Reference no: EM131365954

Part -1:

1) Exchange Rate Systems. Explain the exchange rate system that existed during the 1950s and 1960s. How did the Smithsonian Agreement in 1971 revise it? How does today's exchange rate system differ?

2) Impact of Economic Conditions. Assume that Switzerland has a very strong economy, putting upward pressure on both inflation and interest rate. Explain how these conditions could put pressure on the value of the Swiss franc, and determine whether the franc's value will rise or fall.

3) Bank Balance Sheet. Create a balance sheet for a typical bank, showing its main liabilities (sources of funds) and assets (use of funds).

4) Bank Sources of Funds. What are four major sources of funds for banks? What alternatives does a bank have if it needs temporary funds? What is the most common reason that banks issue bonds?

5) Borrowing from the Federal Res3erve. Describe the process of "borrowing at the Federal Reserve." What rate is charged, and sets it? Why do banks commonly borrow in the federal funds market rather than through the Federal Reserve?

6) Bank Capital. Explain the dilemma faced by banks when determining the optimal amount of capital to hold. A bank's capital is less than 10 percent of its assets. How do you think this percentage would compare to that of manufacturing corporations? How would you explain this difference?

7) Credit Crisis. Explain how some mortgage operations by some commercial banks (along with other financial institutions) played a major role in instigating the credit crisis.

Part -2:

1) Moral Hazard and the Credit Crisis. Explain why the moral hazard problem received so much attention during the credit crisis.

2) FDIC Insurance. What led to the establishment of FDIC insurance?

3) Glass-Steagall Act. Briefly describe the Glass-Steagall Act. Then explain how the related regulations have changed.

4) Financial Services Modernization Act. Describe the Financial Services Modernization Act of 1999. Explain how it affected commercial bank operations and changed the comparative landscape among financial instructions.

5) Capital Requirements during the Credit Crisis. Explain how the accounting method applied to mortgage-backed securities made it more difficult for banks to satisfy capital requirements during the credit crisis.

6) Liquidity. Given the liquidity advantage of holding Treasury bills, why do banks hold only a relatively small portion of their assets as T-bills?

7) Bank Loan Diversification. In what two ways should a bank diversify its loan? Why? Is international diversification of loans a viable strategy for dealing with credit risk? Defend your answer.
Problems:

1) Net Interest Margin. Suppose a bank earns $201 million in interest revenue but pays $156 million in interest expense. It also has $800 million in earning assets. What is its net interest margin?

2) Calculating Return on Assets. If a bank earns $169 million net profit after tax and has $17 billion invested in assets, what is its return on assets?

3) Calculating Return on Equity. If a bank earns $75 million net profits after tax and has $7.5 billion invested in assets and $600 million equity investment, what is its return on equity?