Nicolas Jaramillo

Chapter 11
1. Do you think that before the National Bank Act of 1863 the prevailing
conditions in the banking industry fostered or hindered trade across states in the United
States?

They hindered trade across states because there was no national currency and the banknotes
issued by the  state-chartered banks had become worthless.

2. Why does the United States operate under a dual banking system?

Throughout most of the history of banking in the United States, there has been a fear of
centralized banking power. As a result all banks had been chartered locally by each state.
Due to lax regulation by some states, banks regularly failed due to lack of sufficient capital
or fraud. To stabilize the banking system, the federal government introduced the National
Banking Act of 1863, which created a system of federally chartered banks which were
subject to greater regulation and scrutiny. Since federally chartered banks were less prone
to failure, they increased in number over the years. However, the skepticism of centralized
power in the banking system still allowed state banks to operate effectively. And although
there have been attempts over the years to force all banks to be federally chartered, due to
more uniformity in the chartering process, the distinctions between state and federally
chartered banks have diminished, and so the two standards are still in operation today. 

3. In light of the recent financial crisis of 2007–2009, do you think that the
firewall created by the Glass-Steagall Act of 1933 between commercial banking and the
securities industry proved to be a good thing or not?

Yes. In fact, the repeal of the Glass-Steagall Act is something that many point toas a cause
of the 2008 financial crisis. The firewall between commercial bankingand the securities
industry was a good thing
 

4. Which regulatory agency has the primary responsibility for supervising the
following categories of commercial banks?
a. National Banks ‘’’’’’’’’’’’’’’’’’’’’’’’’’’’’’ Comptroller of the
Currency.
b. Bank holding companies ‘’’’’’’’’’’’’’’’’’’’’’’’’’’’’’ Federal Reserve
System
c. Non-Federal Reserve member state banks ‘’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
State banking authorities.
d. Federal Reserve member state Banks ‘’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Federal Reserve System.
e. Federally chartered savings and loan associations
‘’’’’’’’’’’’’’’’’’’’’’’’’’’’’’ Office of Thrift Supervision
 Nicolas Jaramillo

f. Federally chartered credit unions ‘’’’’’’’’’’’’’’’’’’’’’’’’’’’’’ National

Credit Union Administration.

Chapter 12
1. How does the concept of asymmetric information help to define a financial crisis?

Asymmetric information problems (adverse selection and moral hazard) are always present
in financial transactions but normally do not prevent the financial system from efficiently
channeling funds from lender-savers to borrowers.
2. How can the bursting of an asset-price bubble in the stock market help trigger a
financial crisis?
 Asset-price bubble is the rise of prices in the stock market. Therefore, at the bursting point,
it causes all the stocks prices to realign to regular value.

3. How does an unanticipated decline in the price level cause a drop in lending?
An unanticipated decline in the price level leads to firms real burden of indebtedness
increasing while there is no increase in the real value of their assets. The resulting decline
in firms net worth increases adverse selection and moral hazard problems facing lenders,
making it more likely a financial crisis will occur in which financial markets do not work
efficiently to get funds to firms with productive investment opportunities.
4. Define “financial frictions” in your own terms and explain why an increase in
financial frictions is a key element in financial crises.

Financial frictions are a set of conditions that prevent financial markets to effectively assign
funds to the best investment opportunities. In general, they increase when information
asymmetries worsen, preventing lenders from ascertaining the best potential borrowers.
Financial frictions are a key element in financial crises because as the channeling of funds
through the financial market is interrupted or limited, the economy slows down. This could
trigger an asset price decline, increase in uncertainty, and the deterioration in financial
institutions’ balance sheets.

Chapter 13
1. Is investment banking a good career for someone who is afraid of taking risks? Why
or why not?
Not a Good career for those ones that don’t like to take risks, investment bankers help
corporations raise funds by issuing stocks and bonds in the primary market. They provide
this service in two ways. But the market can change because of many factors is
unpredictable that’s why is always going to be risky.
 
