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In accordance with the Coursera Honor Code, I (KK Fong) certify that the answers here are my own work.

Question 1

All of the following are correct statements about the Fed Funds market, as compared to the repo market, except one. Which one is FALSE?

Dealers are more important than brokers because their balance sheets are monitored by the Fed

Repo markets are accessible to a wider class of economic agents

Both Fed Funds and repo provide mechanisms for flow of funds between banks

Repo markets can function as a channel for inter-corporate borrowing and lending, but the Fed Funds market cannot

Question 2

After the global financial crisis, the overnight repo rate was for a while persistently higher than the overnight Fed Funds rate, whereas previously it had been lower. Which of the following is NOT a possible explanation?

Before the crisis, the Fed was generally trying to impose discipline by keeping the better money at a premium

After the crisis, default risk was no longer priced positively

Before the crisis, the Fed was trying to encourage borrowing at the Fed Funds rate to expand short term credit

After the crisis, the Fed was generally trying to foster elasticity by keeping the better money at a discount

Question 3

Why would a bank seek financing on the Eurodollar market instead of the Fed Funds market?

Greater liquidity in Eurodollar markets due to greater presence of dealers

The Fed Funds market is not available to banks outside the US

Interest rates are higher in Eurodollar markets

Eurodollar loans are available for terms longer than one day

Question 4

Which of the following statements is correct regarding the expectations hypothesis of the term structure of interest rates?

Arbitrage ensures that the hypothesis holds at all times, except during crisis

The expected future spot rate should be greater than the forward rate in order to compensate for risk

Empirically, the forward rate tends to be greater than the expected (or realized) spot rate, which contradicts the expectations hypothesis

The hypothesis provides a scientific explanation for the liquidity premium in the term structure

Question 5

Which statement is FALSE regarding uncovered interest parity (UIP)?

Forward exchange rates tend to be biased estimators of future spot exchange rates

Studies find that high yielding currencies tend to appreciate, which is just the opposite of UIP prediction

Arbitrage ensures covered interest parity holds, but not uncovered interest parity

Arbitrage ensures that UIP holds, except during crises

Question 6

Suppose the Royal Bank of Scotland commits to making a 4-month dollar-denominated loan to one of its customers 2 months from now. Which of the following is least likely to be a part of RBS preparation for funding the loan?

Accept a six-month dollar deposit today

Borrow six-month Euroyen to lock in Yen funding cost

Accept a six-month pound deposit today, and hedge foreign exchange risk in forward exchange market

Purchase a forward rate agreement to lock in funding cost

In accordance with the Coursera Honor Code, I (KK Fong) certify that the answers here are my own work.

You cannot submit your work until you agree to the Honor Code. Thanks!

Economics of Money and Banking, Part One

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by Perry G Mehrling

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Economics of Money and Banking, Part One

Economics of Money and Banking, Part Oneby Perry G Mehrling

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Economics of Money and Banking, Part One
by Perry G Mehrling