Homework Assignment – Week 1
1- Why are financial markets important to the health of the economy?
Because they channel funds from those who do not have a productive use for them to those who do, thereby resulting in higher economic efficiency.
2- When interest rates rise, how might businesses and consumers change their economic behavior?
Businesses would cut investment spending because the cost of financing this spending is now higher, and consumers would be less likely to purchase a house or a car because the cost of financing their purchase is higher.
3- How can a change in interest rates affect the profitability of financial institutions?
A change in interest ...view middle of the document...
American businesses will find it easier to sell their goods in the United States and abroad, and the demand for their products will rise. If, however, an American business depends on supplies/parts from British companies these products will increase their costs.
9- How can changes in foreign exchange rates affect the profitability of financial institutions?
Changes in foreign exchange rates change the value of assets held by financial institutions and thus lead to gains and losses on these assets. Also changes in foreign exchange rates affect the profits made by traders in foreign exchange who work for financial institutions.
10- Using www.bloomberg.com find a chart of the US dollar vs. British Pound exchange rate for the past 5 years. In what year would an American have found it cheapest to visit London? In what year would an English citizen have found it cheapest to visit the Grand Canyon?
The exchange rate chart can be found at: http://www.bloomberg.com/quote/GBPUSD:CUR/chart. The Pound was the weakest in 2009 and this would have been the cheapest time for an American to visit London. The Pound was strongest in November 2007 and this would have been the time when an English Citizen would have found the US the cheapest.
11- What is the basic activity of banks?
Banks accept deposits and then use the resulting funds to make loans.
12- What are other important financial intermediaries in the economy besides banks?
Savings and loan associations, mutual savings banks, credit unions, insurance companies, mutual funds, pension funds, and finance companies
13- Can you think of any financial innovation in the past 10 years that has affected you personally? Has it made you better or worse off? In what way?
14- What types of risks do financial institutions face?
The profitability of financial institutions is affected by changes in interest rates, stock prices, and foreign exchange rates; fluctuations in these variables expose these institutions to risk. Financial institutions also face credit risk to counterparties with whom the trade and clients to whom they lend.
15- Why do managers of financial institutions care so much about the activities of the Federal Reserve System?
Because the actions of the Federal Reserve affects interest rates, inflation, and business cycles, all of which have an important impact on the profitability of financial institutions.
The following table lists foreign exchange rates between U.S. dollars and British pounds during April:
Date | U.S. Dollars per GBP | Date | U.S. Dollars per GBP |
4/1 | 1.9564 | 4/18 | 1.7504 |
4/4 | 1.9293 | 4/19 | 1.7255 |
4/5 | 1.914 | 4/20 | 1.6914 |
4/6 | 1.9374 | 4/21 | 1.672 |
4/7 | 1.961 | 4/22 | 1.6684 |
4/8 | 1.8925 | 4/25 | 1.6674 |
4/11 | 1.8822 | 4/26 | 1.6857 |
4/12 | 1.8558 | 4/27 | 1.6925 |
4/13 | 1.796 | 4/28 | 1.7201 |
4/14 | 1.7902 | 4/29 | 1.7512 |
4/15 | 1.7785 | | |
Which day would have been the best...