Exam 20: Financial Globalization: Opportunity and Crisis

Describe the role of offshore banking and of offshore currency (eurocurrencies) trading.

Describe the extensive "safety net" that has been set up in the United States in order to reduce the risk of bank failure.

How well has the international capital market performed?

Banks in the U.S.

Does the interest rate parity hold in each of the following cases? In case it does not hold, calculate the risk premium.

"Bank failure may not be limited to banks that have mismanaged their assets." Explain why?

U.S. reserve requirements

For most practical matters, economists assume that

In the Interest Parity Condition, R*t - Rt = ( - Et)/Et + xt, where Rt - Rt is the interest rate differential and ( - Et)/Et is the expected change in the exchange rate, what does xt stand for if it potentially is a market efficient difference between the two?

Explain Tobin's idea of "Don't put all your eggs in one basket."

Many observers believe that the largely unregulated nature of global banking activity leaves the world financial system vulnerable to bank failure on a massive scale. Is this a real threat? If so, what measures have governments taken to reduce it?

For the following questions assume the following facts: (1)Balance of Payments = 0 prior to the transactions. (2)Person A (who lives in the United States) purchases an airplane from British Airways for $150,000. (3)Person A pays with a check from his account at First Union Bank in the United States. (4)British airways, since it will need dollars in 1 month, deposits the check at the Bank of England. (5)Bank of England deposits the $150,000 at Commonwealth bank, which is located in the United States. Due to the transactions above, what are the effects on the reserve at the Fed?

Does the interest rate parity hold in each of the following cases by using the formula

In the U.S., the following agencies have the right to examine the bank's books:

The following simple two-country question illustrates how countries are made better off by trade in assets. Imagine that there are two countries, Home and Foreign, and that residents of each own only one asset, domestic land yielding an annual harvest of kiwi fruit. Assume that the yield on the land is uncertain. Half the time, Home's land yields a harvest of 100 tons of kiwi fruit at the same time as Foreign's land yields a harvest of 50 tons. The other half of the time the outcomes are reversed. The Foreign's harvest is 100 tons, but the Home harvest is only 50. -Suppose the two countries can trade shares in the ownership of their perspective assets. Further, assume that a Home owner owns a 10 percent share in Foreign land. He will receive 10 percent share in Foreign land, and thus receives 10 percent of the annual Foreign kiwi fruit harvest. Further assume that a Foreign owner of a 10 percent share in Home land is permitted. In this case, a Foreigner is entitled to 10 percent of the Home harvest. Calculate the expected value of kiwi fruit for each investor. Is the investor better off?

Imagine that there are two countries, Home and Far Far Away, and that residents of each own only one asset, domestic land yielding an annual harvest of mangoes. Assume that the yield on the land is uncertain. Half the time, Home's land yields a harvest of 5,000 tons of mangoes at the same time as Far Far Away's land yields a harvest of 2,500 tons. The other half of the time the outcomes are reversed. The average for each country mango harvest is

Explain the difficulties in regulating international banking.

Which of the following is TRUE about exchange rates?

Which of the following statements is TRUE for the U.S.?

Banks in the U.S.