Final Review

1
Final Review

• Development Finance
• Spring Semester
• 2002

2
Lecture 1Overview of a Financial System

• Basic elements of a financial system
• Financial markets
• Financial institutions
• Financial instruments
• Relationship between financial development and
  economic development
• Theoretical arguments for the causal link between
  financial development and economic development
• Financial development leads to capital
  accumulation
• Financial development leads to productivity
  enhancement
• Empirical evidence
• Measures of financial development - Financial
  Depth
• Empirical Results of the correlation and causal
  link based on time-series and cross-sectional data

3
Lecture 2Financial Mobilization

• The channels of savings mobilization and capital
  allocation of the following financial
  institutions
• Commercial banks
• Development banks
• Mutual funds
• Pension funds
• Life insurance companies
• The debate on intermediated (i.e. bank-based)
  finance and non-intermediated (i.e. market-based)
  finance
• The difference between bank-based and
  market-based finance
• Arguments in favor of bank-based finance and
  against market-based finance
• Arguments in favor of market-based finance and
  against bank-based finance
• Arguments in favor of the view that bank-based
  and market-based systems are complementary
• Empirical evidence

4
Lecture 3Information Asymmetry

• Different types of information asymmetry
• Hidden information leading to adverse selection
• Hidden action leading to moral hazard
• Adverse selection
• When the seller does not have information about
  the potential buyers Understand the numerical
  example in the lecture note, which illustrates
  two types of errors occurring in this situation,
  and solutions based on screening.
• When the buyer does not have information about
  the seller Understand why the problem of adverse
  selection in this situation can caused the
  market to collapse, and how signaling can be used
  as a solution.
• Moral hazard
• Understand problems arisen from the
  principal-agent relationship.
• Know different solutions used for controlling
  moral hazard self-monitoring, market monitoring,
  use of competing information sources, and/or
  creation of incentives.

5
Lecture 4 Information Asymmetry in Informal
Credit Markets

• Differences between the neoclassical explanation
  and institutional explanation of the informal
  credit markets.
• Answer the following questions
• What are indirect and direct mechanisms to solve
  the problems of screening, incentive provision,
  and enforcement in lending activities?
• Why does the average risk of the loan portfolio
  of a bank increase when the loan rate is raised?
• How interest rates are used in the indirect
  mechanism to screen borrowers?
• What are the roles of inter-market linkages in
  the indirect and direct mechanisms?
• How can market segmentation in informal credit
  markets be explained?
• Why do informal credit markets are characterized
  by monopolistic competition?
• Policy implications of the information
  asymmetry's explanation of informal credit
  markets.

6
Lecture 5Financial Repression

• What is financial repression, the reasons to
  repress a financial system, and the instruments
  of financial repression.
• Draw a diagram of a typical repressed financial
  system and explain it.
• Understand the interactions among inflation,
  reserve requirements, and interest rates in a
  repressed financial system based on the model
  presented in the lecture note.
• From the three relational equations in the model,
  derive the relationship between the inflation
  rate (p) and the required reserve ratio (k).
• Analyze the determination of an optimal level of
  k to achieve a minimum level of p.
• Point out that it is necessary to have both p and
  k reduced when there is some reduction in the
  budgetary deficit.
• Analyze what happen to p and k when the economic
  growth rate changes.

7
Lecture 6 - Government Intervention in Credit
Allocation in East Asia

• Effects of financial repression according to Shaw
  and McKinnon (1973).
• Financial restraint in East Asia.
• Positive and negative effects of directed credit
  allocation in East Asia.

8
Lecture 7Financial Liberalization

• The simple supply-demand model explaining the
  effect of financial liberalization on real
  deposit interest rates and loanable funds
• Critics of financial liberalization - New
  Structuralists
• Critics of financial liberalization - Market
  Failure
• Financial liberalization and macroeconomic
  instability
• The order of financial liberalization
• Benefits and costs of capital account opening

9
Lecture 8International Capital Flows

• Classification and definitions of international
  capital flows
• Benefits, costs, and other characteristics
  (particularly the volatility) of various types of
  international capital flows.
• Official development assistance
• Foreign direct investment
• Portfolio investment
• Commercial borrowing
• Trends of international capital flows in the
  1990s and factors affecting these trends
• Official development assistance
• Foreign direct investment
• Portfolio investment
• Commercial borrowing

10
Lecture 9Foreign Aid

• Harrod-Domar model and the need of providing aids
  to developing countries.
• Assessment of aid effectiveness (from the World
  Bank's report - Assessing Aid)
• Lessons drawn from the aid experience (from the
  World Bank's report - Assessing Aid)
• The fungibility problem of aid.
• Reasons for the declining trend of foreign aid in
  the 1990s.
• The HIPC initiative.
• Krugman's model of debt relief.

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Lecture 10Financial Derivatives

• Definitions and characteristics of future and
  forward contracts.
• Differences between a future and a forward.
• Payoffs to the two parties of a forward contract
  at expiration.
• Determination of forward prices.
• Definitions, characteristics, and types of option
  contracts
• Differences between a forward and an option.
• Payoffs at expiration to
• The buyer of a call option
• The seller of a call option
• The buyer of a put option
• The seller of a put option
• Option valuation Determinants of option values.

12
Lecture 11Hedging and Financial Speculation

• Short hedge
• Hedging by selling futures
• Hedging by buying put options
• Long hedge
• Hedging by buying futures
• Hedging by buying call options
• Financial speculation
• Financial speculation by taking short or long
  positions in the underlying assets vs.
  speculation by using derivatives
• Speculation and risks.

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Lecture 12Currency Crisis

• First-Generation Model of Currency Crisis
• Understand the mechanics and implications of
  Krugman (1979)'s Model
• How can Krugman's Model be used in explaining
  the Mexico's currency crisis of 1994?
• Second-Generation Model of Currency Crisis
• Understand the mechanics and implications of
  Obsfeld (1994)'s Model
• Use a simple game to illustrate Obsfeld's Model
• How can Obsfelds Model be used in explaining
  the European Currency System crisis of 1992-93?

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Lecture 13Financial Crisis

• Financial Crisis in East Asia, 1997-98
• Explain different elements of the Crisis moral
  hazard and overinvestment, asset bubble,
  short-term capital flows, and macroeconomic
  imbalances.
• How did these elements interact with one another
  in causing the crisis?
• Financial Crisis in Argentina, 2001-02
• How did the currency board and external shocks
  contribute to the crisis?
• How did the public debt problem arise?
• What are the differences between the Asian crisis
  of 1997-98 and the Argentine crisis of 2001-02?

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Lecture 14Vietnam's Foreign Exchange Market

• Overview, functions, and classification of
  foreign exchange markets
• Exchange rate and exchange rate listing
• Uncovered and covered interest rate parity
• Transactions in Vietnams foreign exchange market
• Spot transactions
• Forwards
• Swaps