Practice Questions for Final Exam Econ 351 Spring 2005 Chuderewicz

Practice Questions for final exam – Econ 351–

True / False (Answer A for true and B for false) / Multiple choice

Use the information in Table below to answer the following questions. Each gold futures contract represents 100 oz of gold. As always, we assume away transactions costs.

1) What is the leverage ratio?

a) 100 b) 7.31 c) 13.67 d) 17.05 ) none of the above

2) Suppose you went long by buying 5 futures contracts on gold. If the futures price of gold rises to price this $1230 and you close, your profit / loss would be......

a) $615 b) $13,400 c) $134 d) $8,800 ) none of the above

3) Given your bet above, your rate of return is over 30%.

We discussed how negative term premiums abound in the world economy. One example that we used was Germany's 10-Year Bond (see below).

4) If a bond has a negative term premium, then the yield implied by the pure expectations theory (PET) of the term structure is higher than the yield implied by the liquidity preference theory of the term structure.

5) A negative term premium implies that some bonds of shorter maturity 'carry' more interest rate risk than the 10 Year bond.

6) One silver lining of the East Asian crisis was that the inflow of foreign financial capital to the US raised the prices on corporate bonds in the US making it cheaper for firms to borrow through the corporate bond market.

7) It is often argued that the existence of the IMF creates a moral hazard problem in that investors (and lenders) take on more risks knowing that if their investment is unsuccessful, the IMF will bail them out anyway.

8) Very large export oriented firms characterized by economies of scale are consistent with the ‘Japanese model.’

9) An industry characterized by economies of scale simply means that bigger is better in an average cost sense.

10). One benefit of the E. Asian crisis on the US economy is that the resulting intense competition from abroad essentially forced US firms (and workers) to be more productive just to compete.

11) If Asian firms would have hedged against exchange rate risk their debt payments to western banks would have been much smaller.

12) When currency pegs broke during the East Asian crisis, foreign denominated debt held by E. Asian firms exploded, since when the pegs broke, US dollars, needed to service that debt, became much more expensive in terms of the local currency.

13) Crony capitalism is the alleged network between the US Treasury and IMF – a secret network involving payoffs and bribery.

14) During the credit crunch of 1998, Greenspan was worried about the credit markets: The demand for commercial paper and corporate bonds rose dramatically causing the yields on commercial paper and corporate bonds to rise dramatically.

15) During the Russian crisis the US T-bill market rallied.

16) The Fed cut in September of 1998, the first of three in a seven week period, came as a complete surprise to many, if not all, investors.

17) During the credit crunch of 1998, the spread between the commercial paper rate and US T-bill rose dramatically up until the Fed’s surprise cut in October.