What does it have to say about “trusted third parties”

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FIN320 Final Study Guide

Autumn 2018

Professor Lamont Black

Final is cumulative, but focused on material post-midterm.

Mostly multiple choice, some short answer

Non-bank financial institutions 

· What is “shadow banking”?

· Names of large investment banks

· Investment banking activities

o Underwriting and the primary market for direct finance

o M&A advisory

o Prop trading and market maker

· IB funding risks

o Wholesale funding, leverage

o How does a repo work?

· Counterparty risk

· IB regulation

o Glass-Steagall Act of 1933 – what and why?

o Gramm-Leach-Bliley Act of 1999 – what and why?

· What is universal banking?

· The basics of investment institutions

· Trends and challenges in the mutual funds industry

Risk management and derivatives

· What is liquidity risk?

· Explain how a federal funds loan can be a liquid bank asset

· Why is deposit funding more stable than wholesale funding?

· What is “Treasury management”?

· What is credit risk?

· What are the six ways that banks manage credit risk?

· How does the role of a credit analyst differ from an equity analyst?

· Managing interest rate risk

o Gap analysis (GAP) – What is a negative gap? Explain how rising rates can affect bank profitability

o Duration analysis (DURATION GAP) – What is a positive duration gap? Explain how rising rates can affect bank capital

· What is the definition of a derivative?

· Importance of Chicago to financial derivatives

· Pros/cons of forwards vs. futures

· Long position versus short position

o Which position benefits/loses from an increase in prices?

o Which position benefits/loses from a decline in prices?

o Which is buying a futures contract and which is selling?

o How does this relate to delivery at settlement?

· How can a bond investor use interest rate futures to hedge interest rate risk?

o Buy or sell futures?

· The basics of a call option and put option

Financial crises and financial regulation

· How banking crisis is related to

o Maturity transformation

o Liquidity transformation

· Bank balance sheet and credit risk

o Loan defaults

o Declines in the value of MBS

· Definition of insolvency

· What is a bank run?

· Deposit insurance

o How does it prevent bank runs?

o Why does more deposit insurance lead to more moral hazard by banks?

· Explain why and how the Fed is the lender of last resort

o What are discount window and discount loan?

o The solvency requirement

· Was Lehman Brothers bailed out?

· The basics of mortgage securitization

o Who originates the mortgage?

o Who funds the mortgage?

o Why is this an “information problem”?

o Who rates the mortgage-backed securities?

o How can you get AAA securities from this process?

o What was the role of AIG?

· When did the Dodd-Frank Act become law and what was the purpose?

· How can higher capital ratios reduce bank risk?

o What is a “risk-based” capital requirement?


o What do the letters stand for?

o What is its purpose?

Central banks and money supply

· When was the Fed created?

· How many regional Federal Reserve Banks are there?

· How does the Fed’s structure reflect a balance of federal and regional power?

· Terms of Fed governors & chair

· Structure of the FOMC

· Central bank independence and transparency. Pros and cons?

· What are ECB and BoJ? What are they doing with monetary policy?

· Monetary base vs. money supply

· Fed’s assets – securities, discount loans

· Fed’s liabilities – currency and bank reserves

· Open market operations

o Draw balance sheets of bank and Fed and show how OMO works

o How does OM Sale or Purchase change the size of Fed’s balance sheet?

o How do OMOs affect money and credit?

· Conventional vs. unconventional monetary policy

· Quantitative easing – goal and post-crisis history

o When did QE begin and end?

Monetary policy

· How does the story of “Goldilocks” relate to the Fed?

· How does money growth affect inflation?

· Risks of hyperinflation and deflation

· Federal funds rate (FFR)

o Interest rate in what market?

o What are banks lending?

o How does it relate to open market operations?

o How does it relate to reserves and money supply?

o Implications for cost of borrowing

o What to do when economy too cold? Why?

o What to do when economy too hot? Why?

o Terms for tightening and loosening

· Taylor rule (the idea, no calculation)

· Dual mandate (two two-word phrases)

o Inflation target

o What is the current unemployment rate?

· FOMC announcements

o What is the expectation for December?

o What is the “dot plot”?

Foreign exchange

· Basics of Bretton Woods

o When, where, why, and what was the outcome?

o When did it end?

· What is a floating exchange rate?

· Exchange rates

o Understanding units (in terms of $ or other currency)

o Review example of Euro and Yen

· Appreciation/depreciation

o Calculation based on exchange rates (old and new)

o “strengthen”/”weaken”

· Do the currencies of strong economies tend to strengthen or weaken?

· What happened to the British pound immediately after the Brexit vote?

· Why might having a “weak” currency improve an economy?

· How does a “strong dollar” affect U.S. exports and corporate profits?

· Factors that affect exchange rates

o Relative inflation rates

o Relative real interest rates

o Relative monetary policy

· How would default risk in a country affect the exchange rate?

· How can an exporter hedge with currency futures (buy or sell)?

· Foreign exchange market intervention

· Devaluation versus depreciation

Blockchain, crypto, and fintech

· Bitcoin white paper

o In what year was it published online?

o Why is the timing significant?

o What does it have to say about “trusted third parties”?

· How does the distributed ledger technology work?

· Marketplace lending

· Robo advising

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