Money and Banking 1

Watchhttp://www.youtube.com/watch?v=N7oqMTboB8if you don’t know absolute cell referenc-ing’ of Excel.
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This is also true when you apply for a job. When you consider what to write in your personal
statement or what to say in an interview, the first thing you should think is what other applicants are
likely to say.
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Questions
1. (Total 20 points) Go to YAHOO! Finance and download historical adjusted price
data (monthly) for four FTSE100 or FTSE250 companies. The data should include
at least last 120 months so you should choose companies that have been traded
for at least 10 years. Compute monthly return series for the four companies and
then answer the following questions. (Do not report the price/return series in your
document file.)
(a) (10 points) Estimate and report (i) the expected return vector, (ii) the vec-tor of standard deviations, (iii) the variance-covariance matrix, and (iv) the
correlation matrix.
(b) (4 points) Report the expected return and standard deviation of the equally
weighted portfolio.
(c) (3 points) Using the Excel Solver, solve a mean-targeted portfolio optimisation
problem with the no-shortselling constraint subject to the risk being no larger
than that of the equally weighted portfolio. Report the portfolio weights.
Report the expected return and the standard deviation of the portfolio return.
(d) (3 points) Using the Excel Solver, solve a variance-targeted portfolio optimi-sation problem subject to the expected return being no smaller than that of
the equally weighted portfolio. Allow short-selling for this answer. Report the
portfolio weights. Report the expected return and the standard deviation of
the portfolio return.
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2. (Total 20 points)
You run a local airline company. There is a flight from city A to city B and the
aircraft for this flight has 20 seats for customers. One ticket can be sold for£1K.
So, if the company sells 20 tickets, the revenue is£20K. There is only fixed and
sunk cost; the cost for this flight is the same regardless of how many passengers
there actually are. Also, statistics shows that each person who purchased a ticket
independently shows up with probability 0.7. Therefore, there is possibility that
the company can earn more money by overbooking tickets. For example, if the
company sells 22 tickets, the sales will be£22K, and there won’t be any problem if
no more than 20 purchasers actually show up. However, the company has a policy
that any customer who cannot take the flight due to overflow’ should be given an
alternative plane ticket as well as monetary compensation. The cost for this is£2K.
That is, if the company sells 22 tickets and all the 22 purchasers actually turn up,
two persons cannot take the flight, so the net revenuewill be£22K sales minus
£4K compensation, that is,£18K. Answer the following questions.
(a) (2 points) If the company sells 25 tickets, what are the company’s net revenues
if exactly (i) 19, (ii) 21, or (iii) 23 people show up, respectively?
(b) (2 points) If the company sells 25 tickets, what is (i) the probability of exactly
19 people showing up, (ii) the probability of exactly 21 people showing up,
and (iii) the probability of exactly 23 people showing up?
(c) (4 points) Compute and report the expected net revenue from selling 25 tickets.
(d) (12 points) What is the net-revenue-maximising number of tickets to sell?
Report the number of tickets to sell and the achieved net revenue.
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3. (15 points) Multiplier effect’ is an economic term that refers to a situation in which
an initial impact on some fundamentals has a second effect, a third effect, a fourth
effect, and so on. Probably the most well-known example in macroeconomics is
the effect of fiscal policy on equilibrium GDP. This is because the rise in GDP
(output) increases people’s income and the rise in people’s income increases GDP
as well. In week 4’s lecture, we saw a multiplier effect in debt rollover (re-financing).
That is, the rise in the borrower’s credit risk leads to a drop in the price of bonds
that the borrower issues, and the latter further raises the former if the borrower is
carrying out re-financing. Provide your own example of a multiplier effect. Your
answer should have at least two variables, say A and B, and correspondingly two
mechanisms; the increase (decrease) of A leads to the increase (decrease) of B
through one mechanism, and the increase (decrease) of B in turn leads to the
increase (decrease) of A through the other mechanism.
4. (15 points) Examples of agents’ hidden types include ability, diligence, healthiness,
faithfulness, honesty, etc. Sometimes, the principal wants to benefit only a partic-ular type of people, but he cannot do so simply because he cannot distinguish that
type from other types. In week 5, we saw the example of a city that hosts a big
football match and the example of a head coach of a high school baseball team.
Provide another example of a principal that faces the problem of being unable to
distinguish the agents’ hidden types. What kind of costly action can the principal
require as a means of signalling/selection mechanism? Make sure your example
satisfies the following;
€¢ There are two hidden types, one is high’ type and the other is low’ type for
the principal.
€¢ There is a stake/benefit that both types are interested in. The principal wants
to benefit only the high type people.
€¢ Some costly action is required in the selection mechanism. If anyone takes
that action, he/she will be selected and get the stake/benefits.
