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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?
· CAMELS
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
· Roboadvising