2. How do hedge funds differ from mutual funds?
    
 Nicolas Jaramillo

Mutual funds are regulated investment products offered to the public and available for daily

trading. Hedge funds are private investments that are only available to accredited
investors. Hedge funds are known for using higher risk investing strategies with the goal of
achieving higher returns for their investors.
 
3. “Hedge funds are not risky because, as their name indicates, they hedge risks.” Is
this statement true, false, or uncertain? Explain.

    
4. What are the four advantages of private equity funds? How do they help alleviate
the free-rider problem?
    
Chapter 14
1. What are the advantages and disadvantages of using forward
contracts to hedge? 

Forward exchange contract advantages

The advantages are clear, the most obvious being you can stop things costing you more, or
make sure you don’t lose out on foreign currency due at some point in the future.

2. Buy now, pay later

3. Lock in the current exchange rate for a future purchase/receipt
4. Hedge your exposure and reduce your risk
5. Very simple to set up
6. Inexpensive to maintain
7. You can draw down to get currency early
8. You can rollover f you don’t need funds until after the original settlement

Forward exchange contract disadvantages

The main disadvantage is of course hindsight.  One thing to bear in mind when looking at
currency risk protection is that hedging can work against you. However, there are only a
few disadvantages, compare to the protection that a currency forward provides.

If the currency moves in your favour you have missed the gains.
Small deposit required still ties up capital
2. What are the advantages and disadvantages of using an
options contract rather than a futures contract?
 Nicolas Jaramillo

There are many advantages and disadvantages of future contracts. The most

common advantages include easy pricing, high liquidity, and risk hedging. The
major disadvantages include no control over future events, price fluctuations, and the
potential reduction in asset prices as the expiration date approaches.

3. Explain why greater volatility or a longer term to maturity

leads to a higher premium on both call
and put options.
An increase in the volatility of the stock increases the value of the call options and also of
the put option. Higher volatility means higher upside risk or higher downside risk. When
there is downside risk, the buyer of the call option will forego premium. When there is
upside risk, the buyer of the call option will rake in the profits.

4. Why does a lower strike price imply that a call option will
have a higher premium and a put option a lower premium?
 A lower strike price implies that a call option will have a higher premium because a call
option gives the holder the right to buy.

Chapter 15
1. How does the provision of several
types of financial services by one firm lead to a lower cost of information production for
the firm?
Because one information resource can be used in providing several services, thus lowering
the cost for each.
2. How does the provision of several
types of financial services by one firm lead to conflicts of interest?
The provision of several types of financial services by one firm can lead to conflicts of
interest because in this case one can use a single information resource in providing several
financial services and this will definitely reduce the cost for each financial
services procedure.

3. “Conflicts of interest always reduce the

flow of reliable information.” Is this statement true, false, or uncertain? Explain your
answer.

The statement is true. Conflicts of interest can cause asymmetric information to be

distributed to market participants. However, the incentives may not always be large enough
to drive inappropriate behavior and, at times, market discipline is likely to prevent conflicts
from behind exploited.

4. Give two examples of conflicts of

interest that do not seem to have been exploited and thus have not led to a reduction of
reliable information in the financial markets.
 
Chapter 19
 Nicolas Jaramillo

1. What are the benefits of using a nominal anchor for the

conduct of monetary policy?
 A nominal anchor helps promote price stability by tying inflation expectations to low
levels directly through its constraint on the value of money.
2. Why would it be problematic for a central bank to have a
primary goal of maximizing economic growth?
Yes, because this may result in structural changes in the economy that could lead to an
increase in inflation.
3. “Since financial crises can impart severe damage to the
economy, a central bank’s primary goal should be to ensure stability in financial markets.”
Is this statement true, false, or uncertain? Explain.
Uncertain. Although stability in financial markets is an important goal, focusing on other
goals such as stabilizing employment, output, or even short-term movements in the
business cycle may be more important to the economy.
 
4. “A central bank with a dual mandate will achieve lower unemployment in the long
run than a central bank with a hierarchical mandate in which price stability takes
precedence.” Is this statement true, false, or uncertain? Explain.
Is False. There is no long-run trade-off between inflation and unemployment.