€¢ Both types could take the costly action. It is just more costly for the low type
than for the high type.
€¢ The selection mechanism is clear to both types. The Judgement of Solomon
is not a correct example for this. There should not be any secret examiner,
secret test, hidden criterion, lie or trick in the selection mechanism.
5. (15 points) During the class, we studied lack-of-commitment problem’ in game-theoretic situations. In the class, we saw that there are two types of lack of com-mitment problems. One is a non-credible promise’ and the other is a non-credible
threat’. Sometimes, one can solve such problems by finding a commitment device’
so he can credibly lock himself into a course of actions that otherwise he would
not choose later. Credible commitment, although it may not be optimal later, may
increase his current payoff by affecting other people’s behaviour in his favour. Give
an example of a lack-of-commitment problem. Draw a game tree and state explic-itly whether it involves a non-credible promise or a non-credible threat. Can you
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find any commitment device? Explain.
6. (15 points) During the class, we studied the concept of option’. An option is a piece
of documentation that gives the beneficiary a right to choose (typically a right to
buy/sell something). This document (contract) can be sold for a fee and it is an
obligation for the issuer. An option is useful when the beneficiary does not want
to make a decision right now and wants to postpone her decision for some time.
Examples include a bank’s loan commitment to a company, the right to change the
schedule of a flight, the right to accept a university admission by one month past
the original deadline, etc. Find or create an example of an option that can be sold
for some fee. (In your example, there should be a good reason why the buyer of
that option wants to postpone her decision.)
Example answers are provided starting in the next page.
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Assignment answer example 1
BEE3043 Money and Banking 1
Student Number: xxxxxxxx
Candidate Number: xxxxxxxx
770 words.
Contents of Q3-6
3. Calorie intake and productivity
4. Early office hours
5. Promise to clean the flat
6. Deposit for a yoga course
1. €¦
2. €¦
3. Odili is a labourer on a vineyard in South Africa. Odili gets paid on the number of
grapes he picks a day. The vineyard owner has to cut Odili’s wage by 10% due to a
recent hike in water and fuel prices. Before Odili’s pay was cut 10% he could pick
5000 grapes an hour. Given Odili is very poor with no savings, he consequently has
to reduce his calorie intake as he cannot afford as much food. This consequently
makes him weaker and thus slower at picking grapes. He can now only pick 4600
grapes per hour. Odili’s pay now falls a further 8% as his productivity has further
decreased. Consequently he has to reduce his calorie intake again. He can now
only pick 4400 grapes per hour and his pay falls again by a further 4.35%. This
process continues on and on. The initial impact of a reduction in Odili’s wage has
a multiplier effect on his productivity as he has to reduce his calorie intake.
(Very good and very unique. 15 points)
4. Professor Miyagi is a very enthusiastic educator and he likes to spend time to help
students who are motivated and hard-working. However, he has realised that some
lazy students come to his office to get easy help just before exams without making
much efforts of their own. Of course, there are also students who work hard and
hence want to ask many questions from Prof. Miyagi. He wants to give the benefits
of his time and help only to diligent students. However, whether a student is diligent
or lazy is a hidden type. (Some students ask very basic questions only because they
don’t have much math/economics backgrounds so the qualities of their questions
do not tell the students’ diligence.)
This year, to overcome this situation, Prof. Miyagi opens his office hours from 7:00-9:00 every day. Consequently, only very motivated, hard-working students come to
this extremely early hours and lazy students never turn up. Prof. Miyagi enjoys
early morning hours helping students and only diligent students benefit from his
office hours.
(Very good. 12 points)
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5. James is a student of the University of Exeter. He is now on vacation and out of
town. James has a friend in Windermere, named Alonso. Alonso called James and
said that he is going to visit Exeter very soon with his sister Veronica and asked
James if they could stay in his flat in his absence so they could save money for B&B.
James would be happy to let his friend use his flat, but only if Alonso spends half
a day to entirely clean the flat before he shows it to Veronica. James likes Veronica
and under no circumstances does he want to show Veronica his extremely messy,
dirty flat, although Alonso and Veronica say they would not care. (Of course they
will care!!) The situation is depicted in the game tree (Figure 1) in which James first
decides whether to let Alonso use the flat and Alonso then decides whether to bother
to clean the entire flat. This is the case of €œnon-credible promise€. Consequently,
James would refuse to let them use the flat (probably by telling a lie that he has
already allowed someone else to use it).
