Essay on Finance -the Market

1079 Words May 5th, 2012 5 Pages

1. How can changes in foreign exchange rates affect the profitability of financial institutions?

Foreign exchange rate determines the price exchange of two currencies. Changes in these rates affects the amount of goods and services import and export of a country. When a country currency is stronger, it is now exchanged for more goods than before, and once the currency is weaker, less of goods are purchased for the same amount of the currency. Financial institutions use the exchange rates changes to decide whether to buy/sell financial assets such as bonds, stocks, etc. That means, they will buy and sell foreign assets to gain profit. The value of these assets increases or decreases as the exchange rates change. If the dollar
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6. Which should have the higher risk premium on its interest rates, a corporate bond with a Moody’s Baa rating or a corporate bod with a C rating? Why?

The lower the credit rating, the higher the default risk, and the higher interest rate, and the bigger spread between a default free risk bond to the rated bond, and therefore a higher risk premium.
The Baa bond is less risky than C bond rated, and therefore C rated bond has a higher risk premium, meaning a higher default risk and a higher interest rate.

7. Explain why you would be more or less willing to buy a share of Polaroid stock in the following situations:

a) My wealth level falls- When that happens, I have less funds to buy these shares. My demand for these stocks decrease. I don’t have the means to purchase them, since I am less wealthy.
b) I expect it to appreciate in value- My demand will increase due to higher expected return.
c) The bond market becomes more liquid- I will shift my demand to the bond market, because the increased liquidity in the bond market is relatively higher than the current stock liquidity. High liquidity increase demand for bonds, because it is more easier to sell them, and a higher demand increase price.
d) You expected gold to appreciate

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