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Suppose that the risk-free zero curve is flat at 4.0% per annum with continuous compounding and that defaults can occur at times 0.25 years, 0.75 years, 1.25 years, and 1.75 years in a two-year plain vanilla credit default swap with semiannual payments. Suppose further that the recovery rate is constant at 30% and the unconditional probabilities of default (as seen at time zero) are 1.75% at time 0.25 years, 2.00% at time 0.75 years, 2.25% at time 1.25 years, and 2.60% at time 1.75 years. (a) Model this CDS and calculate the required credit default swap spread. (b) What would the calculated credit default spread be if the instrument was a binary credit default swap instead?
a. Mention any 5 concepts used interchangeably with:
i. Lending rate. (5)
ii. Strict monetary policy (5)
iii. Accommodative monetary policy (5)
b. Mention the types of inequality that were seen most during the period of hard lockdown in South Africa
1. An individual seller’s monthly supply of downloadable e-books is given by the equation
Qseb = −6.45 3.7Peb – 7.5W
where Qseb is number of e-books supplied, Peb is the price of e-books in euros, and W is the wage rate in euros paid by e-book sellers to laborers. Assume that the price of e-books is €10.68 and wage is €10. The supply side of the market consists of a total of eight identical sellers in this competitive market.
a. Determine the market aggregate supply function.
b. Determine the inverse market supply function.
Determine the slope of the aggregate market supply curve.
1. An individual seller’s monthly supply of downloadable e-books is given by the equation
Qseb = −6.45 3.7Peb – 7.5W
where Qseb is number of e-books supplied each month, Peb is price of e-books in euros, and W is the hourly wage rate in euros paid by e-book sellers to workers. Assume that the price of e-books is €10.68 and the hourly wage is €10.
a. Determine the number of e-books supplied each month.
b. Determine the inverse supply function for an individual seller.
c. Determine the slope of the supply curve for e-books.
Determine the new vertical intercept of the individual e-book supply curve if the hourly wage were to rise to €15 from €10.
Assume a firm is a small business and act as a price-taker in the market, the market price of the firm’s product is 20. The firm’s cost function is:
C(q) = 0.5q2+5q+100.
1. What is the firm’s optimal output level?
2. What’s the firm’s highest profit?
Assume a firm is facing the market demand curve: q = 100-2p, its total cost function is: c(q) = 2q2
1. What is the firm’s marginal revenue?
2. What is the firm’s marginal cost?
3. What is the output level “q” when the firm is maximizing its profit?
4. What is the firm’s maximum profit?
(a) Suppose the Fed purchases $100 million of bonds from a primary dealer. Show the changes that occur in balance sheet items by using T-accounts the consequences of this transaction starting from the initial balance sheet position for:
I. Banking system
II. Federal reserve
(b) Suppose the Fed conducts an open market sale of $100 million of bonds to a primary dealer, show the balance sheet for Federal Reserve.
(c) During the Christmas season, the public wants to hold more currency to buy gifts and so withdraws $100 million in cash, show the effect on the T-account:
I. Non- public bank
II. Banking system
III. Federal reserve
To improve the value of currency, which of the following could work?
Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs
To decrease the trade deficit and to increase short run output, which of the following could work ?