(Very good. 12 points)
People
Lifeguards
Save, if people are
drowning
Swim in the
forbidden area
Not swim in the
forbidden area
Not save if people are
drowning
(1,2)
(2,1)
(0,0)
James
Alonso
Clean
Let Alonso use
the flat
Not let Alonso use
the flat
Not clean
(1,0)
(2,1)
(0,2)
Figure 1:
6. Derekthecat, a yoga studio located in Exeter City Centre, will start an eight-week
beginner course next week. The fee is£66. While the number of seats is limited,
one can reserve a place by depositing£20. In that case, she should pay the rest
(£46) before the first lesson. If she changes her mind, the£20 deposit won’t be
refunded. One can think of the£20 as the price of a call option to buy the eight-week course for£46 on or before the first lesson. Those who don’t have enough
cash yet and those who are not sure how busy they will be in the following weeks
might prefer buying such an option to paying the full fare now.
(8 points. Though deposit to reserve a place’ was a common example, it is a good
daily-life example.)
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Assignment answer example 2
BEE2028 Money and Banking 1
Student Number: xxxxxxxx
Candidate Number: xxxxxxxx
781 words.
Contents of Q3-6
3. Tourism and local economy
4. Belief in chance of winning
5. Short-run self vs. Long-run self
6. Option to sell back an item
1. €¦
2. €¦
3. A new town builds a hotel to attract more people from other areas. The operations
of a hotel require a staff, food orders, furniture orders, etc. Hence, direct and
indirect jobs are created by such demands. As local farmers supply the hotel with
fresh fruits and vegetables and local retailers supply the hotel with furniture, the
suppliers’ revenue increases and so do the taxes they pay to the government. Direct
employment in the hotel also increases the total amount of salaries in the region
and the respective tax payments. The government uses tax revenue to build better
roads and expand infrastructure. This would make the area even more attractive
for tourists and more popular. An additional inflow of tourists will create an even
greater demand for accommodation until one hotel cannot serve them all. As a
result, the number of hotels will grow, the employment will rise, consumer spending
and business investments will increase, and tax revenue of the government will also
increase. The initial investment in the hotel will continue to multiply earnings of
the businesses, employees, and the government.
(6 points. Good answer but GDP multiplier of investment’ is one of the most
common examples among students.)
4. Peter is involved in a complicated tax-evasion case and is in need of the best attorney
in town. Being a wealthy man of high rank many attorneys offer their help in order
to take on such a high profile case. After a couple of talks Peter realises that every
attorney considers himself the best, yet they consider Peter’s chances of winning the
case in court quite differently. Being a leery person Peter wants to make sure that
he does not pick an attorney that tells him how good his chances are only to get the
case. Peter (Principal) faces a principal-agent problem where the attorney’s (agent)
type is hidden. His solution is to propose a contract that connects remuneration
to the outcome of the case. Only those attorneys who truly believe in his winning
chances and/or are really convinced of their skills would sign such a deal. All those
who are suddenly reluctant to sign might have painted too rosy a picture.
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Long -run
self
Short-run
self
Eat 50g each day
By a 200g bag
for £2
Buy a 50g bag for £1
Eat the whole bag
at once
(1,0)
(2,1)
(0,2)
Figure 2:
(13 points. Very good and very unique. If the hidden type was only about the
attorney’s skills, it wouldn’t have been very unique among the students.)
5. James loves crisps. He never stops eating crisps until the whole bag becomes empty.
However, he thinks that eating too much crisps is not good for his health and 50g
should be the right amount for one day. In supermarkets, two kinds of crisps are
avaialble: a 50g bag for£1 and a 250g bag for£2. His long-run self wants to buy
the 250g bag and eat 50g a day, rather than buying a 50g bag every day, because
that way he can save money. However, once the 250g bag is bought, his short-run
self will not stop eating until he finishes the whole bag. This is a game theoretic
situation between his long-run self and short-run self, and it is the situation of a
non-credible promise (Figure2). Some commitment device may be available for his
short-run self. He can hand his wife £100 and tell her that if he eats more than
50g a day, she can take the money. After such an arrangement, his long-run self
believes that his short-run self will not eat the whole bag at once and can buy a
big bag.
(Very good. 12 points)
6. The law of country X allows customers to return most items (electronics, books,
clothing, home and gardens, etc.) to the retailer shops they purchased from even
if the items do not have obvious flaws or defects. In the past, customers got a full
refund by returning an item and presenting the receipt within 14 days of purchase.
Recently, the law has been changed and this period has been extended to 90 days.
This has become an additional business cost for retailers because some customers
buy and use an item, put it back to the original but destroyed package, and return
it saying that it isn’t what they wanted. For this reason, all retailers had to increase
their price by about 10%. A month later, an electronic retailer Radiohut started a
policy that for some items, if a customer signs on a receipt and mails it to Radiohut
within two weeks of purchase, the customer can get cashback which is equivalent
to 10% of the price of the item.
