Financial Institutions and Markets Winter 2009-10 FIN 304 Dr. Andrew L. H. Parkes Day 16 “How do financial markets work?” 卜安吉

Financial Institutions Financial Institutions and Marketsand Markets

Winter 2009-10 FIN 304Winter 2009-10 FIN 304

Dr. Andrew L. H. ParkesDr. Andrew L. H. ParkesDay 16Day 16

““How do financial markets work?”How do financial markets work?”

卜安吉卜安吉

Jan. 21, 2010Jan. 21, 2010 Financial Institutions & Markets, Day 1Financial Institutions & Markets, Day 166 22

China/U.S. Ex Rate China/U.S. Ex Rate AssignmentAssignment

Technically:Technically:– 12 pt. Times New Roman font12 pt. Times New Roman font– 1” margins (top, bottom and sides)1” margins (top, bottom and sides)– Double spacedDouble spaced– 1 page ONLY (references on a second 1 page ONLY (references on a second

page as well as any graphs – ok)page as well as any graphs – ok)– Due at the beginning of class, March 2, Due at the beginning of class, March 2,

20102010– 15 points15 points



First read pp. 854-858 in your First read pp. 854-858 in your MACROECONOMICS textbook by MACROECONOMICS textbook by Krugman/WellsKrugman/Wells – especially focus on the – especially focus on the article “China Pegs the Yuan” on p. 858.article “China Pegs the Yuan” on p. 858.

Secondly, read the questions – Check Secondly, read the questions – Check your understanding your understanding andand make sure to make sure to read the answers in the back of the read the answers in the back of the book too!!!book too!!!



Thirdly, read about (and take notes about) Thirdly, read about (and take notes about) China’s long run/short run exchange rate China’s long run/short run exchange rate factorsfactors – inflation, productivity, preferences – inflation, productivity, preferences for goods, tariffs/quotas, and interest rates for goods, tariffs/quotas, and interest rates COMPARED TO AMERICA!!! So, for example: COMPARED TO AMERICA!!! So, for example: how is the U.S. inflation rate compared to how is the U.S. inflation rate compared to China’s, productivity,China’s, productivity,etc.?etc.?

Use both a short-term (money market) Use both a short-term (money market) interest rate AND a long-run (capital market) interest rate AND a long-run (capital market) interest rate in your comparisons.interest rate in your comparisons.



Now explain your expectations for the exchange Now explain your expectations for the exchange rate – is there pressure on the yuan to appreciate rate – is there pressure on the yuan to appreciate over the near term? over the near term?

List inflation comparisons, preferences for goods, List inflation comparisons, preferences for goods, tariff/quota CHANGES, and productivity for each tariff/quota CHANGES, and productivity for each country as well as the interest rates.country as well as the interest rates.

Will the government continue to “peg” the yuan to Will the government continue to “peg” the yuan to the dollar? Remember that the PBOC is now the dollar? Remember that the PBOC is now tightening the money supply and raising interest tightening the money supply and raising interest rates.rates.

Your time horizon is 6 months – over the next 6 Your time horizon is 6 months – over the next 6 months or so, what you anticipate?months or so, what you anticipate?



Only 1 page so you must be succinct Only 1 page so you must be succinct and precise in your answers.and precise in your answers.

Full sentences ARE requiredFull sentences ARE required References ARE requiredReferences ARE required 5 marks for language, grammar, 5 marks for language, grammar,

etc.etc. 10 points, does your analysis make 10 points, does your analysis make

economic and financial sense?economic and financial sense?

Documents

Financial Institutions and Markets Winter 2009-10 FIN 304 Dr. Andrew L. H. Parkes Day 16 “How do financial markets work?” 卜安吉