Problem Set 2 of EF 4331 Instructor: Dr.

Du Du

Select the best answers for questions 1-12 (2 points each) 1. Assume that the balance-of-payments accounts for a country are recorded as follows. balance on the current account = BCA = $130 billion balance on the capital account = BKA = -$86 billion Then, under the fixed exchange rate regime, the balance on the reserves account (BRA) should be (ignore statistical discrepancies) A) $44 billion B) $44 billion C) $216 billion D) none of the above

2. Consider the supply-demand framework for the British pound relative to the U.S. dollar shown in the following chart. The current demand and supply curve is D and S, hence equilibrium exchange rate is $1.90 = 1.00. Which of the following statements is correct? A) Demand for British pounds exceeds the supply of pounds at the exchange rate of $1.80 = 1.00. B) Supply for British pounds exceeds the demand of pounds at the exchange rate of $1.80 = 1.00 C) Suppose the demand curve shifts from D to D. Under a floating exchange rate regime, the equilibrium pound exchange rate will depreciate from $1.90 = 1.00 to $1.80 = 1.00 D) Both A) and C) are correct

Dollar price per pound (exchange rate)

$1.90

$1.80 D S D D=S Q D

3. The U.S. Trade Deficit

A) is a capital account surplus B) is a current account deficit C) has to be financed by capital account surplus D) both B) and C)

4. From the 1944 to 1971, the international monetary system is under the so called Bretton Woods System, in which U.S. dollar is pegged to gold at $35/oz and all other currencies are pegged to dollar. As a result, gold and dollar are the two most important reserve assets for the central banks. Since gold has a natural scarcity, to satisfy the growing need for reserves, central banks from around the world have the incentive to accumulate dollars. The measures these foreign countries can take to attract dollars include stimulating _____ and _____ interest rates. A) imports from the US , raising B) imports from the US, decreasing C) exports to the US, raising D) exports to the US, decreasing

5. Resuming the above question, as the consequence that foreign countries tried to attract US dollar, the U.S. is likely to run BOP _____ . As a result, the dollar is expected to ____ against gold. A) surpluses, appreciate B) surpluses, depreciate C) deficits, appreciate D) deficits, depreciate

6. Under the currency board arrangment, HK has achieved i) full financial integration ii) exchange rate stability iii) monetary independence A) i) and ii)

B) i) and iii) C) ii) and iii) D) i), ii), and iii)

7. Before 2005, China imposed full control over capital flows across its border, and at the same time pegged its CNY to US dollar at CNY 8.28 for $1. China thus achieved: iv) full financial integration v) exchange rate stability vi) monetary independence A) i) and ii) B) i) and iii) C) ii) and iii) D) i), ii), and iii)

8. Which of the following statements related to the prediction of exchange rates is FALSE?
A) The technical approach that history tends to repeat itself is at odds with the random walk hypothesis B) Technical analysis can become self-fulfilling used by enough traders C) Exchange rates tend to adhere to international parity conditions in the short run rather than in the long run D) Monetary approach generally does not work any better than market-based forecasts, particularly in the short run.

9. Which of the following is correct about bid-ask spreads?

i) ask price should always be higher than the bid price ii) bid-ask spread reflects the dealers expected profits iii) higher degree of competition among dealers will tend to increase the bid-ask spread A) i) only B) i) and ii) C) i), ii) and iii)

D) ii) and iii)

10. Which of the following on provision for loan losses (PLL) is/are true? i) Only current loan losses are recorded by PLL. ii) Both impaired loans and non-performing loans are recorded by PLL. iii) PLL is set aside by a back to cover both current and anticipated loan losses in the future. A) B) C) D) i) only ii) only i) and ii) only ii) and iii) only

11. Which of the following on monetary base and money supply is/are true? i) US credit can raise the monetary base by crediting extra commercial banks with extra reserves. ii) Raising monetary base simultaneously raises money supply rises iii) Raising monetary base typically results in a much larger increase of money supply. iv) Relative to M0, M2 is more difficult to spend.

A) i) and ii) only B) i) and iii) only C) i), iii), and iv) only D) i), ii), iii) and iv)

12. Suppose a commercial bank operating in the USA, Citibank, has reserves with the Fed of USD 980 million. It wishes to run down its reserve to generate a vault cash of USD 400 million. What is the reserve balance of Citibank with the Fed after this transaction has been completed? A) 380 million B) 480 million C) 580 million

D) 880 million

13. Which of the following on certificates of indebtedness (CI) and money creation at HK is (are) true? i) When a note issuing bank (NIB) sells US$ to the Exchange Fund in return for the granted CI, the monetary base in Hong Kong increases. ii) When an NIB uses the granted CI to print out HK$ cash notes, the monetary base in Hong Kong increases. iii) When an NIB uses its vault cash to make a HK$ loan to Mr. X who withdraws the approved loan from an ATM machine, the money supply in HK rises.