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In this story, we can think of the 10% as the price of a put option to sell an item
back to a retailer within 90 days. In giving up this option by surrendering a signed
receipt, customers who do not need such an option are selling the option back to
the retailer.
(Very good and very unique. 15 points)
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Assignment answer example 3
BEE2028 Money and Banking 1
Student Number: xxxxxxxx
Candidate Number: xxxxxxxx
710 words.
Contents of Q3-6
3. Toilet shortage and waiting time
4. Finding a true love
5. Lifeguards will save us anyway.
6. Extra driving lessons
1. €¦
2. €¦
3. In a university campus X, there are 1000 people and 50 restrooms/toilets. People
currently use a restroom once in one hour, but people try to go to the restroom
more frequently if the expected waiting time increases. The expected waiting time
depends on the number of restrooms per person and on the frequency with which
each person goes to the restroom. Now suppose half of the restrooms get out of
order. This will initially make the expected waiting time twice as long. Because
the expected waiting time doubles, people now go to the restroom more frequently,
say 1.5 times per hour. This will further increase the expected waiting time by a
factor of 1.5, so now people go to the restroom even more frequently, say 1.8 times
per hour, further increasing the waiting time. This process can continue on and on.
The initial impact on the number of available restrooms has some multiplier effect
on the expected waiting time due to the fact that people try to use a restroom
frequently if they are not sure that they can use it immediately.
(Very good. 12 points)
4. Jasmine is a single daughter of a billionaire banker in New York. As Jasmine is 28
years old already, she is wishing to find someone who truly loves her rather than
her family background and her father’s billions-dollar assets. Quite a few of her
admirers have told her that they do love her and have no interests in her wealth.
So Jasmine currently is facing a problem of hidden information and unobservable
types of agents. In this situation, after discussing with her father, Jasmine decides
to post a big news on a newspaper, claiming that she has been expelled from her
family because of business conflict between her and her father. Then she moves
out of Upper East Manhattan to a poor and dirty district in Brooklyn and she
has to work as a waitress in a small diner. Only those who do not care about her
background and wealth would continue loving her and help her with the difficulties
in her life.
(5 points. Both types should be interested in the benefit of marriage itself. If she is
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actually poor, there isn’t any hidden type problem. Also, finding a true love’ was
a very common example among students. It is a very enjoyable story, though.)
5. During mid-summer, the beach of Shonan, Japan becomes crowded with visitors
and a lot of lifeguards/lifesavers work along the coast. Once the high season ends,
with fewer people swimming and fewer lifeguards working, the Shonan Lifeguards
Services (SLS) closes half the beach. The SLS announces €œDon’t swim off the
closed, unmonitored part of the beach. We will not save you even if you are getting
drowned.€ However, some people still enter the closed area and swim, knowing
that if anything happens, they can still cry for help and that the lifeguards will
come sooner or later anyway. This situation is depicted in the game tree (Figure
3) in which people first decide whether to enter a closed, unmonitored part of the
beach, and the lifesavers decide whether to rush there if anyone is drowning. It is
an example of non-credible threat.
(Good. 12 points)
People
Lifeguards
Save, if people are
drowning
Swim in the
forbidden area
Not swim in the
forbidden area
Not save if people are
drowning
(1,2)
(2,1)
(0,0)
James
Alonso
Clean
Let Alonso use
the flat
Not let Alonso use
the flat
Not clean
(1,0)
(2,1)
(0,2)
Figure 3:
6. The ABC Driving School offers a driving training course of 20 one-hour-long lessons
for £1000. The course includes normal on-the-road driving, parallel parking, back
parking, driving on narrow winding mountain paths and driving on highways. The
ABC Driving Shool also offers a one-hour lesson for£55. The current law of the
country says that if one fails in the driving test, he/she should take at least 3 hour
driving lessons from driving schools. The ABC offers those who take the 20-hour
course the following option for £80; if a learner buys this option at the point of
contracting the 20-hour course, as long as he fails in the driving test, he will be able
to continue to take a one-hour lesson only for£25 per lesson until he passes the test.
This is an example of a call option to buy a one-hour lesson for£25 as many times
as one wants. Those who are risk-averse would be willing to buy such an option.
Also, it is a good commitment for the school to engage in skill enhancement of their
learners within the regular 20 hours.

community and social policy

Critically explore the commonalities and differences between the experiences of two of the following groups:

Migrants,
People with mental health difficulties
Lesbians, Gay Men, Bisexuals and Transgendered (LGBT)
Older People

To pass the above assignments there must be comprehensive reference to the learning outcomes of this module. i.e. discussing theories and concepts around power and oppression.