity tranche like the correlation of the underlying assets to be high or low? Why?