A. i) only B. i) and ii) only C. i) and iii) only D. ii) and iii) only

Questions 14-15 are quantitative problems: you need to show both the final results and the procedure with which you obtain the final results.

14. Given the following information, what are the NZD/SGD and SGD/NZD currency against currency bid-ask quotations? (3 points for bid and 3 points for ask)
American Terms Bank Quotations New Zealand dollar Singapore dollar Bid .7265 .6135 Ask .7272 .6140 European Terms Bid Ask

1.3751 1.3765 1.6287 1.6300

15. Currently, the spot bid-ask exchange rates between USD and AUD are USD0.6733/AUD USD0.6737/AUD, and the one-year forward exchange rate between USD and AUD is traded at the bid-ask prices of USD0.6624/AUDUSD 0.6635/AUD. In the international money markets, you get the (annualized) interest rates of 0% and 4% by depositing USD and AUD, respectively, and you are charged the (annualized) interest rates of 1% and 5%

by borrowing USD and AUD, respectively.

a) (5 points) Consider a covered interest arbitrage strategy started by borrowing

USD1,000 from the U.S. money market. Calculate the profit/loss in USD one year later.

b) (5 points) Consider a covered interest arbitrage strategy started by borrowing AUD1, 000 from the Australian money market. Calculate the profit/loss in AUD one year later. In both a) and b), please list the detailed steps and intermediate results.
Questions 16-18 are based on the Bankscope data. Please use instructions provided in lecture nodes to retrieve the required data from Bankscope under Global summary. Since at most two users can use Bankscope at the same time, I suggest you retrieve all the required data first and then log off immediately so that the other groups may use Bankscope as well. Note only data of part of the listed banks will be required to answer Q1618.

The following table lists the name of banks as well as their index numbers at Bankscope for which you need to retrieve the data to answer the following questions. Region Banks Accounting Index Standards Number North America Local GAAP United States Citi. Group, 48492 JP Morgan Chase & Co. 44511 Wells Fargo 34019 Bank of America 35019 Europe UK Barclays IFRS 24151 France Societe Generale Greek National Bank of Greece Italy UniCredit German Deutsche Bank Spain Banco Santander S.A. ICBC China Construction bank Bank of China Agricultural Bank of China Hong Kong Hang Seng Bank BOC Hong Kong Bank of East Asia IFRS IFRS IFRS IFRS IFRS 11150 43085 47295 13216 47560 33576 48206 30118 33572 30092 18590 30094

Mainland China

Asia (ex-Mainland China)

IFRS

Standard Chartered Bank (Hong Kong) 40750 Local GAAP Japan Mizuho Bank 19603 Japan Post Bank 27182 Bank of Tokyo 44131 Sumitomo Mitsui Banking Co. 49454 Local GAAP India State Bank of India 31485 ICICI Bank Limited 42294 Punjab National Bank 31489 Bank of Baroda 31473 Oceania IFRS Australia Westpac Banking Corporation 30186 National Australia Bank 30191 Commonwealth Bank of Australia 31376 Australia and New Zealand Bank 30962 Latin America Local GAAP Brazil Itau Unibanco Holdings 16664 Banco Do Brasil S.A. 41090 Banco Bradesco SA 32034 16. Report the average ROA (return on total assets) ending in 2010 for banks in
Europe and in Australia, where the average is taken with respect to all banks listed in the above table for the given region. Which of the two regions has the higher ROA? Scoring: please report ROA for each of the aforementioned bank (0.5pt each). Then report the average and make the comparison (1pt).

17. Report the average ROE (return on equity) ending in 2011 for banks in Europe and in Hong Kong, where the average is taken with respect to all banks listed in the above table for the given region. Which of the two regions has the higher ROE? Scoring: please report ROE for each of the aforementioned bank (0.5pt each). Then report the average and makes the comparison(1pt). 18. Report the average reserve for impaired loans/NPLs as the ratio of gross

loans ending in 2011 for banks in Europe and in Hong Kong, where the average is
taken with respect to all banks listed in the above table for the given region. Which of the two regions has the lower impaired/NPLs as the ratio of the gross loan? Scoring: please report impaired loans/NPLs as the ratio of gross loans for each of the aforementioned bank (0.5pt each), then report the average and make the comparison (1pt).